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Brokerage Recommendations

Tuesday, October 04, 2011

Sharekhan calls a ‘Buy’ on Bajaj Corp
CMP: Rs. 102    Target Rs. 142

Bajaj Corp Ltd (BCL) has acquired Uptown Properties and Leasing Pvt Ltd (Uptown) for Rs75 crore (including liabilities of Rs49.5 crore). Uptown owns a building in Worli with a built-up area of 33,600 square feet. The sole reason behind the acquisition is to develop a corporate office on the acquired plot to bring in all the scattered divisions at various locations under one roof to improve the operational efficiencies.

Expensive acquisition compared to recent deals: Judicious utilisation of free cash on the books to expand its product range or to grow inorganically was one of the key triggers in the stock and the market was enthused by the recent launch of the cooling hair oil, Kailash Parbat, which was in line with the stated strategy. However, the move to spend a substantial chunk of this cash on non-yielding assets such as property, that too at a premium, would dilute its earnings and is seen as a de-rating factor by us. Moreso, since the company would have to spend additional Rs15-20 crore on either refurbishing the existing property or rebuilding a new structure.

Q2FY2012 to be another good quarter: The company has yet to feel the heat of the current inflationary situation and expect its strong volume growth to sustain in the coming quarters. For Q2FY2012, we expect the company’s top line to grow by 29% year on year (YoY) to Rs105.0 crore with a sales volume growth of around 18% YoY. The prices of the key raw materials such as liquid paraffin and glass bottles remained firm during the quarter. Hence, we expect the gross profit margin to decline by 334basis points YoY and the operating profit margin (OPM) to decline by 192basis points YoY in Q2FY2012. However, with a higher other income YoY, we expect the bottom line to grow by 29% YoY to Rs25.7 crore during the quarter.

Outlook and valuation: To factor in the deal, we have downgraded our earnings by 1.6% and 2.4% for FY2012 and FY2013 respectively. The BCL stock has already reacted negatively to the announcement of the property deal and factors in the negative implication of the same at the current market price. Going forward, any initiative on the company’s part to expand its portfolio or strengthen its core business would be the key upside trigger for the stock. At the current market price the stock trades at 13.4x its FY2012E EPS of Rs7.8 and 11.1x its FY2013E EPS of Rs9.5. We maintain our Buy recommendation on the stock with the price target of Rs 142 (15x FY2013E earnings as against 16x earlier due to the not so judicious use of free cash on the books).

Pinc Research calls a ‘Buy’ on NTPC
CMP: Rs. 165    Target Rs. 192

We met Mr. Siva Kumar, ED (Finance), NTPC, to get an update on its capacity addition programme and to gauge the risks that the industry could face in the longer term. Key takeaways of the meeting are mentioned below:

Maintains capacity addition target, but we remain skeptical: NTPC continues to maintain its commissioning target of 4,320MW and plans to commercialise ~2,320MW during FY12– 1,320MW at Sipat, 500MW at Farakka and Kahalgaon each. However we remain skeptical as the company is already lagging its target with commercialisation of only 660MW at Sipat till date. As per CEA, NTPC shall add 2,820MW during the year – we factor this into our estimates.

Confident of re-allocation of the coal blocks: NTPC remains confident of being re-allocated the cancelled coal blocks, and continues to spend on the development of these mines. Coal from these blocks will meet ~20% of the company’s FY17 requirement. In addition, NTPC has been recently allocated four new coal blocks which will cater to the requirement of Unchahar, Baretti, Kudgi and Gajmara projects.

Expects improved payment cycle from problem states: NTPC had served notices to regulate power supply to BSES, Delhi and Haryana SEB owing to delays in payments and non-issuance of LCs. In addition, NTPC plans to send notices to J&K, Bihar, UP and Tamil Nadu in the near future as they near the end of 60 day payment window. However, the company expects things to improve with tariff revisions happening at the discom level.

Valuations And Recommendation: We lower our FY12 and FY13 capacity addition estimates to build in delays. Against the initial addition target of 18GW during the XIth Plan, we believe NTPC shall achieve ~50% of its target, i.e. ~9GW. The management hinted that future addition will depend upon smoothness in land acquisition and water availability coupled with severity of fuel shortage. We believe lower PLF’s and PAF’s could lead to lower heat rate and availability linked incentives respectively. We reduce our FY13E book value to reflect lower capacity addition and value the company at 2xFY13E P/B to arrive at our target price of Rs 192/share, maintain ‘HOLD’ rating on the stock.

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