Stock Idea - Maruti Suzuki India

Recommendation: Buy
CMP = Rs 990
Price target: Rs 1,230
Key Points:
  • Maruti Suzuki India Ltd (MSL) has outperformed the passenger vehicle segment in the current year due to the success of its new products. The new managing director (MD), Shinzo Nakanishi, aims to stay focused on the goal of achieving one million sales by 2010. This translates into a compounded annual growth of 14-14.5% in sales which is achievable. 
  • MSL is ready to play a greater role in Suzuki Motor Corporation's (SMC) global operations with increasing focus and investments in new product development.
  • The new MD has reiterated that the current profit margins are not sustainable.
  • I maintan strong positive outlook on this stock and recommend Buy call at target price of Rs 1,230 over next 6 months time frame.

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Stock Idea - Madras Cement

Recommendation: Buy
CMP = Rs 4,508
Price target: Rs 4,800
Key Points:
  • Madras Cement Ltd's (MCL) capital expenditure plan is on track. The 2MTPA cement expansion work at Jayanthipuram kicked in September 2007 and the 2MTPA plant at Ariyalur is expected to be commissioned by June 2008. Going ahead, this expansion exercise will drive the much needed volume growth of the company.
  • On account of the series of price hikes in Andhra Pradesh and Tamil Nadu in the first half of FY2008, MCL was able to enhance its profitability with its earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne standing the highest in the industry at Rs 1,500 in the second quarter of FY2008.
  • Cement prices were hiked by Rs 3-4 per bag in Andhra Pradesh, Kerala and Tamil Nadu in early December and we expect a price hike of Rs 3-4 per bag in Karnataka in the coming week. This will drive the earnings of the company going ahead and will be a positive trigger for the stock.
  • In the first half of FY2008 MCL recorded a 30% increase year on year (yoy) in its net sales to Rs 969.4 crore on account of higher volumes and better price realisation which in turn caused the operating profit to grow by 35% yoy. On the back of the robust operating level performance, the profit after tax (PAT) grew by 31% yoy to Rs 221 crore.
  • As mentioned in one of our earlier updates, the company could reward its shareholders either with a bonus or with a stock split either of which will be a positive trigger for the stock. 
  • MCL's expansion plans will drive its volume growth going ahead. It plans to increase its capacity by 4MTPA by the end of FY2009. It is also investing in renewable energy and captive power plants (CPPs), which will keep a check on its variable costs and enable it to maintain its operating profit margin (OPM).
  • At the current market price of Rs 4,508 the stock is trading at a price-to-earnings multiple of 11.6x discounting our FY2008 earnings estimate and at 9.1x discounting our FY2009 earnings estimate. It also trades at an enterprise value (EV)/tonne of USD152 on increased capacity.
  • I maintain Buy recommendation on MCL with a price target of Rs 4,800 per share. 

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Stock Idea - Crompton Greaves

Recommendation: Buy

CMP = Rs 400

Price target: Rs 646

Key points:

  • Crompton Greaves Ltd (CGL) is one of the major players in transmission and distribution (T&D) equipment space in India. With vast product portfolio and a roll out of massive expenditure in the T&D space, we reassert our confidence in the company to show strong growth in years to come.
  • Industrial and consumer segments of the company also look well placed to grow robustly. HT motors will drive the growth of industrial segment while the booming real estate industry will drive the growth of consumer segment. 
  • With acquisition of Pauwels, Ganz, and Microsol, CGL is well placed to garner a pie not only in domestic market but also in international markets. We expect CGL's consolidated revenues to grow at a compounded annual growth rate (CAGR) of 22.7% over FY2007-09E.
  • CGL has signed a distribution franchise agreement with Maharashtra State Electricity Distribution Company Ltd (MSEDCL) for power distribution in three divisions of Nagpur for 15 years. The net present value (NPV) of the agreement is put at Rs 2,600 crore. However we have not factored in any value from this agreement and would wait for CGL to acquire assets from the utility by the end of the year.
  • At the end of H1FY2008, CGL had a consolidated order book of Rs 5,211 crore. The order flow remains strong for both domestic and international businesses, and we believe this to continue going forward on the back of increased spending on T&D world over.
  • Continued growth stint of CGL and management's endeavors to integrate all its acquisitions (Pauwel, Ganz, and Microsol) have been impressive. Historically, CGL has traded at a discount to the likes of ABB, Siemens, and Areva due to its limited product range. By integrating its international acquisitions, CGL has emerged as a complete solution provider in T&D sub-station business, and we expect the discount vis-à-vis its peers to get reduced. A wider product range would differentiate it in the domestic market and would enable it to compete effectively with other MNCs. 
  • At the current market price the stock trades at 34.9x its FY2008E earnings per share (EPS) of Rs 11.5 and 26.7x its FY2009E EPS of Rs 15.
  • I believe these valuations are attractive because of (a) Robust operating performance of stand-alone company; (b) Higher geographical width and product depth of the company due to subsidiaries and (c) Management's expertise in turning around operations of subsidiaries.
  • I remain bullish on this stock and reiterate Buy recommendation with the price target of Rs 464.

