Bull's Eye BUY stock recommendations - ONGC, SHREE RENUKA SUGARS

Research reports on these companies from various research houses with analysis of recent results and recommendations from these houses...


CMP: RS 694
CITIGROUP maintains ‘buy’ rating on Oil & Natural Gas Corporation (ONGC) with a target price of Rs 850. Citigroup has adjusted its estimates for ONGC on the back of a revision in its global oil forecasts to $101/bbl ($105/bbl earlier) for ’08E, $65/bbl ($90/bbl) for ’09E, $75/bbl ($90/bbl) for ’10E, $80/bbl ($95/bbl) for ’11E, and long-term crude assumption (’12E onwards) at $85/bbl ($100/bbl). Despite significant weakening in crude prices recently, FY09E net realisations are unchanged at $52.5, given lack of clarity on subsidy-sharing for the rest of FY09 (assumed at Rs 47,000 crore, higher than the cap).

However, the continued weakness in the rupee offers some cushion to FY09 estimates. The target price is based on price-to-earnings (P/E) multiple of 7x FY09E. This is at the lower end of ONGC’s historical trading band of 7-12x, which adequately captures:
(i) Lack of clarity on subsidy-sharing for the rest of FY09 and FY10-11;
(ii) The government’s attitude towards retail price cuts in the next three months; and
(iii) Likely policy direction of the next government in FY10.


CMP: RS 57
MERRILL Lynch has cut its target price for Shree Renuka Sugars by 56% to Rs 71 per share. The reduction is due to:
(1) 20% cut in FY09E earnings per share (EPS) on account of higher interest and sugarcane costs; and
(2) Cut in price objective (PO) basis to 6x FY09E EV/EBITDA, equivalent to the long-term average of the sector since 1996.
The key driver for ‘buy’ rating is the likelihood of 117% growth in FY09E EPS. Merrill Lynch expects FY09 EPS to double on:
(1) 54% increase in sugar sales to 0.9 million tonnes, including 0.35 million tonnes from the Haldia sugar refinery;
(2) 35% increase in sale of power;
(3) Doubling of ethanol sales to 120 million litres; and
(4) Jump in cane crushing capacity by 49%.

However, Merrill Lynch has cut FY09E EPS by 20%, driven by the likely rise in sugarcane cost to Rs 1,500/tonne in FY09E, compared to the previous assumption of Rs 1,400/tonne. Shree Renuka Sugars may go slow in setting up its proposed Rs 350-crore white sugar refinery at Mundra to avoid a cash crunch following refinancing of Rs 120 crore worth of longterm loans. This could also mean no dilution in equity in FY09E from conversion of 20 million warrants issued to promoters at Rs114 per share, contrary to Merrill Lynch’s earlier assumption.