Business OpportunitiesAnalysts' corner
HINDUSTAN UNILEVER
Reco price: Rs 280
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Hindustan Unilever (HUL) continues to witness volume deceleration in some of its key categories despite several re-launches, hefty advertising and pricing action implemented by the company since January 2009. As per the latest industry data, the company’s soaps, laundry bars, shampoos and tea categories registered a year-on-year (y-o-y) volume decline of 9.5 per cent, 5.5 per cent, 5.5 per cent and 16.4 per cent, respectively in October 2009. However, the washing powder category provided some respite by achieving a volume growth of 7 per cent y-o-y.
Though October 2009 industry data suggests an improvement in the market share of a few categories, the sales volume of most of the categories continue to decline for HUL. Thus, with the top line growth remaining subdued and increased raw material prices, the bottom line growth would come under severe strain in the coming quarters; December 2009 quarter may still witness some of the benefits of the lower raw material cost. At the current market price, the stock trades at 27.1 times and 23.5 times its estimated 2009-10 and 2010-11 earnings, respectively. Due to the minimal upside from current levels, the brokerage maintains hold on the stock.[----------]
ORBIT CORPORATION
Reco price: Rs 297
Current market price: Rs 300.25
Target price: Rs 350
Upside: 16.6%
Brokerage: Ambit Capital
Orbit Corporation (OCL) is focused primarily on redevelopment of dilapidated buildings in Mumbai, which has support of the Mumbai government. Further, OCL has been able to get an attractive land bank (4.8 million sq ft) despite the land scarcity in Mumbai.
The balance sheet is improving with net debt-equity reducing from 1.3 in June 2009 quarter to 1 in September quarter. The credit ratios have also shown steady improvement. Net debt to trailing four quarters EBITDA has decreased from 5.4 in March 2009 quarter to 3.7 in September quarter. Debtors have also shown a decline in September quarter. Sales have shown steady improvement from 16,521 sq ft to 62,650 sq ft during the same period.
The brokerage has initiated a buy rating with a target price of Rs 350 based on 1 times its NAV. This is ahead of consensus due to inclusion of the Mandwa project, since OCL has already acquired the land. A recovery in the Mumbai real estate market also supports the buy rating. However, rising interest rates are a risk factor.[----------]
SIEMENS INDIA
Reco price: Rs 520
Current market price: Rs 549.10
Target price: Rs 476
Downside:13.3%
Brokerage: Centrum Broking
Siemens reported lower-than-expected performance (standalone) for the fourth quarter ended September 2009 on the back of disappointing EBITDA margins and lower other income. Its EBITDA margins fell 360 basis points y-o-y to 9.8 per cent, and were 119 basis points lower than expectations. Margins in the power segment disappointed and were at mere 1.5 per cent compared with 17 per cent average margin in the last 3 quarters. Expect margins to correct by 110 basis points to 11.1 per cent in 2009-10. Price war in the T&D segment combined with lower premium margins from extra high voltage products would likely hit the high margins in the power segment.
The company claims to witness early signs of revival in industrial investments with the auto sector returning to the capex mode. Huge money raised from primary market in the last 3 months might fuel momentum in infrastructure capex cycle. This would boost order flows in 2009-10 by 20 per cent to Rs 10,560 crore.
At Rs 520, Siemens trades at 23.1 times its estimated 2009-10 earnings, a 27 per cent discount to ABB, which trades at 32.1 times its estimated CY2010 earnings. Siemens’ discount to ABB appears unjustified, given that margins for both are at similar levels and a diversified presence would protect the former during a downturn. Maintain hold.[----------]
TATA CONSULTANCY SERVICES
Reco price: Rs 690
Current market price: Rs 690.20
Target price: Rs 750
Upside: 8.7%
Brokerage: Religare Hichens, Harrison
The volume growth for TCS would be slower in December 2009 quarter at around 3.5 per cent q-o-q compared to 5 per cent in September quarter. Nevertheless, volume growth should be ahead of Infosys with a boost from BFSI vertical. The management indicated that the demand environment has improved materially over the last two quarters. Though discretionary spending is still largely curtailed, the deal pipeline is back to pre-crisis levels due to client-led cost-cutting and business transformation initiatives. Hiring too has picked up in the current quarter. Though room for further margin improvement is limited, the goal would be to sustain margins in a narrow range.
The brokerage has revised its volume growth expectations for 2010-11 from 15 per cent earlier to 17 per cent. EBITDA margin estimate for the fiscal has also been increased by 39 basis points to 27.4 per cent. Further, 2010-11 revenue and earnings projections are revised upwards by 3.2 per cent and 5.3 per cent, respectively, while 2009-10 numbers remain largely unchanged. Consequently, TCS’ target price is increased from Rs 694 to Rs 750. At the target price, the stock would trade at 20 times its 2010-11 estimated earnings. Maintain buy.[----------]
YES BANK
Reco price: Rs 253
Current market price: Rs 267.85
Target price: Rs 327
Upside: 22.1%
Brokerage: Motilal Oswal Securities
Rapid branch network expansion, acquisition of new customers and deepening of existing customer relationships would help ensure that Yes Bank’s asset growth remains higher than industry. Its loan book and net profits are expected to grow at a CAGR of 37 per cent and 32 per cent, respectively over FY09-12. With likely capital raising in next one year, the banks’ tier-I capital adequacy ratio would improve to around 12 per cent and support asset growth over the next 2-3 years.
The bank targets to scale up its branch network to 250 by 2011-12 and 750 by 2014-15 from 126 as of September 2009. The bank mainly focuses on the national capital region and the western region, which would help it to increase its CASA ratio from the current 10 per cent to 14 per cent by 2010-11 and 16 per cent by 2011-12. As of September 2009, its gross NPA ratio was 31 basis points and provision coverage ratio was 75 per cent. Its standard restructured loans are one of the lowest at 96 basis points.
The brokerage expects the bank to earn a return of over 1.5 per cent on assets and 17 per cent on equity over the next three years, despite equity dilution. Given the superior return ratios, superlative growth and a competent management, Yes Bank could get premium valuation. The stock trades at 2.3 times its estimated book-value and 15.7 its earnings for 2010-11.
Current market prices as on December 3