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Tuesday, September 30, 2008

Stocks Analysis-Power grid corp-SESA GOA-Bharati Airtel-Reliance Capital

POWER GRID CORP
RESEARCH: INDIABULLS SECURITIES
RATING: BUY
CMP: RS 89

INDIABULLS Securities initiates coverage on Power Grid Corporation with a ‘buy’ rating. Power Grid is a central transmission utility engaged in inter-state and inter-regional power transmission business. Over a period of 16 years, it has emerged as one of the largest and best-managed transmission utilities in the world. Currently, it operates around 67,000 circuit km of transmission lines, along with 111 sub-stations and transmits 40-45% of the power generated in the country. The company has around 45 projects in hand, which will drive its revenues and earnings in the medium term. Indiabulls estimates that Power Grid’s net sales and net profit will witness a CAGR of 20.5% and 19.5%, respectively, by ’10 on the back of significant investment opportunities. At the current market price (CMP), the stock is trading at a price-to-book (P/B) multiple of 2.7x. Based on the valuations, the target P/B multiple of the stock is 3.29x, resulting in a fair value price of Rs 110. This implies a potential upside of 21% from the CMP.

BHARTI AIRTEL
RESEARCH: HSBC
RATING: BUY
CMP: RS 776

HSBC retains ‘overweight’ rating on Bharti Airtel with a target price of Rs 1,002. The investment thesis expects sharp growth in the domestic wireless market, outstanding execution of a low-leverage, low-cost business model with high return on invested capital, and continued alignment of majority and minority shareholder interests. Principal risks will be upward revision of subscriber-based criteria for additional spectrum, hike in spectrum charges, aggressive international expansion and higher capital expenditure (capex) than HSBC’s estimates. Receipt of 3G spectrum should aid Bharti in consolidating market leadership. If the new entrants are able to manage roll-outs, players like Tata Teleservices, Reliance Communications and BSNL will be more vulnerable. The impact on Bharti will be the least. Bharti was willing to pay the government an additional Rs 2,600 crore for 4.4 MHz to start up 2G spectrum.

RELIANCE CAPITAL
RESEARCH: MOTILAL OSWAL
RATING: NEUTRAL
CMP: RS 1,173
MOTILAL Oswal downgrades Reliance Capital to ‘neutral’ with a revised target price of Rs 1,340. Reliance Capital’s management has reiterated its objective to emerge as one of the leaders in all business verticals of financial services. The strategy is to create ‘a difficult-to-replicate’ distribution reach across the country, a mass retail customer base and exploit cross-sell opportunities. However, the larger businesses are linked to capital markets, which pose growth uncertainty in the current environment. Life insurance premiums are growing rapidly and Reliance Capital is fast gaining market share. The company has rapidly built its consumer finance book, which stood at Rs 8,100 crore as of June ’08. Motilal expect profits and return ratios to remain low in this business. The general insurance business witnessed strong topline growth in FY08, but is likely to continue reporting losses in FY09. Profitability is expected only in FY10. The broking and distribution venture is scaling up fast and has gained ~3.5% market share in the first year of operation from purely retail business. Motilal has reduced its fair valuations for general insurance, broking and consumer finance businesses due to bleak outlook on either business growth and/or profit growth.

ONMOBILE GLOBAL
RESEARCH: MACQUARIE
RATING: OUTPERFORM
CMP: RS 485
MACQUARIE initiates coverage on OnMobile Global with an ‘outperform’ rating and a target price of Rs 650, implying 42% upside from current levels. Macquarie is excited about the opportunities in the mobile value-added services (VAS) sector in domestic and emerging markets. It recommends that investors should accumulate OnMobile shares to benefit from the robust growth in the mobile VAS space, which is likely to play out over the next 2-3 years. OnMobile Global is the leader in the evolving domestic telecommunications’ VAS and software products sector. The company is a white-label VAS player for mobile, fixed-line and media service providers, with a dominant presence in India and a growing presence in emerging markets. Its promoters include OnMobile Systems (OMSI, unlisted) and the company’s top management. Argo Capital Management (unlisted) is the majority holder (62%) in OMSI.

SESA GOA
RESEARCH: KOTAK SECURITIES
RATING: BUY
CMP: RS 117
KOTAK Securities reiterates a ‘buy’ rating on Sesa Goa with a target price of Rs 300 per share for an investment horizon of eight months. The stock price has been tumbling continuously over the past few weeks. It has now fallen more than 50% from its peak and is even trading at a discount to the price Vedanta paid last year to acquire the company from Mitsui.
At that time:
(i) iron ore prices were half that of the present levels;
(ii) sales volumes were considerably lower,
(iii) cash levels were also much lower; and
(iv) other competitors had shied away from bidding due to imposition of Rs 300/tonne export duty on iron ore just before the process.

Several factors have collectively led to this fall. The key negatives are:
(i) seasonal weakness;
(ii) lower import demand from China, given curtailed steel production due to Olympics and Paralympics;
(iii) global commodities sell-off as financial institutions pull out funds to enhance liquidity amidst the global financial crisis; and
(iv) higher coke prices in China causing weakness in low-grade iron ore prices.
However, these negatives are fading away and this will result in a dramatic shift in sentiment, going forward.

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