>COLGATE-PALMOLIVE (ICICI SECURITIES)

Stretched valuations; increasing uncertainties

We downgrade Colgate-Palmolive to HOLD from Buy based on rich valuations and higher risks to EBITDA margin due to increased competitive intensity, likely withdrawal of the excise stimulus in the Budget, rising input costs and concerns on poor monsoons. We value Colgate at FY11E P/E of 20x and raise our 12-month target price to Rs568/share from Rs531/share. While Colgate’s prospects are bright (our estimates remain unchanged), rich valuations and increasing short term uncertainties lead us to believe that most positives have been priced in.

■ Further EBITDA margin expansion unlikely after it touches an all-time high in FY10. Colgate’s EBITDA margin has increased consistently since FY99 (when it bottomed at 8.1%); we expect it to touch an all-time high of 21% in FY10E (270bps rise over FY09). We do not expect further margin expansion and anticipate earnings to grow in line with sales.

■ We expect effective tax rate to rise to 23% in FY11E from 16.5% at present. As per management, no greenfield capacity is coming on stream in tax-exempt areas in the short term as there is enough capacity for the next 18-24 months. At present, ~60% of sales is tax exempt due to its production facility in Baddi. However, from FY11E, tax exemption will reduce to 30% from 100%.

■ Increasing uncertainties – Higher focus on oral care by Hindustan Unilever, monsoon disappointment & withdrawal of excise stimulus. Enhanced focus on the oral care segment by Hindustan Unilever (HUL) might create pricing uncertainty. Likelihood of poor monsoons, withdrawal of excise duty stimulus in the Budget and rising HDPE prices also pose risk to earnings growth.

■ Downgrade to HOLD; bright prospects priced in. The stock has yielded 36% return since our last report (refer ‘Strong earnings growth ahead’ dated April 20, ’09). We remain positive on long-term prospects of Colgate. However, the company trades at FY11E P/E of 21.9x versus its seven-year historical one-year forward P/E of 18.7x. We believe rich valuations have priced in most of the upside. Hence, we downgrade Colgate to HOLD from Buy. We value the company at FY11E P/E of 20x and raise our 12-month target price to Rs568 from Rs531.

To see full report: COLGATE-PALMOLIVE

>INDIA MARKET STRATEGY (UBS)

A Dream Budget? ? Unlikely, in our view

■ Rural & Infrastructure thrust likely
The central government Budget will be announced on 6th July 2009 for year ended March 2010. Given UPA’s pro-rural policies, Budget may give impetus to rural spending programmes especially given late monsoons. We believe the budget will provide a clear roadmap on infrastructure investment. Other key announcements could include 1) Hiking FDI/FII limits in insurance & retail 2) Roadmap for PSU divestment.

■ Fiscal concerns likely to dampen Budget FY10
We believe rising fiscal deficit remains a key concern for FIIs investing in India. While the FY10 budget may do very little to bring down the fiscal deficit in the near-term, we expect a road-map that is likely to target much lower fiscal deficit in the medium term (3-5 years). Some key issues are 1) Setting revised FRBM targets 2) Setting a clear timeframe for implementation of GST. 3) There could be some relief in personal taxes. We believe the government is unlikely to decontrol oil
prices (fully or partially) due to lack of political consensus on the issue

■ Maintain our positive view on the Indian market over medium term
Over the medium term, we believe fundamentals and liquidity are likely to support higher valuations and maintain our March 2010 Sensex target of 16,750. We are overweight on banks, autos, cement, IT Services, telecom and real estate. We have also allocated 5% weight to Cash in our model portfolio. We are underweight on petrochem, metals, engineering, conglomerates and oil & gas. Key overweight stocks in our model portfolio are BoB, Infosys, Tata Power, Bharti, & Union Bank.

To see full report: MARKET STRATEGY

>PUNJ LLOYD LIMITED (INDIABULLS)

Stock run-up offers limited scope for upside

Punj Lloyd reported a robust revenue growth of 53.7% yoy in FY09, closely in line with our estimates. However, the performance remained disappointing at the operating level with the Company having to provide for the cost overruns for Heera Project and SABIC order, as well as the guarantee claims for the SABIC order. Thus, the Company reported a net loss of Rs. 2.4 bn for the year.

Revenue visibility declining, top-line growth to be subdued in FY10: Punj Lloyd’s book-to-bill ratio declined from 1.90x in FY08 to 1.65x in FY09. Going forward, we believe that order inflows in the Company’s Petrochemicals and Oil & Gas segments are likely to slow down as CAPEX plans are being reviewed cautiously by clients across all geographies. However, given the re-elected UPA government’s thrust on infrastructure, we expect the order inflows in this segment to be quite strong; it would however fail to completely offset the weakness in the other two segments. Hence, we expect the order backlog to decline by 14.1% yoy and revenue growth to slowdown to 7.1% yoy in FY10.

Operating performance dips in FY09, Company to focus on improving bottom-line: During Q4’09, Punj Lloyd recorded cost overruns in ONGC’s Heera Project and also made provisions of Rs 2.2 bn related to guarantee claims of SABIC order (in addition to the provision of Rs. 2.0 bn for cost overruns in Q3’09). As a result, EBITDA margin nosedived 605 bps yoy to a mere 3.2% in FY09. The Company has indicated its strong focus towards improving the bottom-line. We believe that the profit maximisation measures being taken by the Company under ‘Project Hawk’, coupled with the new project take-up at margins of ~9%, would help in pulling up the margins in the coming quarters.

Valuation: With the re-election of the Congress-led UPA government, we expect an increase in the thrust on infrastructure development, which we believe will support Punj Lloyd’s long term growth. Our DCF-based fair value estimate of Rs. 215 offers a limited upside potential from the current market price. The stock is trading at an EV/ EBITDA of 8.6x and a PEG of ~0.80x. We maintain Hold.

To see full report: PUNJ LLOYD

>BOMBAY RAYON FASHIONS (MOTILAL OSWAL)

■ 4QFY09 results below expectation: Bombay Rayon standalone 4QFY09 sales are up 27% YoY at Rs3.33b (expected Rs4.2b). PAT is down 26% YoY at Rs251m (expected Rs475m). Sales and EBITDA are below expectation mainly due to delay in commissioning of two of its garmenting units at Latur and Islampur. PAT is sharply lower than expected mainly due to (1) charging of full year’s interest on account of borrowings against GURU; and (2) charging of deferred tax on projects commissioned in 4Q (effective 4Q Tax/PBT of 49%)

■ 9-10% downgrade in FY10 and FY11 EPS estimates: Considering the delay in capacity addition, we have lowered FY10E sales estimate by ~7%. Further, pending clarity, we had assumed the equity issue proceeds to be parked in liquid investments. The same is now deployed in the operations. However, we have not increased commensurate sales or margins. As a result, our PAT and EPS are downgraded by 9-10% to Rs28.6 for FY10 (up 45% YoY) and Rs43.8 for FY10 (up 53% YoY). FY09-11E EPS CAGR works out to a high 49%.

■ Stock trading at 6.4x FY10E, target price of Rs286 (10x FY10E) Buy: Bombay Rayon stock is trading at a P/E of 6.4x FY10E and 4.2x FY11E. We believe this is extremely attractive considering its 49% EPS CAGR and RoE of over 25%. We value the stock at 10x FY10E EPS to arrive at a target price of Rs286, 55% upside from current levels. We maintain Buy.

To see full report: BOMBAY RAYON FASHIONS