Saturday, September 25, 2010

>STRATEGY: Which stocks to buy now?

Buy under-valued, under-performing stocks
Given the pace of the rally, we believe the market is vulnerable to a correction. We believe even if the market uptrend continues, the outperformers may see some rotation. We, therefore, screen for stocks that have under-performed the current rally and are cheap relative to their history as a means of identifying ideas for investors. Some of the large cap stocks that look attractive on this screen are Reliance, Zee, BHEL, Sterlite, Wipro and Maruti. These are not necessarily stocks on which our fundamental analysts have a Buy rating currently.

Stocks vulnerable to a correction
Similarly, stocks that have outperformed the market sharply and are expensive relative to history are most vulnerable in a correction. As expected these include many stocks in the financial space like SBI, ICICI, HDFC Bank and HDFC and other large cap names like Bajaj Auto, Ambuja Cements, Bharti and ONGC. Similar to the list above, these are not necessarily stocks we are negative on from a fundamental point of view but stocks that tactically could under-perform in a market correction.

Other stocks that have under-performed the market
For the purpose of identifying laggards, we have taken the base as the market lows in May, 2010. The market has bounced over 20% from these lows. Other stocks that have lagged in the rally include Lupin Labs which is one of our preferred stocks. On the other hand, we continue to like stocks like Tata Motors and United Spirits that have been sharp outperformers in the rally.

To read the full report: INDIA STRATEGY

>ORIENT GREEN POWER: IPO NOTE; Unexciting ‘Orient’ation

Orient Green Power (OGPL) is India’s leading renewable energy-based power generation company focused on developing, owning and operating a diversified portfolio of renewable energy power plants. OGPL, which currently has an installed capacity of 213.0MW, has another 836.5MW of prospective capacity expected to get operational by FY2013.

Huge potential for the development of renewable power: India’s renewable energy-based power capacities have increased their share of total power capacity from 2.0% in FY2003 to around 10.0% in 2010. Despite this, the renewable power sector still has huge potential, which remains untapped. The country’s wind power capacity stands at 10,890MW although the potential has been estimated at approximately 48,500MW. The government has announced a number of fiscal incentives and measures such as renewable power obligation and the renewable energy certificate mechanisms, which are expected to spur growth of this sector.

Leading player in the renewable energy segment and poised for rapid growth: OGPL plans to increase capacity by more than four-folds to 1,049MW by FY2013 and is well poised to capitalise on the untapped potential in the renewable energy space. OGPL currently has 405MW of wind power committed projects, and the infrastructure is in place for majority of the projects. Financial closure has also been achieved for most of the projects. It may be noted here that the execution risks and project commissioning time are lower for renewable energy projects due to the lower land requirement and lesser regulatory hassles. Hence, we believe that OGPL has good revenue visibility going ahead.

Lower PLFs to suppress IRRs: OGPL’s wind energy plants currently have a PLF of 20-21% (varies according to wind density), which is lower than the normative PLF of 25% set by the CERC. This would result in the company reporting lower IRRs than the achievable IRRs if CERC’s prescribed norms are achieved. Moreover, the company also does not have fuel supply contracts in place along with lower availability of fuel for the biomass plants, which would result in lower PLF than the normative standard set by CERC.

Outlook and Valuation
The renewable energy sector is set for healthy growth due to its vast unexplored potential and supportive government policies. Leader OGPL has also charted out aggressive expansion plans to capitalise on the emerging opportunities in this nascent but growing industry.

At the lower and upper price bands OGPL is available at implied P/BV of 1.7x – 1.9x on FY2012E financials, which we believe is fair considering higher RoE’s of its business and the risks associated with lower PLFs. The IPO is available at a premium to its private sector peer Indowind Energy (1.3x FY2012E P/BV), which has lesser operational assets at 44MW. For OGPL, the EV/MW works out to Rs6.3cr and Rs6cr on FY2012E capacity at both ends of the price band, which is at 10% and 7% premium to its replacement cost, which limits further upside
considering the return ratios. Hence, we recommend a Neutral view on the IPO.

