Thursday, April 9, 2009


Price target achieved
During the past 2 weeks the markets are in an uptrend and in the process, prices of extremely beaten down stocks seem to be catching up with their fundamentals. ONGC, since our Buy recommendation on 30th January 2009 after Q3 FY09 results has given a return of 24%. At current levels, we advise our clients to book profits and enter at lower levels.

Our investment argument in ONGC was basically linked to the cheap valuations and attractive dividend yield. At our recommended price of Rs 640, the stock was earlier trading at extremely cheap valuations of 6.2x FY10 EPS estimates, and dividend yield at that point in time was at attractive 5%. In our view, the valuations at that point of time didn't capture various positives like low oil prices leading to lower subsidy burden, depreciating rupee which contributes substantially to bottom-line and extreme pessimism of market which was extrapolating poor net realizations at $34 per barrel in Q3 FY09 in future also. We expect net realization of ONGC to remain at $45-$50 per barrel mark irrespective of oil price movements.

However, at the current market price of Rs 794, the stock is trading at FY10 P/E multiple of 7.5x, which we believe captures most of the positives. Though over the long term in view of the company's ability to generate significant free cash flows and debt free status we continue to like the stock, but believe that at higher levels, market will again start focusing on lack of pricing power above $50 per barrel of oil prices and uncertainty regarding subsidy burden. Keeping in view the uncertain market conditions, we advise our clients to book profits and re-enter at lower levels.

The stock is currently trading at FY09 and FY10 P/E multiple of 7.9x and 7.5x respectively. ONGC continues to generate significant amount of free cash flows to support its future investment needs, and the company has a strong balance-sheet with almost a zerodebt position and healthy cash flows. However, in view of lack of support of valuations and uncertain market conditions we advise our clients to book profits and re-enter below Rs 765 levels.

To see full report: ONGC


Strong resilience in cigarette volumes
ITC has managed to register stable earnings growth with a marginal decline in volumes despite heavy tax burden and regulatory restrictions on cigarettes. With its strong brand recognition and product portfolio. ITC has always been well-placed to pass on any tax burden to consumers. The pictorial warnings and smoking ban are not likely to have a major impact on the segment due to impmlementation issues,

Major beneficiary from shift in demand to filter cigarettes.
The government has levied additional excise duty on the non-filter cigarettes mainly to bring them on par with filter cigarettes. ITC exited from it post excise hike as it had a very small presence. The demand uptrade from non-filter to filter and premium filter cigarettes (post excise duty hike) is expected to be almost over 75%. ITC being the market leader in the filter cigarettes category will be the major beneficiary from this shift in demand.

Diversified into various lucrative segments
ITC over the years has been investing cash flows from its cigarette business into various lucrative segments like foods, personal care, hotels and paper. With the paperboard division coming out of a major capex cycle and a reduction in losses from FMCG- others divison from FY10E, we expect the non-cigarette businesses to become self-sufficient. The agri division continues to provide a strong support as an excellent raw material sourcing base.

To see full report: ITC

>The Exit Lane From the Road to Ruin

To see report: EXIT LANE

>Varun Shipping (KARVY)

We recently met the management of Varun shipping and come back with conviction that the company's strategies are paying off. The timely exit from drybulk segment in FY08 where freight rates have fallen by 85% since MAY 2008 and entry into promising deepwater support services segment by acquiring high end anchor handling tugs (AHTS) are expected to help the company to grow operating profits in current turbulent time in shipping. Considering 49% discount to current net asset value (NAV) and attractive dividend yield of 12%, we reiterate BUY.

Presence across less volatile segments: The Company has significantly reduced cyclicality associated with the shipping industry with selection of low risk assets and building diversified fleet across three segments viz. the Liquefied Petroleum Gas i.e. LPG, crude and offshore. The company is also cushioned to an extent against a downside in international freight rates, as it derives ~45% of revenues from transportations of LPG where freight rates for LPG carriers are more stable as compared to crude or dry bulk carrying vessels to long term nature of contracts and organized market with 83-99% business from repeat customers. In tanker segment, company has three Aframax carriers where volatility is significantly lower than other tankers like VLCC and Suezmax.

Offshore revenue to contribute ~40% in FY10: The company has six anchor handling tugs (4 high end) operating in offshore support business. We expect the charter rates for support service to remain strong as demand is mainly driven by committed capital expenditure for exploration by oil companies. . We expect the offshore segment to report revenue growth of 64% CAGR from Rs 1.6 bn in FY08 to Rs 4.3 bn in FY11 contributing ~ 40% of total revenue on back of vessel addition.

Attractive dividend yield: Varun has declared the dividends in each of past 24 consecutive years on expanded capital. With current stock price of Rs 44 the stock is trading at attractive dividend yield of 11%. With relatively stable cash flow and support from offshore business, we expect the company to maintain attractive dividend yield going ahead.

To see full report: VARUN SHIPPING

>Shriram Transport Finance Company Ltd. (SKP Securities)

Company Profile

Shriram Transport Finance Company Ltd. (STFC), a flagship company of the Shriram group is India’s largest asset financing institution with a pan-India presence. It provides finance to almost 600000 customers and enjoys a track record of almost three decades (since 1979) in this business. STFC is mainly engaged in financing commercial trucks between 5-12 years. It’s consumer base consist of Small Truck Owners (STOs) and First Time Users (FTUs) with market share of 20-25% in preowned CV financing and 7-8% in new CV financing segment.

Investment Rationale

· Unique Business Model – A steering towards growth

STFC has created niche in financing the small fleet operators. It follows a relation based business model thereby substituting formal credit evaluation tools. The relationship based management helps the company to keep a close check on their credit profile, ensure ready business thus maintaining peer pressure thereby restricting defaults. Accordingly the company’s NPAs are restricted below 2%.

