International BusinessAnalysts' corner
Gail India
Reco price: Rs 279
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GAIL India"s (GAIL) board approved an investment plan of Rs 7,500 crore last week for laying the Dabhol-Bangalore and Kochi-Mangalore-Bangalore pipelines.
According to the broking house, the approval of the aforementioned pipelines is seen as positive news, which will give a fillip to GAIL"s growth story. The Dabhol-Bangalore pipeline (16 mmscmd capacity with Rs 4,540 of capex) will source natural gas from the Dabhol LNG terminal.
Similarly, the Kochi-Mangalore-Bangalore pipeline (16 mmscmd capacity with Rs 3,030 crore of capex) is dependent on Petronet LNG"s upcoming Kochi terminal for gas supplies. Also, a reasonable level of comfort on the offtake is assured due to EOIs (expressions of interest) from a number of industries.
Overall, the brokerage estimates that gas volumes for GAIL, which grew at 4.7 per cent annually for the past three years, are expected to jump due to the inherent advantages of gas as a fuel over other fossil fuels and infrastructural bottlenecks being eased due to large investments being made in the sector.
Also, with the setting up of the national gas grid and finds like the KG basin, more industries like fertilisers, power generation, and refining will be able to use gas as fuel. At the recommended price of Rs 279, GAIL is valued at 11.7 and 10.7 times estimated EPS for FY10 and FY11, respectively.
KEC International
Reco price: Rs 373
Current market price: Rs 403
Target price: Rs 477
Upside: 18.3%
Brokerage: Angel Broking
KEC International (KEC), which is a global player in the power transmission and distribution (T&D) network. The company, which recently enjoyed a good inflow of domestic orders primarily from Power Grid Corporation (PGCIL) is well poised to bag more orders from the domestic markets.
Further, KEC derives close to 63 per cent of its revenue from its overseas operations and is expected to clock good growth in this space as well. Thus, KEC is on a high growth path on the back of healthy order book position of Rs 5,163 crore (1.5 times its FY09 revenue), stable margins (registered in spite of volatile commodity and currency markets) and diversification into the railways and telecom segments, where substantial investments are expected.
The report mentions that KEC is the lowest bidder for BSNL"s Rs 5,000 crore telecom order to be allotted in the next two months. The brokerage believes that if KEC secures this order, the same will nearly double its order book, which is not factored into the estimates.
On the valuations, the brokerage believes, historically, KEC has been trading at above 8-12 times its two-year forward earnings. At the recommended price of Rs 373, the stock is trading at 10.2 times FY10 and 7.8 times FY11 estimated earnings.
Max India
Reco price: Rs 206
Current market price: Rs 215
Target price: Rs 260
Upside: 21%
Brokerage: India Infoline
Max India remains well positioned in its two key business areas of life insurance and healthcare. Max New York Life"s annual premium equivalent grew 20 per cent in FY09 versus an average of 6 per cent for private life insurers, reflecting its focus on traditional products, relatively low dependence on ULIPs and a highly productive agency network.
The healthcare business is ramping up fast and the brokerage forecasts that EBITDA (operating profit) from existing facilities will almost quadruple over the next three years. This is due to a expanding hospital network and increase in number of available beds from the current 770 to 1,240 by FY11.
The report says that there is a strong likelihood that the new government would raise foreign holding limit in insurance ventures from the current 26 per cent to 49 per cent.
Max India"s insurance business has been unaffacted as far as future capital inflows are concerned as its JV partner New York Life emerged unscathed from the recent financial crisis and is in a strong position to raise its stake in the fast-growing Indian venture. The brokerage values the stock on a sum-of-parts basis to arrive a value between Rs 260 and Rs 296 per share.
ONGC
Reco price: Rs 1,025
Current market price: Rs 1,040
Target price: Rs 820
Downside: 21%
Brokerage: Citi Investment Research
The brokerage has recommended a sell on ONGC after its Q4FY09 results. ONGC"s March quarter net profit of Rs 2,210 crore (a decline of 16 per cent y-o-y, 11 per cent q-o-q) was significantly below its expectations and was mainly due to higher depreciation, depletion and amortisation expenses and Rs 860 crore of provisions made on account of an ongoing arbitration by JV partner Cairn India in the Ravva field.
The profits were also impacted due to the lower oil and gas production and sales due to the delay in implementation of certain production schemes which include Vasai (Mumbai), Heera and C-Series projects. Also, despite earlier indications of no subsidy burden in the March quarter. ONGC had to share Rs 850 crore as the subsidy for the quarter.
This translated into a subsidy discount of $4.5 per bbl, resulting in net realisations on its own crude oil of $43.4 per bbl. The report says that weakness in crude oil prices has started hurting ONGC, despite lower subsidy sharing, as realisations on JV and international crude decline.
Also, despite talks of deregulation, the brokerage believes that even if petrol and diesel prices are partly deregulated, LPG and kerosene would continue to be loss-making, implying a subsidy burden on ONGC. The report mentions a target price for ONGC at Rs 820, which is based on 10 times FY10 estimated price-to-earnings ratio, at the higher end of ONGC"s historical median band of 7-11 times.
Sun TV Network
Reco price: Rs 235
Current market price: Rs 237.95
Target price: Rs 272
Upside: 14.3%
Brokerage: Enam Securities
Sun TV Network"s (Sun) standalone revenues and net profits rose of 17 per cent and 14 per cent, respectively for 2009. However consolidated profits came lower at Rs 348 crore compared to standalone PAT of Rs 417 crore due to losses on its radio business of about Rs 69 crore.
In the March quarter, standalone revenues grew at 12 per cent y-o-y to Rs 276 crore with ad revenues inching up 6 per cent in this period. There has been an increase in Sun"s channel viewership to 43 lakh viewers (33 lakh at the December quarter) and correspondingly, the DTH revenues were also up by 49 per cent q-o-q to Rs 35 crore.
However, cable revenues remained flat at Rs 35.2 crore. The significant traction in DTH revenue growth will boost margins for Sun. However, ad revenues can give an indication of further stagnation in revenue growth. Adjusting for lower ad revenue growth, FY10E EPS is reduced to Rs 10.7 from Rs 11.2. FY11E EPS is revised upwards from Rs 13.2 to Rs 13.6 owing to lower-than-expected losses on the radio business.
At Rs 272, the stock is trading at 20x its FY11E EPS. Maintain outperformer.
Current market price as on June 26.