[sharetrading] Investor's Eye [1 Attachment]

 

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Subject: Investor's Eye

Investor's Eye [March 11, 2010] Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Hindustan Unilever Cluster: Apple Green Recommendation: Hold Price target: Rs243 Current market price: Rs229 Downgraded to Hold P&G has increased the grammage of Tide Natural by 25% to 500gm keeping the price unchanged at Rs20 per 500gm (indicating a price reduction of 20.1%). The company is also likely to increase the grammage of Tide by 25% to 625gm from 500gm currently (indicating a price decline of 20.0%). We believe this is in response to the severe pricing action undertaken by Hindustan Unilever Ltd (HUL) across its portfolio recently to further improve its volume growth and consequently its market share in the detergent category. The soaps and detergent segment contributes nearly 50% to the company?s top line. With the competition intensifying in the detergent category and subdued volume growth in the soaps category, we expect HUL to post a subdued performance in FY2011. During the more aggressive price war of 2004, the bottom line had declined significantly by 31.4% year on year (yoy) and the stock price had corrected significantly and was trading at close to 20x its one-year forward earnings. Thus, to reflect the higher risk and lower earnings growth, we reduce our exit multiple from 23x to 20x and revise our price target to Rs243 (based on 20x its average earnings of FY2011 and FY2012). We also downgrade our recommendation on the stock from Buy to Hold. At the current market price the stock trades at 20.4x its FY2011E earnings per share (EPS) of Rs11.2 and 17.5x its FY2012E of Rs13.1. Thermax Cluster: Emerging Star Recommendation: Hold Price target: Under review Current market price: Rs684 Supercritical foray priced in, book partial profits Thermax and Babcock & Wilcox (B&W) have formed a joint venture to build subcritical and supercritical boilers for the Indian market. The joint venture intends to set up a boiler manufacturing facility with an annual capacity of 3,000MW involving a capital expenditure (capex) of approximately Rs750 crore. Thermax will own a 51% stake while B&W will have a 49% ownership in the joint venture. Thermax is expected to invest Rs175 crore in the form of equity. The joint venture is expected to commence production in FY2013. We are positive on the long-term business opportunities arising from the joint venture, but there is no revenue visibility in the near term from the new venture. Hence, we maintain our earnings estimates. We also believe that the market has already priced in most of the positives from the supercritical joint venture but has neglected the project execution risk involved. At the current levels, the stock is trading at 23x FY2011 EPS and 18.7x on FY2012 EPS which is a 5-10% premium to BHEL?s valuation. Hence, we find the stock a little expensive at the current level and advise the investors to book partial profits. We, however, remain positive on the company and maintain our Hold recommendation on the stock with the price target under review. India Cements Cluster: Ugly Duckling Recommendation: Reduce Price target: Rs115 Current market price: Rs121 Price target revised to Rs115 xIndia Cements has raised Rs295.62 crore (USD65 million) through the private placement of 2.46 crore shares with qualified institutional buyers at a price of Rs120.2 per share. The proceeds from the qualified institutional placement (QIP) are expected to be utilised to part fund the company?s capital expenditure (capex) requirement. Though the company has started delivering a healthy volume growth due to capacity addition and though cement prices have also recovered in the past three months in the southern region, we believe the earnings of the company would deteriorate in FY2011 on account of cost inflation in terms of an increase in coal?s price and freight cost, and the expected decline in the average realisation for FY2011. Hence, we maintain our Reduce recommendation on the stock with a revised price target of Rs115 (based on price/ book value of 1x on FY2011). At the current market price the stock trades at a price/earnings of 17.9x, discounting its diluted earnings per share for FY2011 and an enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 6.9x its FY2011 earnings estimates. SECTOR UPDATE Sugar Book out of sugar stocks Sugar prices in international markets have been on a freefall for the past couple of weeks. The fall, which was triggered by deferment of purchases by the importing countries due to high prices, has gathered momentum lately and has led to panic selling/profit booking by investors/speculators (for more details refer our sugar sector update dated March 09, 2010). The sugar prices in the domestic market that are now essentially determined by import parity price have also corrected accordingly. The profitability of sugar companies is highly sensitive to sales realisation, and at the current realisation of Rs32-33 per kg, the blended realisation (including levy sugar realisation) is below the cost of production. If prices sustain at these levels or fall further, the sugar companies are likely to report minimal profits/losses. However, the current market price of sugar stocks factor in the decent profits by the sugar companies. Considering the high degree of uncertainty on sugar prices and thus high risk to the profitability of the sugar companies, we have had a cautious stance on the sugar stocks over the past month. However with the global sugar deficit expected to ease out substantially, we opine that at the current prices the risk in sugar stocks outweigh the likely rewards. We thus close our call on Balrampur Chini Mills and Dhampur Sugar Mills and advise investors to book out of both these stocks. MUTUAL GAINS Sharekhan's top equity fund picks We have identified the best equity-oriented schemes available in the market today based on the following 5 parameters: the past performance as indicated by the one, two and three year returns, the Sharpe ratio and Information ratio. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation. Information Ratio is one of the most important tools in active fund management. It is the ratio of active return (the return over the index return) to active risk annualized. A higher Information Ratio indicates better fund manger.

Regards, The Sharekhan Research Team

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