· Robust growth in loan book

STFC is aggressive in lending the small ticket size segment through referrals. Simultaneously it maintains client and truck wise exposure with the LTV restricted to 65%. The company has also introduced a wide range of products to the segment and arranged various road shows and truck utsavs. This has helped STFC to widen its reach and increase its disbursements to Rs. 11590 crore. Going forward, we expect disbursements to grow at 35% CAGR (FY08-FY11) and reach to Rs. 28215 crs.

· Margins to remain intact

STFC being the NBFC, it doesn’t have access to low cost funds like banks. Therefore over the years it has reduced borrowing from retails, which lowered its cost of funds. Since the company mainly finances the small operators, the yield earned on assets is quite high. This helps to keep the NIMs intact at approx 7%. The lower branch and employee cost helps to maintain lower operating cost, thereby keeping the PAT margins at 16%. We expect NIMs and PAT margins to be in the range of 7-8% and 13- 15% respectively.

· Efficient collection system to restrict credit losses below 2%

STFC mainly finances STOs & FTUs who has underdeveloped or no banking habits. Collection is always a challenge as these people are scattered in remote areas. To overcome this issue, STFC made its employees responsible for recovery in cash on every installment due date. This helps to keep an eye on the financial position of the customer and take adequate steps to reduce the credit losses below 2%. We expect STFC to maintain same level of credit losses inspite of prevailing challenging scenario.

· AUM to grow at 25% CAGR over FY08-FY11

STFC registered more than 60% growth in AUM from Rs. 12038 cr in FY07 to Rs. 19520 cr in FY08. The growth was mainly achieved due to availability of ready funds to the company. The inflow of funds leveraged company’s brand, customer base, wide reach and strong business model. Going ahead we expect the same factors to drive the growth of AUM to Rs. 37619 cr. by FY11.

Outlook & Recommendation

STFC being a leader in the financing of the STOs and FTUs, the unique business model will act as a support to survive in the prevailing slowdown and restrict its losses below 2%. We value the stock at 1.50x FY 11E book value implying a price target of 247 (33% upside) in 12 months and recommend accumulate rating on the stock.

To see full report: STPC

>Steel Authority of India (CITI)

Initiating at Buy: Safety in Challenging Times

•Target price Rs116 — We initiate on SAIL at Buy (1M) despite EPS degrowth and our conservative steel outlook because SAIL 1) is better geared to current and expected prices; 2) has a strong balance sheet (net cash); 3) has a 97% domestic exposure (better growth); 4) it offers relative value on EV/EBITDA.

•Best play on current/forecast prices — We see absolute share price return at current steel prices and relatively better returns (vs peers) if prices weaken. However if there is a meaningful sudden upturn in the steel cycle, stocks with higher indebtedness (JSW Steel and Tata Steel) would offer more upside.

•Preferred steel pick — Our target price is at 5x March 10 EV/EBITDA, higher than SAIL's 3-year avg but lower than peaks of 8-10x. This is at a discount to JSW Steel's target multiple of 5.5x as SAIL offers lower volume growth and a PSU-tag, although both offer largely domestic exposure. It is at a meaningful
premium to Tata Steel's 4x target multiple and high international exposure. SAIL trades at a discount to global peers − now at 5.4x CY09 EV/EBITDA.

•Steady growth; strong balance sheet — We expect sales volumes to grow by 7% in FY10 and 9% in FY11. Saleable steel capacity should grow from 13m tpa to 23m tpa by 2012. Of the three domestic steel majors, SAIL is the only one with a net cash position (Rs32/share as of Dec 2008). SAIL's net debt/equity ratio was -0.5x as of March 2008 versus 1.7x for TSL and 1.5x for JSTL.

•Risk factors — 1) Further steel price declines; 2) Delays in access to captive iron ore; 3) FX rate changes; 4) Lower volume growth; and 5) Govt. ownership.

To see full report: SAIL

>Cadila Healthcare (SHAREKHAN)

Cadila enters into drug developmental deal with Eli Lily

Zydus Cadila (Zydus) has signed a new collaborative drug discovery and development deal with US-based Eli Lilly to develop drugs focusing on the area of cardiovascular diseases. As per its earlier deals with Piramal Healthcare, Jubilant Organosys and Suven Life sciences, Eli Lilly has adopted a similar approach and will pay Zydus for finding new drug candidates and taking them to mid-stage trials, at which point Eli Lilly will have the option to step in and licence the most promising therapies.

· About the deal

Zydus will work to discover and develop potential molecules against a novel target, primarily in the cardio-vascular research space. Zydus will initiate the drug discovery and identify the potential drugs. It will also conduct animal trials (ie pre-clinical trials) on the potential drugs and take them up to mid-stage human trials (ie Phase-II Human Proof-of-Concept). Eli Lily will provide chemical starting points as well as expertise and feedback regarding clinical and regulatory aspects as needed to potentially increase the probability of success of the programme. The collaborative research programme may continue for a span of up to six years.

As part of the agreement, Eli Lily will have the option to licence any promising molecule at different stages. Under the deal, Zydus could receive up to $300 million in potential milestone payments and royalties from sales upon successful launch of any compounds derived from the research programme.

· Cadila to reap in cash flow benefits in long term

Although the deal would fructify in the longer term (as currently Zydus would incur all the expenses for the research), yet this alliance seeks to increase productivity in drug discovery and development by synergising the unique strengths of both the companies.

· A win-win situation for Zydus and Eli Lily

This deal reinforces our thrust on Zydus’ research and development (R&D) capabilities as the company will get access to world-class expertise of Eli Lily besides regulatory .

To see full report: CADILA HEALTHCARE