Fw: Company Report - Steel Authority of India Ltd and Express Idea - Midcap

 

Steel Authority of India Ltd: Not yet out of the woods – SELL CMP Rs83.2, Target Rs70.7, Downside 15% Steel Authority of India Ltd (SAIL) has underperformed the Sensex by 19.7% over the past one year, on account of concerns over the delays in the company's expansion projects, lower margins and availability of iron ore. SAIL's expansion plans have been facing delays in project implementation besides cost escalation. Projects which were earlier expected to be completed by FY12 are now estimated to get over in a phased manner by FY14E. Volume growth over the last five years has remained stagnant due to delay in capacity addition and technical issues at various plants. We believe these issues would continue over the next one year as benefits of the new capacities would set in only from H2 FY14. We expect sales volume growth to remain flat in FY13 and increase 9% yoy to 12.8mn tons in FY14 as the impact of incremental production from new capacities would be offset by the shutdown of old facilities. The full benefit of new capacities would be witnessed only by FY15, where we expect the company to register a volume growth of 14.6% yoy to 14.7mn tons. SAIL's Gua mines have remained closed since June '11 and its Bolani mines were also shut for a month due to expiry of forest clearance. The company's margins have been hit over the last two years on the back of high fixed costs, high coking coal costs, increase in consumption of externally purchased coke and degrading product mix. EBIDTA/ton in Q3 FY13 is expected to decline to its lowest level since FY04 as steel prices decline sequentially. Though we expect margins to improve going ahead, we believe it would remain below its 5-year historical average. Earnings growth would further decline on account of rising interest costs and depreciation. At the CMP, the stock is trading at 7.2x FY14E EV/EBIDTA, higher than its domestic as well as international peers. We assign no value to the company's CWIP, given the dismal track record of SAIL's execution capabilities. We value SAIL at 6.5x FY14E EV/EBIDTA and arrive at a fair value of Rs70.7. At the CMP, the stock is 15% above our fair value; Initiate coverage with a SELL rating. Click here for the detailed report on the same. Midcap Trades After underperforming in 2011, Indian equities have outperformed its global peers in 2012 year-to-date. Initially, the rally was limited to large caps. However, over the past 3 months, small and mid cap stocks (a jump of 17% in CNX Midcap) have recorded smart gains. Likelihood of continued Government action (most recent being passing of opening of FDI in retail in Lok Sabha) and a supportive global sentiment is expected to trigger further upside in the stock market. A possible cut in CRR in the upcoming RBI policy meet and Repo cuts from January 2013 are added triggers which can further accentuate the current momentum. Based on our reading of charts, the Nifty appears headed towards the 6,400 mark, which implies 8.5% upside from current level. We believe midcaps could rally even more, possibly 15-25 in case of many companies. We recommend 9 midcap ideas based on technical analysis. We have categorized our picks into the following three buckets based on technical indicators: Category Action advised Stocks I Momentum trades JB Chemicals, Divis Labs, Shriram Transport, IB Real Estate II Bottom fishing ideas Adani Enterprises, Punjab & Sind Bank, Phoenix Mills III Defensive bets DCB, Vijaya Bank Recommendation Stock Reco Price Target SL Exp. Returns (%) Momentum Trades J.B. Chem 86 98.5 75.5 15 Divis Labs 1162 1320 1120 14 IB Real Estate 75 89 65 19 Shriram Transport 691 750 640 9 Bottom Fishing Ideas Adani Ent 249 275 232 10 Phoenix Mills 233 300 195 29 PSB 72 81 66 13 Defensive Bets DCB 47 55 42 17 Vijaya Bank 61 71 51.5 16 Click here for the detailed report on the same. Warm Regards, Amar Ambani

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Fw: Investor's Eye: Thematic Report (Piping hot); Update - HDFC Bank (Price target revised to Rs712)

 

 

