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Brokerage Recommendations

Monday, August 26, 2013

Sunidhi calls a ‘Buy’ on REC
CMP: Rs 189      Target
Rs 225
Rural Electrification Corporation (REC), equity capital stands at Rs 987.5 crore. With reserves of Rs 16,542.4 crore, the book value of the share as at FY13 works out to Rs 177.5. REC has an asset base of Rs 1, 36, 534 crore (Rs 1, 08, 819 crore) YoY as at Q1FY14 and advances stood at Rs 1, 32, 915 crore as against borrowings of Rs 1, 11, 104 crore (YoY). REC's capital adequacy ratio stood at 17.71 percent at end-FY13, which provides sufficient buffer to the regulatory requirement of 15 percent. REC's high profitability is characterized by its reasonable interest spread and return on net worth of 3.62 percent and 23.85 percent at end-FY13 respectively.

Valuation & Recommendation: REC will make all efforts and harness all resources to capture optimal share of funding business of the estimated debt requirement of `7.7 lakh crore for XII Five Year Plan. According to the Planning Commission’s estimates, REC is expected to fund around Rs 1.75 lakh crore worth of power projects in 12th plan (2012-17).

This translates into a 22 percent growth annually over this period. Apart from high demand for credit, the company’s access to Section 54EC bonds and tax-free bonds for low-cost funding may help it maintain its margins. The loan book growth is expected to be strong in the long-term, given the huge investment opportunity in the transmission and distribution space where REC is the top financier.

First Call Research calls a ‘Buy’ on Ipca Laboratories
CMP: Rs 623      Target Rs 706
IPCA Laboratories Ltd. is a fully-integrated Indian pharma company manufacturing over 350 formulations and 80 APIs for various therapeutic segments. The Company has posted a net profit of `717.70 million for the quarter ended June 30, 2013 where as the same was at Rs 429.80 million for the quarter ended June 30, 2012. Revenue for the quarter rose 26.98% to Rs 8055.60 million from Rs 6344.00 million, when compared with the prior year period. Export Income at Rs 4965.40 millions in Q1 FY14 as against Rs 3667.30 millions in Q1 FY13, registered a growth of 35%.

Outlook and Conclusion: At the current market price of Rs 625.00 the stock P/E ratio is at 21.41 x FY14E and 19.07 x FY15E respectively. Earnings per share (EPS) of the company for the earnings for FY14E and FY15E are seen at Rs 29.20 and Rs 32.77 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 16% and 14% over 2012 to 2015E respectively. On the basis of EV/EBITDA, the stock trades at 12.80 x for FY14E and 11.37 x for FY15E. Price to Book Value of the stock is expected to be at 4.07 x and 3.35 x respectively for FY14E and FY15E. We recommend ‘BUY’ in this particular scrip with a target price of Rs 706.00 for Medium to Long term investment.

Ambit Capital calls a ‘Buy’ on Tata Power
CMP: Rs 78      Target Rs 97
Tata Power’s stock is trading at a 40% discount to its historical five year average forward P/B. The stock will rerate if the Mundra project receives a tariff increase and demand for Indonesian coal picks up. We do not see any challenges in its regulated business given 100% fuel linkage and 98% assured offtake. We cut our EPS estimates by 17% and 35% for FY14 and FY15, respectively owing to a cut in our coal realisation estimates at Bumi and increase in interest expense. Our TP of `97/share already factors in a single-digit EBITDA margin for Bumi in FY14-30 and `3.6bn valuation for Mundra. We retain our BUY stance. Trading at 40% discount to historical valuation:  Tata Power stock is presently trading at 1.4x FY14 P/B, a 40% discount to its last 5-year avg P/B. We expect a rerating in the stock with a likely tariff raise at Mundra and a gradual ramp up in coal demand. Our SOTP valuation assumes neither of this, as we model ~8% EBITDA margins for Bumi over FY14-30 as compared to 14% in FY13 and >30% in FY09-12 and losses in Mundra until FY17. We do not see any risks to their regulated utility businesses given 100% fuel linkage and 98% of the offtake tied up. We cut our TP by 12% to `97/share, implying 1.7x FY15 P/B given 17% and 23% cut to our FY14 and FY15 EPS estimates.

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