To read the full report: ORIENT GREEN POWER

>CANTABIL RETAIL:IPO NOTE; Expansion led growth

About Cantabil Retail (CRIL): CRIL, an integrated discount apparel retailer, is in the business of designing, manufacturing, branding and retailing of apparels under the brands ‘Cantabil’ and ‘La Fanso’. The ‘Cantabil’ brand offers a complete range of formal wear, party wear, casuals & ultra casual clothing for men, women and kids in the middle-to-high income group. The ‘La Fanso’ brand caters to men’s segment in the lower-to-middle income group. Apparel range catering to a wide customer base, strong in-house design & research team and inhouse integrated capacity, are some of the strengths of CRIL.

Retail network of 411 outlets: Currently, CRIL has a network of 411 outlets (Cantabil - 270, La Fanso - 141), predominantly in North (230) and West (113), with total area under operation of 3.17 lakh sq.ft. Out of this, 268 stores are operated under Franchisee owned/leased and Franchisee operated (FOFO) model, while the rest under Company owned/leased and Franchisee managed (COFM). It intends to open 180 new outlets in the next two years; 80 in FY11e and 100 in FY12e.

Bahadurgarh manufacturing facility to reduce dependence on third parties: Presently, CRIL has three in-house manufacturing/finishing units and four warehouses located in Delhi. They also have third-party dedicated units manufacturing exclusively for CRIL and fabricating arrangements with 94 manufacturing units to which CRIL outsources cutting and stitching. CRIL is proposing to set up a large integrated manufacturing facility at Bahadurgarh to reduce its dependence on third-party fabricators and to meet growth needs.

Valuation and Recommendation: CRIL’s diversified product basket in the discount apparel segment, coupled with wide retail network, provides strong edge in the highly fragmented and competitive marketplace. Not only has Cantabil scaled up its business (Turnover up 9x and profits 12.5x in 4 years), it has also improved its operating margin by nearly 620bps in last four years and with the commencement of proposed facility at Bahadurgarh, it will provide further impetus to its margin profile. Given the proposed store expansion plans, we expect CRIL to witness strong growth in the medium term. At the higher band, valuations at ~15.4x FY10 EPS look reasonable in comparison with its peers. Higher inventory, working capital requirements and leverage (2.1x preissue) constitute key risks.

To read the full report: CANTABIL RETAIL

>Ashoka Buildcon Limited: IPO NOTE

Ashoka Buildcon Ltd (ABL) is a Nashik based EPC contractor having pan India presence. Company owns 23 projects on BOT (Built Operate Transfer) basis covering 1100 kms and 6 foot
over bridges which are operational. Other business vertical of ABL would include sale of ready mix concrete for road construction and civil works. ABL can also provide toll collection services to third party BOT projects. ABL is also capable of providing EPC solutions for power sub stations.

In last 4 years ABL's EPC revenues have increased by a CAGR of 48%, Toll revenues have surged by 47%. Revenues from ready mix concrete business grew by CAGR of 33% in last 4 years. EBITDA profits of ABL saw a rise of 48% while profits after taxes witnessed growth of 130% in previous 4 financial years.

Investment Rationale:
Proven track record of order execution and O&M services across road industry ABL has a proven track record of constructing 2390 kms of road projects across the country. ABL is also capable of providing operational & maintenance (O&M) services as well as toll collection services to the existing toll projects for its customers.

Strong base of operational BOT projects
ABL currently has 23 projects on BOT basis, off which 11 road projects spanning across 1100 kms are operational. ABL also has 6 foot over bridges as a part of its BOT projects located in
Mumbai. BOT projects are valued at Rs.6.9 bn in which ABL has 93% stake worth Rs.6.5 bn.

To read the full report: ASHOKA BUILDICON


ZF Steering Gears (India) Limited, a pioneer in manufacturing and supply of Steering Gears for commercial vehicle (CV) space in India, is expected to gain from the rising demand for the steering gears. Apart from the positive business outlook, ZF also has significant liquid investments in its balance sheet which at the current prices is valued of Rs 115 per share. This provides much needed cushion to the stock. Over the next two years ZF is expected to exhibit a CAGR of 29% & 40% in its revenues & profitability respectively. At CMP of Rs 450, the stock is available at 9.1x & 7.3x its estimated earnings of Rs 49.4 & Rs 61.3 respectively. We recommend a BUY at CMP for a price target of Rs 615 an upside of 37% for a time horizon of 12 to 15 months.