Investor's Eye [December 07, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   THEMATIC REPORT Piping hot Key points Global demand-supply gap to widen: CY2012 began with a production shortage of 12.5 million kg. With tea production down in the key black tea exporting countries, the demand-supply gap in the international market is expected to rise further at the end of the year. As per industry data, black tea production from key tea exporting countries for the first nine months of 2012 dropped by about 3% year on year (YoY; or 41 million kg) to 1,427.5 million kg. The industry expects CY2012 to end with a production shortfall of around of 50 million kg of black tea.  Domestic tea prices to remain firm, to benefit domestic tea companies: The supply shortage in the domestic and international markets has led to a spike in the tea prices in the domestic market. The raw tea prices in India are currently trading at Rs15-20 per kg, higher than last year's price. However, with a lower yield the sales volume has been affected for most. Hence, we don't expect any significant expansion in the margins of the domestic tea players in FY2013. With the demand-supply gap likely to expand further in the coming months, the tea prices are expected to rise higher in the next year. On the back of expectations of stable sales volume, we might see the profitability improve substantially in FY2014.  Maintain Buy on Mcleod Russel, recommend Jayshree Tea as a short-term trading idea: Indian tea is gaining preference in the international markets while the domestic tea market is growing at a steady pace of 2-3% YoY. The favourable demand-supply environment would keep the Indian black tea producers in a sweet spot, as tea prices are expected to remain firm in the domestic and international markets with no signs of easing of the deficit globally. We believe companies like Mcleod Russel, Jayshree Tea India Ltd (JTIL), Harrison Malayalam, Warren Tea and Goodricke are likely to witness an improvement in profitability in the coming years. We maintain our Buy recommendation on Mcleod Russel with a revised price target of Rs381 (10x based on average FY2014-15 earnings of Rs38.1). JTIL is another key domestic player that is likely to witness a handsome improvement in its profitability in the near term. Hence, we recommend it as a short-term trading idea (with a six-month time horizon).    STOCK UPDATE HDFC Bank Recommendation: Hold Price target: Rs712 Current market price: Rs693 Price target revised to Rs712 We interacted with the management of HDFC Bank to discuss the growth outlook in the evolving macro environment. The key highlights are as under: Operating leverage to play out Due to a sharp increase in the number of branches (819 branches added in the past three years) that too outside the top ten cities, the cost-to-income ratio increased to 49.0% from 48.0%. Of the total 2,620 branches, around 895 branches are around 24 months old and are close to break-even. Generally, it takes around two to three years for these branches to break-even and slightly lesser in case of branches located in top cities. Further, the average branch addition is likely to slow down to around 250 per year, which would aid in lowering the cost-to-income ratio to 46% levels (50-70 basis points/year) over the next two to three years. Corporate lending book to grow at ~15% while retail to remain a key driver  Though the bank's loan book grew by ~23% year on year (YoY) in Q2FY2013, the bank expects the FY2013 loan growth to be around 22% YoY. Within this, the corporate loans are expected to grow at a slower rate of 10-15% YoY, whereas the retail loans will continue to grow at a healthy rate of 26-28%. As the bank penetrated in newer geographies, the components within the retail (vehicle loans, gold loans etc) are showing a strong traction. Further, the revised priority sector norms will facilitate lending in the sector and the bank expects to meet the requirement of the sub-heads (within overall limit of 40%) in the next 18 months. NIMs likely to remain stable  The bank's 70% of the liabilities are retail in nature and are expected to get re-priced over Q3FY2013 and Q4FY2013. This is likely to ease the pressure on the net interest margins (NIMs) due to a decline in yield on asset book. Moreover, the bank has one of the highest current and savings account (CASA) ratios in the sector (45.9% in Q2FY2013), while 70% of the non-CASA deposits are from the retail customers. Therefore, the NIMs are likely to be maintained at 4.2-4.3% level. Outlook and valuation HDFC Bank stands out from other banks as it delivered a consistent growth in its profits coupled with an impeccable asset quality. Going forward, the steady margin and a strong growth in the retail segment will drive the operating performance while the lower slippages are expected to moderate, keeping credit costs under check. Consequently, we expect the bank's earnings to grow at a CAGR of 21.6% over FY2012-15. On the valuation front, the stock currently trades at 4x its FY2014 and 3.4x its FY2015 book value. We are rolling over the price target on an average book value of FY2014 and FY2015 by keeping the multiple same. Thus, our revised price target stands at Rs712 (3.8x average of FY2014/FY2015 book value). Given the limited upside, we maintain Hold rating on the stock. Click here to read report: Investor's Eye