CMP: RS 144
MERRILL Lynch has maintained the ‘underperform’ rating on Bajaj Hindusthan, with a reduced target price of Rs 136. It expects the company to be impacted by higher cane prices, following the recent High Court approval for a government-determined price in Uttar Pradesh (UP). The decline in target price is driven by 23% cut in FY09E EPS and lower target P/E of 11.8x at a 10% discount to the sector average. The possibility of an increase in cane costs and likely decline in cane availability are key reasons for the stock’s underperform rating. Merrill Lynch has cut its gross margin assumption on account of higher cane costs and lowerthan-expected production. On July 7, ’08, the UP High Court upheld the power of the government to fix sugarcane prices in its dispute with sugar mills. The government has asked UP-based sugar mills, including Bajaj Hindusthan, to pay Rs 1,250 per tonne of normal variety of sugarcane, compared to Rs 1,100/tonne decided earlier, as per an interim order in FY08. This is higher than Merrill Lynch’s assumption and is set to rise further as the cost of production, the key determinant of price, increases. While the UP High Court has given its final verdict, the Supreme Court’s decision is awaited. Merrill Lynch now assumes a sugarcane cost of Rs 1,350/tonne in FY09. At Rs 1,100/tonne cane price, Merrill Lynch’s FY09E EPS will rise by 101%. However, cane costs will rise, irrespective of SC’s decision, as the cost of cane production has increased to Rs 1,141/tonne for FY08, as estimated by the UP Cane Research Farm.

CMP: RS 290
CREDIT Suisse has upgraded its rating on Indiabulls Real Estate (IBREL) to ‘neutral’ from ‘underperform’ on valuation grounds. The new target price of Rs 308 is based on a 40% discount to the FY09E net asset value (NAV). In a deteriorating macro environment, real estate developers are seeing slowing demand for both residential and commercial projects, which, coupled with difficulties in fund-raising from other sources, may lead to delays in launches. IBREL’s Jupiter and Elphinstone Mill projects and cash invested in other businesses boost its valuation. Further, IBREL has a potential development of 5,447 mw power capacity, which can act as a catalyst for the stock in future. Credit Suisse’s FY09E NAV for IBREL stands reduced to Rs 353 from Rs 447. The company’s Jupiter and Elphinstone Mill projects are nearing completion, and account for Rs 126/share in the valuation, even when valued at a conservative cap rate of 10.5%. These, coupled with net cash of Rs 65 per share, lend comfort to the valuation, as they account for ~70% of IBREL’s current market price of Rs 273. Credit Suisse has revised its estimates for IBREL to account for slower launches, and hiked its weighted average cost of capital (WACC) and cap rate assumptions to factor in a worsening macro environment. Credit Suisse has now assumed a WACC of 14.85% for IBREL (13.3% earlier), on a higher risk-free rate assumption of 9.5% (8.2% earlier), and higher cap rates of 10.5% and 12% (9% and 10% earlier) for commercial and retail lease projects, respectively. Accordingly, the FY09E NAV for IBREL stands reduced to Rs 353 from Rs 447.

CMP: RS 2,113
A BOUT of negative news flow across businesses has weighed on Reliance Industries (RIL) recently. Cumulatively, these risks can shave off 33% from its FY10 EPS and 28% from its fair value estimate. While some of these risks may materialise, most are transitory and are likely to subside. The finance ministry is said to be seriously considering a cut in petrochemical tariffs, given the spike in inflation. Demand for imposition of windfall tax and withdrawal of EOU benefit for RIL’s refinery have gained currency in recent weeks. The RPET and KG-D6 gas projects have also slipped past initial expectations. Further, the uncertainty on Section 80-IB income tax benefits continues, while the Reliance-RNRL court case is still dragging on. The estimates of an October ’08 start-up for RPET and KG-D6 gas do not appear at risk currently, but they cannot be ruled out — especially for the KG-D6 gas project, which RIL has indicated is running four months behind its June ’08 internal target. The company’s FY09 earnings will depend on the timing of project start-up, but overall, CLSA sees limited fair value risk from these uncertainties. Further, with the worse-case scenario (Rs 1,845/share) being only 9% lower, downsides appear limited, even if these uncertainties remain. RIL’s valuation multiples (9x P/E, 6.8x P/CF, 47% EPS CAGR) are now 15% lower than the Sensex on FY10 estimates and in a ±5% range to its global peers (9.6x P/E, 6.8x P/CF).

CMP: RS 687
AXIS Bank’s Q1 FY09 net profit was Rs 330 crore (+89% y-o-y), significantly above the estimates of Rs 225 crore. The company’s earnings drivers remain strong, in line with estimates, with net interest income up 81% y-o-y and non-interest income up 83% y-o-y. Net interest margin was 3.35%, down 60 bps q-o-q on high cost of funds. A striking feature of the bank’s result was the 194% y-o-y increase in provisions and contingencies. Provisions for investment depreciation rose 339% y-o-y, while loan loss provision rose 44% y-o-y. The sharp rise in the former is due to the steep increase in G-Sec yields, to 9.31%. Asset quality deteriorated, with net NPLs rising to 0.47%, versus 0.36% as of end-March ’08. Effects of a slowdown in the sector and lag effects of monetary tightening were reflected in Axis Bank’s credit offtake, which moderated to 48% as of end-June ’08, from 62% as of end-March ’08. The SME and mid-corporate segments are still driving growth. HSBC lowers its loan growth estimates and increases its estimates for credit costs for FY09-11E. It now assumes a 9.5% cost of equity, compared to 7.5% earlier, in view of the deteriorating macro economic environment. Increase in provisions for credit costs and MTM losses on the bond portfolio are key risks.

CMP: RS 440
PUNJAB National Bank (PNB) saw improvement across many fronts in Q4 FY08. Its net interest income (NII) rose 12.7% y-o-y in Q4, compared to less than 5% growth in both Q2 and Q3. Better asset quality led to a substantial fall in provisioning, which boosted the bank’s bottomline. Indiabulls Securities maintains ‘buy’ rating on the stock due to the following reasons: The bank’s net interest margin (NIM), at 3.66%, is one of the highest in the industry. Moving forward, NIM is likely to be sustained at these levels, as PNB recently increased its PLR by 50 bps, while it hiked deposit rates by 25-50 bps. Further, the re-pricing of high-cost deposits by the bank in Q4 will help it to maintain the cost of funds. PNB’s large rural presence helps it to mobilise low-cost deposits. This helps to keep its CASA ratio among the highest in the industry (43% in Q4). There has been a decline in the bank’s NPA ratio, both on a yearly and sequential base, to 0.64%. On a sequential basis, NPAs fell by 69 bps due to the upgradation of technical NPAs, while they declined by 12 bps on a yearly basis. This reflects that PNB has improved its recovery efforts and risk management practices, which will help it to maintain its asset quality in the current high interest rate scenario, as the latter increases the risk of default.