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Brokerage Recommendations

Monday, November 22, 2010

Nirmal Bang calls a ‘Buy’ on Indian Metals & Ferro Alloy (IMFA) 
CMP: Rs 681  Target Rs 1030
IMFA is India's largest, fully integrated producer of Ferro Alloys with 157 MVA installed furnace capacity, 108 MW coal-based Captive Power Plant and extensive Chrome Ore mining tracts.
Standalone Quarterly Result Analysis: Standalone Net Sales for Q2FY11 was up by 82% at Rs 300.32 crores as compared to Rs 165.04 crores in Q2FY10 and was up by 27.4% from Rs. 235.73 crores in Q1FY11. The major reason for increase in the net sales on y-o-y was due to the significant jump in sales volume. The company reported an EBITDA of Rs 107.4 crores in Q2FY11, an increase of 423.1% as compared to Rs 20.53 crores in Q2FY10 and decreased by 3% from Rs. 110.74 crores in Q1FY11. The Company reported an EBITDA margin of 35.8% for Q2FY11 as compared to 12.4% for Q2FY10 and reported 47% in Q1FY11. The margin was impacted due to fall in average price realization. Net Profit for Q2FY11 rose by 1160.8% to Rs 57.24 crores as against Rs 4.54 crores for Q2FY10 and increased by 5.4% from Rs 54.31 crores in Q1FY11 on account of fall in interest rate due to debt repayment. The Company has reported an EPS of Rs 21.73 in Q2FY11 as compared to Rs 1.62 in Q2FY10 whereas the company has posted an EPS of Rs 20.62 in Q1FY11.
Valuation & Recommendation: At current price of Rs 755 the stock is trading at 6.4x EV/EBIDTA for FY11E and 5.2x EV/EBIDTA for FY12E. Whereas on price earning the stock is trading at 9.8x FY11E EPS of Rs 76.9 and 7x FY12E EPS of Rs 108. Looking at the positive industry scenario for Ferro Chrome, near term benefit of capacity increase and further backward integration with captive coal mine, we recommend to BUY the stock with target price of Rs 1030 implying upside potential of 36.4%. 
Angel Broking calls a ‘Buy’ on McNally Bharat Engineering 
CMP: Rs 236    Target Rs 368 
McNally Bharat Engineering (MBE) posted strong set of numbers for 2QFY2011 on standalone basis. The company’s consolidated order book stood at Rs 4,518cr (2.5x FY2010 consolidated revenues) at the end of 2QFY2011 led by the power sector, which lends high revenue visibility. We maintain a Buy on the stock. Strong execution-led growth: For 2QFY2011, MBE posted yoy sales growth of 31%. EBITDA grew 29% yoy, which was restricted due to the marginal decline in EBITDA margin, which came in at 5.4% (5.5%). Bottom-line surged 128% primarily on the back of the 10x jump in other income to Rs 4cr during the quarter. Subsidiary, McNally Sayaji (MSE) posted disappointing performance for the quarter clocking mere 1% yoy growth in sales, while PAT declined by a substantial 39% to Rs 7cr.
Outlook and Valuation: We believe that an improving economic scenario, the continuous government focus on infrastructure spend and a pick-up in private capex augurs well for the companies providing EPC solutions for the core sectors of the economy. Hence, over FY2010-12, we estimate the company to register a CAGR of 32% and 25% in sales and profit, respectively. However, we have revised our sales and EBITDA margin estimates downwards to factor in MSE’s poor 2QFY2011performance and low EBITDA margin posted by MBE for the quarter. At Rs 239, the stock is available at attractive valuations of 9.1x FY2012Ec earnings and 4.8x FY2012E EV/EBITDA. Hence, we maintain a Buy on the stock, with a revised Target Price of Rs 368 (Rs 406). 
Elara Capital calls a ‘Buy’ on Orient Paper & Ind. 
CMP: Rs 55   Target Rs 87 
Strong cement, electric durables volume drives topline: Orient Paper & Industries Limited (OPI) has reported a net sales growth of 8% YoY to INR 3,829mn thanks to higher revenues from electrical consumer durables and the paper division. EBITDA margins, however, declined by 1520 bps YoY (1140 bps QoQ) to 4.9% due to lower margins from the cement business. Net profit declined YoY by 98.8% (98.5% QoQ) to INR 5mn on the back of lower EBITDA and an increase in depreciation expense.
Firm cement volume on capacity additions: OPI reported cement volume of growth of 31.1% YoY to 0.81 mn tonnes in Q2FY11. The company has grown 7.6x faster than industry during the quarter. The increment in volumes was mainly on the back of capacity additions and market share gain. However, on QoQ basis, the cement volume declined by 20.7% due to seasonal weakness. EBIT/tonne for cement stood at INR 66 as compared to INR 758 in Q1FY11 and INR 981 in Q2FY10. Sequential decline in EBIT per tonne was primarily on account of the negative impact of operating leverage and lower realizations.
Maintain Buy with unchanged target price of INR 87: At CMP of INR 56, the stock is trading at EV/tonne of USD35 on the FY12 capacity. Losses in the paper division have been acting as a drag on the overall profitability of the company for the past several quarters. However, with the paper division turning around at the EBITDA level (EBIT level losses of the operating plant i.e. Amlai cut down by 90% QoQ and 63.3% YoY) and cement prices showing a sharp increase, we believe earnings of the company will recover sharply in H2FY11. Cement prices in key markets of the company have gone up by INR 25- 100 per bag. Thus we are maintaining our ‘Buy’ rating on the stock with an unchanged target price of INR 87.

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