Favourable Industry Outlook The Indian CV industry, after facing a severe demand slowdown in the second half of 2008-09, has bounced back strongly, reporting a strong demand recovery across most segments. After posting a drop of 24% in the production of CV for the fiscal 2008-09, the CV industry achieved an impressive 36% growth in 2009-10. The trend has even continued in the first quarter of the current fiscal (Q1FY11) with growth coming in at a robust 36.4% growth. Although the medium to longer term outlook remains strong given the expectations of continued economic revival, the growth in volumes is likely to see some moderation & is expected to be at around 19-20% for FY11 & 7-8% for FY12.

Commands a significant market share ZF Steering commands a strong market share in the domestic CV space with nearly 45% market share. Its only competitor with similar market share is Rane TRW Steering Systems Limited. The balance 10% of the CV Steering Gears market is met by imports from China. Almost 65% of the Tata Motor’s requirement in the CV space is met by ZF whereas in case of Ashok Leyland, it meets nearly 35% of its requirements. Further 100% of the requirement for Eicher Motors & Man Force is met by ZF.

Investment Value per share provides cushion Besides its core business of manufacturing steering gears, ZF has significant portion of income coming from its investments in liquid funds. The cash value per share of these investments is valued at Rs 115 per share and provides significant cushion.

Better Capacity Utilization to enhance its operating margins
Currently ZF has installed capacity of 270,000 power steering gears & 180,000 mechanical steering gears. The capacity utilization in FY10 stood at 51% & 69% for power & mechanical steering gears respectively. With the volume growth expected at 24% & 15% for FY11 & FY12 respectively capacity utilization would improve leading to higher operating margins at 22.8% in FY12 from 20.4% witnessed in FY10, an increase of 240 bps.

To read the full report: ZF STEERING GEARS

>PRAKASH INDUSTRIES: Story remains unhampered

We hosted a conference call with Vipul Agarwal, Director of Finance, Prakash Industries (PKI). The management of PKI has categorically denied any indulgence in illegal activities as mentioned in the Times of India (9th September 2010 issue) with regard to selling coal in the open market from the Chotia mines. The management ascertained that the whole news article was published with malafide intent and entire allegations are baseless. The management also clarified that the Chotia
mine does not fall in the Hasdeo Arand “No Go” region hence, the company can continue mining coal from it as per the approved mining plan.

Mining from Chotia mine to continue undeterred

The management ascertained that mining from the Chotia mine will continue undeterred. It has also applied for two more coal blocks viz Madanpur and Fatehpur, which are under the approval stage. If the approval for these mines is delayed, PKI has the option to continue mining additional coal from Chotia subject to the approval of mining plan from the concerned ministry.

Future growth prospects remain intact
The expansion plans of the company in the sponge iron as well as merchant power are progressing on time. The company also has applied for two iron ore and coal mines each. The approval for these mines is at various stages and PKI expects to start the iron ore mining from Sirkaguttu mine (with reserves of ~10mn tonnes) by March 2011 as it has got the approval for the mining plan. It is waiting for the forest clearance. The said mine is under the jurisdiction of State government hence PKI expects to obtain clearances sooner than the Kawardah mine which is subject to the Central government’s approval. Besides, Sirkaguttu mine does not have forest cover as well and hence, can be operational within two months after getting the requisite approvals.

Continue to recommend BUY with a reduced target price of INR220 to account for iron ore mining delays.
We believe that the rationalization of steel operations and the foray into merchant power would fuel PKI’s profit margins in the coming years. The iron ore mining once it becomes operational will boost the profitability of the steel business. PKI management has guided for the start of Sirkaguttu iron ore mine from March 2011. To factor in delays in the iron ore mining, we have reduced our estimates for FY11 as well as FY12. Considering the growth prospects in the steel business, foray
into merchant power business and the cheap valuations the stock is trading at, we continue to maintain BUY recommendation on the stock. However, we reduce our target price to INR220 in line with reduction in our estimates.

To read the full report: PRAKASH INDUSTRIES