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Brokerage Recommendations

Monday, November 08, 2010

Angel Broking calls a ‘Buy’ on Reliance  
CMP: Rs 1105   Target Rs 1260 
Valuations attractive: RIL’s stock price has borne the brunt of negative news flows on account of slower ramp-up of KG Basin gas, subdued refining and petrochemical margins and concerns over the redeployment of the cash flows. However, we believe that the current price has discounted the worst case scenario and there is potential upside for the stock from the current levels. We expect RIL’s profitability to register 34% CAGR over FY2010-12E driven by improvement in refining margins coupled with ramp up of oil and gas production at the KG Basin. Moreover, increase in the share of E&P in the profit matrix will in turn reduce exposure to cyclical segments. We expect the company's foray in the newer ventures (such as shale gas, Broadband and power) along with discovery and monetisation of its upstream portfolio to keep it on high-growth orbit going ahead. Moreover, the same is also likely to resolve the concerns over the redeployment of the cash flows On the valuation front the stock is relatively under-valued trading at 1 9x FY2012E P/BV Hence we recommend a Buy on RIL, with a Target Price of Rs 1,260, translating into an upside of 14.1% from current levels.
Refining margins to improve going ahead: Refining margins have been under pressure over the last eight quarters due to decline in demand and addition of the new refining capacity However we believe lower capacity. However, margins scenario is unsustainable as the average operating cost of refineries stands close to US $3.5- 4.0/bbl. We expect the benchmark Singapore margins to average around US $4.5-5.0/bbl during the next fiscal driven by increase in product demand. This, coupled with the improvement in light-heavy crude differential would improve the spreads for complex refiners such as RIL. Thus, the worst in terms of refining margins is behind us. Moreover, improvement in demand in transportation fuels in North America and Europe is likely to further aid margin expansion of complex refineries such as RIL.
Cash redeployment concerns easing: Certain section of the market voiced its concerns about sustenance of RIL’s profitability growth beyond FY2012 on account of limited growth opportunities and significant cash likely to be generated by the company. However, we believe that RIL has already made significant investments in new businesses like shale gas and telecoms, and is likely to crystallise its plan to foray into the power segment. Thus, on account of the same, the cash redeployment concerns have been addressed to a large extent. Moreover, the proposed plans to increase capacity of the petrochemical segment and addition of the coker in the refining segment are likely to further consolidate the company’s position in its existing businesses.

Anagram calls
a ‘Buy’ on Diamond Power Infra 
CMP: Rs 241  Target Rs 310 
Diamond power infra is the only EPC player with major captive facilities (80% of the project cost) which gives the company an advantage over other EPC player who outsources 60 to 70% of the project work. We believe the company is well placed to take the benefit of $100 bn spend in T&D sector. We recommend “BUY” on the stock with target price of Rs 310, a potential upside of 33% from CMP.
Only EPC players with Integrated Model: Integrated business model will not only accelerate the margins but help company to bid competitively. Company commenced EPC business in 2006 and now has healthy order book of Rs 1745 cr which is 2x its FY10 sales.
Expansion will accelerate topline while de-risking the product portfolio: The company has done a capex of Rs 274 cr over 2007-2011 which will increase the capacity of LT cables (25000 kms), HT cables (2200 kms) and add new capacities of EHV cables (220-550kv, 2000kms), dry-type transformers (1500 MVA) and transmission tower (48000 MT). Entry into transmission tower business will help company to qualify for transmission projects which will add new segment of revenues.
Higher voltage + In-house manufacturing = Higher Margins: The company was present in low voltage products like LT cables and distribution transformers. Expansion into new product like EHV cables (132 kv to 550 kv), HT cables, Power transformers will enable company to increase margins substantially. We expect a 300 basis point margin expansion over 2010-2013 where the highest contribution will made due to the in-house manufacturing (150 bps).
Turnaround in transformer division: Margins of erstwhile western transformers have increased from 6% to 16% in FY10 which will sustain going forward. Acquisition of Apex transformers (10000 MVA) will help the company to enter power transformer segment and will make them among the top players in transformers industry. We expect the consolidation to be done in FY12 which will add substantially to sales and profit of transformer division.
Valuation: Sales are expected to grow 3 times while profits to grow by 4 times over 2010-13 led by capacity expansion, entry into new segments and margin expansion. At CMP the stock trades at 5x its FY12 E EPS and 4x its FY12 E EBITDA.
Emkay calls a ‘Buy’ on Blue Star 
CMP: Rs 446  Target Rs 543 
Blue Star reported better than expected revenues of Rs 6.9bn in Q2FY11 driven by higher revenues in PEIS division. However, lower margins in other businesses spoil the show
EBIT margins in EMP and Cooling Products decline190bps yoy each – along with high interest cost and taxation, PAT decline by 12.6% yoy to Rs 386 mn
Order inflows up 8.4% yoy to Rs 7.2 bn and order book up 10.1% yoy to Rs 20.0 bn - expect order inflows to grow at 20% in H2FY11
Maintain earnings estimates of Rs 25.0/Share and Rs 29.6/Share for FY11E and FY12E – Maintain positive bias with ACCUMULATE rating and target price Rs 543/Share
Revenue growth better than expected: Blue Star (BLSR) reported healthy revenue growth at 23.3% yoy to Rs 6.9bn (better than estimates) led by continued traction in all business segments – (1) EMP&PAC segment grew 12.6% yoy to Rs 4.7bn, (2) Cooling Products division grew by 28.3% yoy to Rs 1.4bn and (3) doubling of revenues in PEIS division to Rs 674mn.
But margins spoil the show: However, continued pressure on raw material costs, execution of FY10 orders and rise in Cenvat rate spoiled the show as the EBIDTA margins shrank by 190bps yoy to 9.7%. The pressure on margins was visible across the segments as (1) EBIT margins in EMP&PAC shrank by 190 bps yoy to 9.4% due to booking of old orders and (2) EBIT margins in cooling products also shrank by similar proportion due to raw material cost pressures and increase in Cenvat rate.
… Along with higher interest costs and taxation, APAT declines 12.6%: BLSR’ borrowings have gone up 3x over H1FY11 driven by the acquisition (Rs 1bn for DS Construction) and stretching of the working capital cycle (Rs 1.2bn) resulting in almost 4x jump in interest expenses. This along with higher effective tax (31%
compared with 24% in Q2FY10) led to 12.6% yoy decline in APAT to Rs 386 mn.
Order inflows grow 8.4% yoy to Rs 7.2 bn in the quarter: Order backlog grew 10.1% yoy to Rs20bn, led by order inflows across sectors. Order inflows grew 8.4% yoy to Rs7.2bn – in line with our estimates. BLSR made good inroads in the power sector (for electrical orders) and industrial sector (for mechanical & instrumentation orders). BLSR received Rs 1.3 bn order inflow from MIAL.
Maintain our FY11E & FY12E estimates, Reiterate 'BUY': We continue to hold positive bias on BLSR in view of (1) +95% exposure to domestic markets (2) leveraging mechanical skill-set to get industrial projects – erection or piping work in Steel & Hydrocarbons and (3) buoyancy in room air-conditioners and commercial refrigeration. We maintain our earnings estimates for FY11E and FY12E at Rs 25.0/Share and Rs 29.6/Share respectively. We reiterate ‘BUY’ rating with price target of Rs 543/Share

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