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Monday, June 23, 2008

Bull's Eye - NESTLE, GAIL, ONGC, AUROBINDO PHARMA, PUNJ LLYOD, PARSVNATH DEVELOPERS

PARSVNATH DEVELOPERS
RESEARCH: MORGAN STANLEY
RATING: UNDERWEIGHT
CMP: 152

MORGANStanley has downgraded Parsvnath Developers (PDL) to ‘underweight’ by reducing the price target to Rs173, a 50% discount to FY09 NAV estimate (at par to NAV earlier). PDL’s stretched balance sheet coupled with capital requirements for land payment/construction, early stages of execution for SEZ portfolio, and tough property market conditions will impede stock price performance in the near- to mid-term. Morgan Stanley has argued for a 50% discount to account for the stretched balance sheet and tough credit/physical property market conditions, which together will likely limit NAV growth. As of December ’07, PDL had Rs1,300 crore pending land payment (70% of December ’07 equity) to be paid over next 2-3 years; plus, upfront construction cost for commercial projects such as SEZs and DMRC malls. Morgan Stanley see value in PDL’s SEZ portfolio, township portfolio, DMRC/Chandigarh/Rohini malls, and Noida group housing projects.


PUNJ LLYOD
RESEARCH: CITIGROUP
RATING: BUY
CMP: 242

PUNJ Lloyd’s business prospects remain good with an order backlog of Rs 19,600 crore (~2.5x FY08E sales) and continued order inflow momentum evident in the Rs 649 crore order win from IndianOil . Besides Rs 305 crore from SABIC, an amount totalling Rs 54.1 crore from other parties is also under dispute. However, the remaining Rs 276 crore can significantly reduce FY09E/FY10E profits and EPS estimates if written off. Punj Lloyd has had a history of contractual disagreements with clients, case in point being: 1) IOCL–PIL; 2) GAIL; 3) Petronet; and 4) Spie Capag Petrofac. Though the nature of business is such that scope/design changes need to be treated prudently in the accounts. The cut from Rs 493 earlier factors in: 1) Cut in target multiple to 18x (23x); 2) Reducing earnings estimates by 2-3% and 3) Cut subsidiary value to Rs 21 (Rs 38). Punj Llyod has maintained its ‘buy’ rating given 1) stock has fallen 55+% from its peak; and 2) potential upside of 30+% to new target price. Recent sharp correction has largely factored in the Rs 305 crore SABIC order-related auditor qualification. However, it is imperative that outstanding amounts are settled and management follows conservative accounting: 1) writing off disputed amounts outstanding for a long time; and 2) writing them back when it gets settled.

AUROBINDO PHARMA
RESEARCH: HSBC
RATING: OVERWEIGHT
CMP: 308

HSBC has decided to terminate equity coverage of Aurobindo Pharma as a result of reallocation of resources towards different Indian pharmaceutical stocks. Aurobindo was established in 1986 and is one of the largest active pharmaceutical ingredients (API, or bulk drugs) manufacturers in India. Its products include antiinfectives, gastroenterologicals, anti-retrovirals, and products for the cardiovascular and central nervous systems. Final rating and target price HSBC has given final target price of Rs 902 to Aurobindo Pharma. This is based on a three-stage DCF-based valuation which consists of three years of explicit forecasts, 10 years of semi-explicit forecasts and a 25-year fade period. The final rating on Aurobindo Pharma stock is ‘overweight.’ Key risks include USFDA strictures for noncompliance of manufacturing protocols, and any large acquisition, which can necessitate equity dilution for funding the acquisition.
ONGC
RESEARCH: ABN AMRO
RATING: BUY
CMP: 867
Given the lack of transparency in government policy, ABN Amro has raised ONGC discount rate to 13%, thereby maintaining the target price at Rs 1,400. Despite an apparently positive package on upstream subsidies in FY09, ONGC shares continue to underperform the market as investors choose to take the worst-case view. The Indian government (GoI) has pegged upstream subsidies at Rs 45,000 crore in FY09, assuming gross under-recoveries are Rs 2,03,400 crore. The GoI has not clarified what happens if under-recovery turns out to be higher or lower than Rs 2,03,400 crore. The market appears to be assuming the worst, i.e., if the oil price is higher, the entire additional burden will have to be borne by upstream, but if it is lower, the subsidy would remain at Rs 45,000 crore. Given the GoI has declared an apparently positive subsidy package for upstream (contrary to market expectations), we see no logic for assuming the worst case scenario. ABN Amro has raised thier Brent forecasts by $10-25/bbl over FY09-11. In FY09, the upstream subsidy is assumed at the GoI figure of Rs 45,000 crore, despite a lower oil price assumption ($110/bbl), resulting in net oil realisation of $65/bbl. In subsequent years the subsidy is estimated at one-third of gross under-recovery. The price hike in diesel/gasoline has raised the effective price paid by consumers by nearly $20/bbl, which should have positive long-term implications for upstream subsidies.

GAIL
RESEARCH: INDIA INFOLINE
RATING : BUY
CMP: 380

INDIAInfoline has recommend a ‘buy’ on GAIL with a target price of Rs 483. The Petroleum & Natural Gas Regulatory Board is expected to announce tariff notifications for natural gas transmission business, much in line with notification for city gas distribution (CGD) projects. Return on net assets (RoNA) is likely to be capped at 14%. With tariffs for GAIL’s existing pipeline already in line with stipulated RoNA, not much downside to tariffs on these pipelines is expected. For new projects, the 10-year tax holiday will enable the companies to earn actual RoNA higher than 14%. GAIL, with plans of setting up pipelines with capacity of 136 mmscmd, will be a prime beneficiary of the new regulations. India is a gas-starved nation with demand of 180 mmscmd and supply of 85 mmscmd. The scenario will improve with the commencement of production from Reliance Industries’ KG-D6 field (peak production of 80 mmscmd). Further, import of LNG will increase as Petronet LNG raises its capacity at Dahej and commences operations at Kochi. With increasing supplies, GAIL’s core operations of natural gas transmission will witness robust growth over the foreseeable future. GAIL has stakes in more than 30 E&P blocks and three coal bed methane blocks. Any announcement of hydrocarbon discoveries will only add value to GAIL. The only concern is a margin decline on account of petrochemical business and subsidy burden. The stock is attractively valued at FY10E P/E (adjusted for value of listed investments) of 8.1x.

NESTLE
RESEARCH: INDIABULLS SECURITIES
RATING: BUY
CMP: 1,670
NESTLE India posted another good set of numbers for the first quarter of CY08. Net sales in Q1’08 surged 26.4% to Rs 1,090 crore, primarily on the back of a strong growth in domestic sales, which grew 29.2% yoy. Domestic sales witnessed growth across all product groups and collectively crossed the Rs 1,000 crore mark. EBITDA rose 38.2% yoy to Rs 250 crore and EBITDA margin increased 195 bps yoy to 22.8%. This appreciation in the margin was attributable to a judicious price increase, economies of scale, and an improved sales channel mix. All these factors offset the impact of rising raw material prices and energy costs. Net profit soared 54.8% yoy to Rs. 1.6 bn while margin jumped 276 bps on the back of the tax holiday benefits applicable on the Pantnagar factory operations. Nestle possesses a strong pricing power as the Company has achieved consistent growth despite the increase in raw material prices. With increasing disposable incomes in the hands of the middle class, Nestle is well-equipped to tap the opportunities in the FMCG sector, given its operational efficiencies, effective marketing strategies, and innovative product launches.

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