Research Notes – October 29, 2010

Reiterate ‘buy’ on BGR Energy – TP Rs. 968

 Buy call is reiterated on BGR Energy with a one year target price of Rs.968. The stock is currently traded at Rs.763 range.

 Company has reported 2QFY11 revenue of Rs.1130 crore, which is 143% up y-y and 25.2% q-q.

 For the 1HFY11, sales increased by 162% and PAT grew by 172% y-y.

 Excellent results are due to faster than expected pick up in execution of existing projects.

 Operating margin at 12% is better than the expected level and the half year numbers indicate increasing execution momentum.

 Company has maintained strong order intake guidance at Rs.15000 crore and has already won orders worth Rs.4470 crore till date in the financial year. Company has also bid for the boiler portion of NTPC bulk deal of 11×660 MW.

 With strong order intake guidance, BGR is expected to clock in revenue increase of 50% in FY11.

 Company has raised debt worth Rs.518 crore in the first half and the working capital at Rs. 230 crore is in line with faster execution of large EPC projects.

 The stock is traded at 16.6 P/E of FY12 estimated EPS while the capital goods peers are traded at a P/E multiple of over 23.

 The stock is likely to be re- rated in the market ased on its traction from supercritical JV, strong order inflow and healthy earnings growth.

Maintain ‘buy’ on IRB Infra – TP Rs.323

 IRB Infra has reported 37% y-y increase in revenue for 2QFY11 at Rs.500 crore because of 46% increase in construction revenue and 26% rise in BOT revenue.

 Operating profit increased by 34% y-y at Rs.240 crore with 49.1% operating profit margin against 50.1% last year.

 Construction margins increased to 24% versus 20.7% last year due to favorable project mix.

 Overall income tax rate at 15.7% is much lower than the street estimates of 25.4% and PAT increased by 40%y-y to Rs.99.1 crore. PAT looks better than the market estimates.

 In the BOT segment, daily collections were down by 3% and it seems that the decline is only due to seasonality. Daily collections improved by 20% y-y because of the ramp up in the Baruch –Surat project. Company’s flagship project, Mumbai –Pune Expressway has reported 4.7% y-y increase in toll revenue.

 To achieve FY11 estimates, company has to achieve 7% BOT revenue growth and almost to double its construction revenue. Construction of four new projects would help the company to achieve the targets.

‘Buy’reiterated on Bajaj Auto – TP hiked to Rs.1650

 Buy call on Bajaj Auto is reiterated with an upward revision in target price to Rs.1650 over one year from the earlier target price of Rs.1530 due to better than expected performance of the company.

 Based on higher volumes, EPS projection has also been raised by 7-8% for FY11 and 12.

 The company has reported better than expected volume and earnings beat for 2QFY11.

 Based on its recent performance, volume sales estimates have been hiked to 4 million vehicles from 3.9 million and the new projections are in line with the company’s guidance.

 For FY12, volume growth is projected at 15% from 14.8% earlier due to better export growth at 17.4% from the earlier estimate of 15%.

 Operating profit margin is expected at 20.3% for FY11, which is a tad better than the company’s estimate of 20%.

 The newly launched Discover 150 sold an average 36000 units per month in the second quarter, against the company’s estimate of 30000 units a month. Based on better sales and capacity addition in the Pantnagar plant, 2HFY11 sales are expected to increase by 7% over sales volume in 1HFY11.

 Reiterate buy with a higher target price of Rs.1650 over one year.

Retain ‘buy’ on Sun TV – TP hiked to Rs.575

 Sun TV has reported 33% y-y growth in revenue at Rs.424.7 crore for 2QFY11. Sequentially, 2Q revenue was lower by 4% due to lower revenue from movies.

 The company has reported improved performance in all other segments. Advertising revenue at Rs.230 crore is up by 4%q-q despite the absence of any major festivals during the quarter. The management has projected 18% revenue growth from the advertising segment.

 Sun TV has also reported increase in subscription revenue also. DTH revenue increased by 3% while cable connection revenue increased by 6% during the quarter.

 Operating profit margin declined to 78.2% in the second quarter from 81.7% in 1QFY11 due to higher expenditure related to promotional activities of movies including Enthiran.

 Revenue from the tent –pole movie Enthiran has not been included in the second quarter numbers as the movie was released in October. The movie has already provided a return of 25% till now and the final numbers would be disclosed in 3QFY11.

 Third quarter numbers of Sun TV would be excellent as revenue from Enthiran would be included in the 3QFY11 results.

 Reiterate ‘buy’ on the stock with a revised target price of Rs.575 over one year. The TP is at 25 multiple of FY12 expected EPS of Rs.23.

Hold on SAIL – TP Rs.210

 2QFY11 PAT at Rs.1090 crore is lower by 34% y-y and 7% q-q.

 Net sales at Rs.10800 crore better by 8% y-y and 18% q-q. However, sales as well as PAT are below market expectations.

 Operating profit margin at was lower by 449 bps at 15.7% and operating profit at Rs. 1690 crore is down by 29% y-y and by 8% q-q.

 Sales bolume at 3.3 million tons lower than market expectations and average sales price at Rs.34993/ton is l;ower by 11% q-q, possibly due to higher than expected discount.

 The risk –reward ratio does not seem appealing and the stock is recommended to hold with a one year target price of Rs.210.

Market Outlook

 The Sensex is expected to target 21000 by the end of 2010 and the index may move upward to 23900 by end 2011.

 Sensex EPS is expected to improve from October 2010 onwards, after minor declines for the previous eight months.

 At the 2010 target, the Sensex would trade at 20x FY11 earnings and at 16.5Xfy12 earnings.

 At the 2011 target, Sensex is expected to be at 18.8 multiple of FY12 and at 16.1 multiple of FY13 expected earnings.

 The outlook is bullish on automobile, engineering, IT telecom and one could be over weight on these sectors.

 Underweight sectors are banking, cement, metals and energy.

 Economy continues to be robust and the growth rate is sustainable.

 A little concern is widening trade deficit, which has accelerated to USD30 -35 billion over the last two quarters.

 Indian Rupee remains stable driven by capital inflows and the country may have positive balance of payment despite widening trade deficit, because of good FII equity and debt market inflows.

 BHEL, HDFC, HCL Tech, Ultratech Cement, PNB and Adani Power are out from the model portfolio while Bajaj Auto, IRB Infrastructure, Nagarjuna Construction, Tata Motors and Power Grid are in.

 Weight increased on Bharti and L&T.

 Top buys – Tata Motors, ICICI Bank, BGR Energy.

 Top sells – ABB, DLF, Ambuja Cement

 Top buys – Stocks with strong growth and reasonable valuation.

 Top sells – Over valued and have structural medium term concerns.


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