Stock Idea - Mahindra & Mahindra

Recommendation: Buy

CMP = Rs 794

Price target: Rs 900

Key points:

  • A diversified play in the auto sector Mahindra & Mahindra (M&M) aims to become a speciality player and continue its domination in the utility vehicle (UV) segment. In the current year, the automotive segment has grown by 22% year till date. The growth was driven by UVs other than Scorpio (such as Bolero and Maxx Maxi Truck) and revenues from exports. 
  • Farm equipment contributing 35% to sales has under performed in the current year. Year-till-date (y-t-d) volumes were down by 5% as compared with 6% decline witnessed by the auto industry as a whole. The focus of integration of recently acquired Punjab Tractors Ltd (PTL) is recovery of outstanding dues. 
  • The new UV platform code named Ingenio is slated for launch in August 2008. A new Sports UV is planned to be launched from its Chennai facility. The joint venture (JV) with International Truck for manufacturing medium and heavy commercial vehicles (M&HCV) is expected to start by CY2009.
  • The management continues to unlock value in its various subsidiaries and group companies. I estimate value of Rs 40 per share from its subsidiary Mahindra Holiday Resorts which is to be listed in 2008. Any higher value on listing would further add to its holding. All new product launches would commence from FY2009 onwards, triggering good growth.
  • At the current market price of Rs 794, the stock quotes at 11.4x its FY2009E consolidated earnings. I maintain Buy call on this stock with a price target of Rs 900.

Stock Idea - Indian Hotels Company

Recommendation: Buy

CMP = Rs 150

Price target: Rs 180

Result highlights:

  • Indian Hotels Company Ltd's (IHCL) Q2FY2008 revenues grew by 15.7% year on year (yoy) to Rs 341.4 crore. Room revenues continued to grow robustly and grew at 19% yoy for H1FY2008, as the average room rate (ARR) grew by 17.7% yoy to Rs 8,581. The growth in room revenues appears strong considering the fact that a fair proportion of room inventory was under renovation in H1 (off season) and the fact that weak dollar adversely impacted the revenues. 
  • Stringent cost controls and operating leverage due to higher ARR's improved the operating profit margin (OPM) by 420 basis points yoy to 29%. The net interest charge was up by a hefty 64.4% yoy to Rs 25.7 crore as proceeds from foreign currency convertible bond (FCCB) were fully deployed for recent international acquisitions. Incremental debt raised during the quarter also contributed to a rise in interest cost.
  • Profit before tax (PBT) increased by 25.7% yoy to Rs 77.7 crore, however a higher tax incidence at 31.5% in Q2FY2008 against 25.7% in Q2FY2007 led the net profit rise by 16% to Rs 53.2 crore.
  • IHCL acquired an 11.01% stake in Orient Express Hotels Ltd during the quarter and has further raised its stake to 11.5%. IHCL seeks a strategic alliance with the later, however Orient Express has rejected IHCL's offer for such a strategic alliance.
  • We believe IHCL's strategy of expansion both in domestic and overseas markets and better profitability of its international operations would ensure that IHCL maintain the growth momentum. At the current market price of Rs 150, IHCL trades at 20.9x its consolidated earnings per share (EPS) of Rs 7.2 (post dilution on account of the rights issues) for FY2009E.
  • I maintain Buy recommendation on the stock with a price target of Rs 180.

Stock Idea - Patels Airtemp India

Recommendation: Buy
CMP = Rs 88 (as of Friday)
Price target: Rs 135
Key points:
  • Booming user industries: Patels Airtemp India, which manufactures heat exchangers, pressure vessels, industrial fans and blowers and other heat-transfer-technology products, would benefit from the ongoing boom in its user industries such as oil and gas, refineries, power, cement, and fertilisers. The heating, ventilation and air conditioning (HVAC) business, where the company undertakes turnkey projects and manufactures HVAC equipment is also expected to benefit from the ongoing retail boom.
  • Expect strong growth in new order booking: The company has a healthy order book of Rs 45 crore, out of which Rs 40 crore is executable over the next six months. I expect the orders to continue to grow at a strong rate of 45-50% annually for the next two years. I also expect new order booking of ~Rs 70 crore in FY2008, which should increase to ~Rs 120 crore by FY2009, while the momentum is expected to continue considering the current buoyancy in its user industries. Exports too are expected to grow at a fast pace. Out of the current order book of Rs 45 crore, about Rs 15 crore pertains to export orders as against export orders of 0.98 crore in FY2007. 
  • Healthy return ratios: I expect a strong improvement in its return ratios going forward on the back of improved margins and no major capex requirement in the next two years. We estimate the topline to grow at a compounded annual growth rate (CAGR) of 49.1% and the bottomline to grow at a CAGR of 72.7% between FY2007-09.
  • Attractive valuations: At the current market price, the stock discounts its FY2009E earnings by 5.9x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.5x.
  • I believe the valuations are very attractive and recommend a Buy on the stock with a price target of Rs 135.  

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Stock Idea - State Bank of India (SBI)

Recommendation: Buy
CMP = Rs 2,300
Price target: Rs 2,680
Key points:
  • State Bank of India (SBI) has received the government's approval for its Rs 16,740 crore rights issue to be concluded this fiscal. The government is likely to invest Rs10,000 crore to maintain its 59.7% holding in SBI.
  • The actual number of shares to be subscribed, the tenure of the securities and other modalities will be worked out by the government in consultation with the bank in due course of time. The government is expected to issue bonds (paying a coupon of 7.9% per annum) to fund its investment in the SBI rights issue. 
  • The public sector behemoth SBI remains one of our top picks in the banking space. We state below four reasons why I feel SBI should be a Buy at the current levels:
    1. Upcoming rights issue—at a price far higher than envisaged earlier 
    2. New business initiatives—general insurance, private equity
    3. Launch of PSU Bank Benchmark Exchange Traded Scheme (Bank BEES)
    4. Other positive news flows and developments that are expected going forward
  • Based on these factors, I strongly recommend Buy call on SBI.

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