Research Notes – November 3, 2010

‘Buy’maintained on HCC with lower TP Rs.70

 Buy call is maintained on Hindustan Construction Company (HCC) while the target price is pruned to Rs.70 over one year term. Earlier target price was Rs.78 over one year.

 TP is slashed because of lower profitability for 2QFY11.

 For the second quarter, revenue increased by 13%, which is better than market expectations. Operating profit also appeared better than expected.

 However, interest cost increased by 34% y-y offsetting increase in revenue and operating profit. Higher interest costs adversely affected bottom line.

 Higher interest cost is due to higher debt and higher cost of debt. Company borrowed additional Rs.800 crore in the first half in order to meet its working capital requirement.

 Also raised mobilization advances which attracts higher interest than bank debt.

 Gross debt increased to Rs.3380 crore, 34% higher than March 2010 level and the funds were used to increase working capital by 29%.

 Company has long outstanding dues of Rs.750 crore to be collected from its clients and efforts are underway to collect these payments.

 Debt for FY11 is estimated at Rs.2800 crore as against the earlier projection of Rs.2400 crore and this would have its bad effects on PAT. Thus, PAT estimates are lowered by 11% and 17% respectively for FY11 and FY12.

 Buy call on the stock is maintained on expectation that working capital would be lowered by the company and considering positives that may arise on listing of its subsidiary ‘Lavasa’.

Hold on Suzlon

 Consolidated revenue for 2QFY11 declined by 21.3% to Rs.3770 crore due to weak international market for wind power. Company’s stand alone wind sales is better due to improving trends in the India market.

 Operating profit at Rs.90 crore is driven by operating profit of Repower, at Rs.80 crore.

 International market for wind energy is unlikely to recover in the near term. However, sales may pick up slightly in the domestic market in the second half of FY11.

 Maintain hold with one year target price of Rs.55

Sector Watch – Banking; time to book profit selectively

 It seems that expectations are riding high on 2HFY11 credit growth and deposit growth. However, no significant earning re-rating is in sight while looking ahead.

 On a sequential basis, second quarter loan growth is at 5-6% for private sector banks while it is at 3 -4% for public sector banks. Cost of credit increased by 16% for PSU banks while it declined by 12-13% for private sector banks. Employees cost increased by 14-15% y-y for PSU banks whereas, it is at the rate of 4 -5% for private sector banks.

 In the credit policy review, RBI has increased risk weight and standard provisions for housing loans along with cutting the loan portion to 80% of asset value. An incremental standard asset provisioning ratio of 2% for all teaser rate loans as against 0.4% earlier. All these norms are expected to impact housing loan growth.

 It seems that the primary drivers of loan growth in FY11 would be infrastructure sector in the corporate front and mortgages and auto loans in the retail front.

 Based on recent RBI announcements through the credit policy review, reiterate the stance ‘it is time to book profit in the banking space.

 Private sector banks are preferred to PSU banks in the large cap space and our top picks are ICICI Bank and Axis Bank.

 ICICI Bank is preferred because of expanding return on assets (ROA) and expanding return on equity (ROE) due to loan book growth.

 Axis Bank is preferred because of attractive valuation. Current price is at 2.9 times of FY12 adjusted book value. This looks attractive while compared to its peers.

Sector Watch – Real Estate; RBI new norms to hit luxury housing market

 Three measures introduced by RBI is likely to hit premium housing market.

 Risk weight for residential housing loans of Rs.75 lakhs or more increased to 125% irrespective of the loan to value while risk weight for other loans remains unchanged.

 Curb on the loan to value (LTV) ratio at 80% may check speculation and asset price increase in the luxury housing market segment in the near term.

 Standard asset provisioning at 2% for all teaser rate loans from 0.4% earlier may make an end to teaser rate loans.

 These norms are expected to hit premium housing market in general and Mumbai real estate market in particular because average home cost in Mumbai is over Rs.75 lakhs.

 Companies to affect are HDIL, Indiabulls Real Estate, Oberoi, DB Realty etc and the underperformance of the sector is likely to continue in the near term.

 A slow turnaround in the sector could be expected with the recovery of the office space segment, which is slowly picking up.

Reduce Punj Lloyd –TP Rs.99 over one year

 2QFY11 revenue declined by 30.8% y-y at Rs.1990 crore and operating profit at Rs.180 crore is down 42% as compared to the previous year.

 Operating margin has declined by 180 bps to 9.2% y-y and interest cost at Rs.92.38 crore is higher by 16% over the previous year.

 PBT declined by 86% to Rs.26.20 crore and PAT at Rs.23.92 crore is lower by 54.7% y-y.

 Execution of three out of five Libyan projects already commenced but work on the largest project is yet to commence. Management has viewed that it may take 3 – 6 months for the project execution to improve.

 Company expects order flow to improve by 4QFY11 and the prospects of FY12 depend on the order inflow in FY11.

 Current order book at 3 times of FY11 expected revenue and the order book is comfortable. But the execution delay continues to be the major concern in the near term.

 Maintain target price of Rs.99 over one year term and advise to reduce holdings.

Source: Geojit

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