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Brokerage Recommendations

Monday, December 06, 2010

J P Morgan calls a ‘Buy’ on Jet Airways

CMP: Rs 829 Target Rs 1090

Initiate with Overweight, PT of Rs 1090: Our PT implies 35% upside potential from current levels. JETIN is the leading private carrier in India with a domestic market share of 26.2% and also has strong international operations connecting 24 international destinations.

Yields accentuated by recovery in premium travel: JETIN is reconfiguring its seats by adding back premium seats reconfigured to economy during the FY09 downturn. This is accentuating yields, which are already trending up in a favorable economic environment – current domestic yields are still 17% below historical peak levels.

Jetlite turning around, competitive threat to international operations abating: Acquired LCC Jetlite (erstwhile Sahara Airlines) is likely to break even in FY12E aided by restructuring of operations. International operations, which are highly profitable, are likely to continue to see strong growth over the next two years - imminent threat from KAIR has receded with KAIR scaling back on international growth plans. We estimate EBIDTAR CAGR of 15.8% over FY10-FY13E.

Balance sheet improving: JETIN has recently restructured its debt, resulting in annual interest savings of Rs 850MM. It is also looking to sell its land in Mumbai, for which it may receive Rs 5 - 5.5B – a potential upside trigger not factored into our estimates. We estimate gearing to decline from 4x in FY10 to 2.6x by FY12E.

Price target, valuation, key risks: Our Sep-11 PT is based on 8x FY12E EV/EBITDAR, a 14% premium to its Asian airlines peer group and a 10% discount to Chinese airlines. We believe the premium to Asian airlines is justified, given stronger growth prospects, debt restructuring, and better long-term growth potential offered by the Indian market. Key risks include slowdown in traffic, increase in aviation fuel prices, a delay in debt restructuring, and an unfavorable outcome of litigation with Sahara Group.




Citigroup calls a ‘Buy’ on NIIT

CMP: Rs 59 Target Rs 81

Interaction with management — We interacted with the CEO of NIIT Mr. Vijay Thadani recently. Presented below are key highlights from that discussion.

Individual Learning Solutions (ILS) on an uptick — Enrollments in India are increasing with products like Infrastructure management, 99 Day diploma and GNIIT doing well. A prominent trend in ILS is that there is a preference for shorter duration courses. ILS should benefit from the positive trends in the IT Services sector with increasing (1) volumes; and (2) attrition. ILS continues to accelerate – growth last quarter was 13% yoy up from 6-11% yoy in the prior quarters.

Corporate Learning Solutions (CLS) showing pickup — CLS is seeing a pickup in demand with (1) Corporates spending on training; and (2) Government spending on skills training in places like India. The Learning Products and Managed Training segments are showing good pickup. Management expects good volume growth in FY11 with some good deal wins in the recent past.

School Learning Solutions (SLS) slow; New Businesses doing well — Private schools are doing well; Government schools are slow in decision making. Small players are under cutting in the government schools space - NIIT has decided to be selective. Mgmt expects marginal growth in FY11 (like on like). The Banking (IFBI) and Management (Imperia) courses are doing well with significant growth in enrollments. The New Businesses on an overall basis is expected to break even in FY12. Slower growth in SLS is a positive from a balance sheet perspective.

SOTP based valuation (Fig 4); Reiterate Buy — Our new target is Rs 81 (earlier Rs 87) based on SOTP given 4 diff segments (earlier P/E). We value ILS at 7x Mar'12E EV/EBITDA, SLS & CLS at 6x Mar'12E EV/EBITDA and New Businesses at 2x Mar'12E EV/Sales (expect breakeven in FY12). We value the 25% stake in NIIT Tech at a 25% disc. NIIT trades at ~9x on FY12E EPS. Our FY11-12E EPS are ~9% below consensus – near-term risk but valuations factor it in, in our view.


Religare calls a ‘Buy’ on Sunteck Realty

CMP: Rs 600 Target Rs 800

We initiate coverage on Sunteck Realty (SRL) with a BUY rating and a target price of Rs 800 (implied P/BV of 2x on FY13E), offering a 23% upside. SRL is one of the best plays on Mumbai’s super-luxury segment, with 67% of its land bank located in and around the city. We like SRL for: (1) its asset-light model through JVs and joint development agreements (JDA) with landowners, resulting in low land cost of Rs 409psf and high IRRs of 50–55%; (2) its three key super-luxury residential projects in BKC-Mumbai (a commercial hub), which form 25% of our GAV (Rs 285/sh) and are likely to generate net cash of Rs 30bn+ (pre-tax) over FY11- FY13; and (3) its strong financials with a adjusted D/E ratio of 0.4x and high operating cash flow visibility of Rs 6.7bn and Rs 17.5bn in FY12 and FY13 respectively. We estimate a sales/EPS CAGR of 326%/400% over FY10-FY13. Key risks are timely execution, approval delays and an economic slowdown.

Asset-light business model: SRL holds 77% of its saleable area through JV/JDAs with landowners and the balance through slum rehabilitation schemes (SRA), redevelopment projects and land buyouts. We believe the JV/JDA model helps the company build a capital-efficient business by stripping away the investment on land purchase and allowing a greater focus on value addition. It also supports efficient capacity utilisation and higher IRR (50–55%). The cost of land via JDA/JVs is Rs 48/Rs 130psf for SRL, significantly lower than that of outright land buyouts.

Cash flows to strengthen: SRL is currently developing three super-luxury residential projects in Mumbai’s BKC district. These projects form 25% of our gross annual value for the company and are likely to generate cash of Rs 30bn (pre-tax) over FY11-FY13 (in comparison, the company’s current market cap is ~Rs 39bn). We expect residential absorption of 4.0msf (FY11: 0.8msf; FY12: 1.7msf; FY13: 1.5msf) including the above projects, which will aid further cash generation during FY11-FY13. Operating cash flows during FY12 and FY13 are estimated at Rs 6.7bn and Rs 17.5bn respectively, which will likely be utilised for further land acquisition. SRL’s adjusted D/E ratio of 0.4x could decline further, in our view.

Improving revenue and margin profile: Since SRL follows the project completion method, a bulk of the revenue from ongoing projects is expected in FY12 and FY13. The company’s EBITDA margin is also likely to improve from 38% in FY10 to 54% in FY13 as high end luxury projects get recognised.

Initiate with BUY: We value SRL at a 20% discount to NAV, translating to a target price of Rs 800. Key risks to our estimates are execution risk, rules and regulations in newer territories which may delay projects, and a slowdown in the economy.


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