RESEARCH: IL&FS INVESTSMART
RATING: BUY
CMP: RS 2,357
IL&FS Investsmart initiates coverage on L&T with a target price of Rs 2,904 (19x FY10E). L&T's core business of engineering and construction (E&C ) is likely to see domestic market opportunity of Rs 17 trillion over the next 5-7 years. L&T is set to become a Rs 51,000-crore enterprise by '10 with 33% CAGR in sales and 40% CAGR in PAT through FY08-10 E. L&T's ability to execute projects in different verticals puts it ahead of its competitors.
It is likely to maintain strong momentum, given its presence in growing sectors like hydrocarbon, infrastructure and power, along with a strong foothold in the Middle East market. L&T is also likely to sustain double-digit operating margins, given its margin-protected order book, increased outsourcing and high operating leverage. An existing order book of Rs 55,300 crore, 3x FY08 projected business, provides revenue certainty beyond FY10.
L&T's stock price has corrected 47% from its peak, de-rating from 28x 18-month forward earnings to the current 14x. The surge in commodity prices, worrisome macro-environment and hedging losses in FY08 have shaken investors' confidence in the stock. But L&T's future business prospects outweigh these negatives. So, the stock is likely to command a higher P/E.
SIEMENS INDIA
RESEARCH: JP MORGAN
RATING: NA
CMP: RS 469
Siemens India derives 80% of its revenues from projects and a smaller proportion from products. Around 15% of the company's revenues are generated from power generation, 25% from power T&D , 10.5% from industrial solutions and products, 12.5% from IT, 4% from transportation, and the rest from diverse segments including medical systems.
Its order book of Rs 9,500 crore provides 1.2 years' visibility, but the book has remained stagnant over the past five quarters, mainly due to the execution of the large Qatar T&D project, which once constituted 40% of the company's order book.
Siemens' recent performance track record has been chequered, mainly due to fixed price contracts and cost overruns on the Torrent and MUTP projects. The basic concerns remain the company's sustainability of revenue growth, penchant to disappoint on margins of large projects, and predominance of IT and large overseas project exposing the company to a slowdown in spending.
A key upside risk is that JP Morgan's target price is significantly below consensus and below the management's guidance to double revenue in three years.
SESA GOA
RESEARCH: GOLDMAN SACHS
RATING: BUY
CMP: RS 3,005
Goldman Sachs retains its positive stance and 'buy' rating on Sesa Goa with a 12-month target price of Rs 5,450. However, it has removed the company from its 'conviction buy' list, as Sesa Goa has breached stop-loss territory relative to the coverage universe.
Sesa Goa's share price has fallen 27% since May 22, '08, compared to a 20% fall in the Sensex. This decline is attributed to the weakness in the broader market and not to any failure on the company's part. The 'buy' rating on the stock is based on a positive view on the fundamentals of the iron ore sector, with sustained deficit in seaborne trade well into '09. The valuation suggests an NAV of Rs 4,189 per share for Sesa Goa.
Goldman Sachs has arrived at a target price of Rs 5,450 using a combination of DCF and EV/EBITDA multiple-based valuation. In the long term, the market assigns a premium to Sesa Goa's DCF-based NAV, given the positive sector fundamentals and the company's growth profile.
The stock is currently trading at 2.5x EV/EBITDA FY09E, and is at a 29% discount to DCF-based NAV. The risks include: 1) Weaker than expected iron ore prices on the back of a slowdown in steel production in China; 2) Slower than expected ramp-up in iron ore volumes; 3) Regulatory measures; and 4) Announcement of non-remunerative deployment of surplus cash pile.
SUZLON ENERGY
RESEARCH: UBS INVESTMENT
RATING: NEUTRAL
CMP: RS 201
UBS Investment has lowered its FY09 EPS estimate for Suzlon Energy by 20.5% to Rs 8.6, and FY10 estimate by 23.4% to Rs 12.2. It has also lowered the target price from Rs 305 to Rs 225, but has retained 'neutral' rating on the stock. The lower earnings estimates reflect lower sales volumes and lower EBITDA margins due to higher provisioning costs and raw material prices.
The revised estimates are 24-30 % lower than FY09 consensus estimates. UBS remains bullish on the long-term prospects of the wind energy sector, especially in China and the West. It estimates wind energy to be cheaper than coal and CCGT, including carbon costs. There have also been successful fundraisings by renewable utilities in Europe.
The acquisition of Honiton Energy in China by Suzlon's main shareholder can potentially lead to orders in China , which is a hugely competitive market.
Hansen and REpower account for 40% of Suzlon's m-cap . Hence, 60% of the valuation is accounted for by Suzlon's remaining business, which contributes 90% to its consolidated earnings , indicating a better valuation for the acquired subsidiaries than for Suzlon . This valuation gap for Suzlon is likely to persist, given the execution slippages . Suzlon trades at a P/E of 22.5x for FY09, and 16x for FY10, compared to 30-32 x and 23x, respectively, for its peers.
HINDUSTAN ZINC
RESEARCH: CREDIT SUISSE
RATING: OUTPERFORM
CMP: RS 539
Credit Suisse has reduced the target price of Hindustan Zinc (HZL) from Rs 765 to Rs 705 and upgraded its rating from 'neutral' to 'outperform' . It expects HZL to post EPS of Rs 22 on revenues of Rs 1,820 crore, and has reduced its zinc price forecast for FY09, in line with the sharp correction in LME zinc prices recently. This has largely been driven by zinc surplus of 78 kt in January-April '08.
However, even at the reduced prices, HZL is likely to post strong EBITDA margins of 61% in FY09 and 60% in FY10. The stock is valued at 5x rolling one-year forward EV/EBITDA. Given the pure-play nature of HZL's business, zinc price has been embedded in the market value of the stock: at 5x EV/EBITDA, the market seems to be factoring in a sub-$ 1,500 zinc price on the LME. Even if zinc price remains stagnant at $1,800, HZL's fair value should be Rs 656 per share (34% upside).
SIMPLEX INFRASTRUCTURE
RESEARCH: EDELWEISS SECURITIES
RATING: BUY
CMP: RS 434
Edelweiss Securities maintains 'buy' recommendation on Simplex. The company's revenue growth of 65% in FY08, against revenue CAGR of 33% over FY03-07 , means the efforts put in by the company to boost its manpower strength, asset base, systems & processes, and funding capabilities are bearing fruit.
Simplex is on a high-growth path and investments made during the past few years will benefit the company in future. Having one of the most diversified order books in the construction sector (in terms of segmental and geographical mix), Simplex is hedged against any slowdown in order awards due to impending elections in India. It expects margins to improve, driven by a shift in its order book towards higher margin segments and more profitable overseas operations.
At CMP, for revised fully diluted EPS estimate of Rs 27.9 and 37.4, Simplex trades at a P/E of 16.3x and 12.2x for FY09E and FY10E, respectively. Though the outlook for the construction sector is challenging in the short term, Edelweiss believes Simplex is better placed with limited funding concerns — it has a well-diversified business model, strong growth prospects, and limited real estate & asset ownership exposure.
