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Brokerage Recommendations

Friday, October 07, 2011

Motilal Oswal calls a ‘Buy’ on Hindalco
CMP: Rs. 120    Target  Rs. 226

HNDL is setting up a 359 ktpa smelter along with a 900MW CPP in the Sidhi district of Madhya Pradesh over an area of ~3,700 acres. The smelter (360KA-AP36S technology from RTA) will consist of two pot lines of 180 pots each, capable of producing 2.7tons of metal per pot per day. The state of the art (ALPSYS) pot controller will ensure high degree of automation. Manpower costs are estimated to be USD12/ton i.e. almost 1/ 5th of the existing smelting operations at Renukoot. Construction work on site is in full swing, as HNDL is targeting to commission 40 pots in the first line by December 2011 and the balance 140 pots of the first line will come on stream by July 2012. The second pot line is expected by January 2013. Over 10,000 workers are working on the site. The first cast house will consist of 360ktpa ingots and SOW ingots capacity. This is a very ambitious target - only one pot has been erected so far, though civil work is nearly complete. Though HNDL expects 204k tons of hot metal production in FY13, we believe that commercial production will take some time after first metal tapping and expect meaningful production to start only in 2HFY13. We have built in ~40k tons of production from Mahan in our estimates.

Construction work at the 900MW CPP (6x150MW) is also in full swing. BTG and other equipment from BHEL have already reached the site and commissioning is under progress. The first unit of 150MW is likely to undergo hydraulic test in the first week of October. Coal and ash handling units are expected to be ready by December. Distribution line to connect output to the state grid is almost ready. HNDL intends to commission the first unit of 150MW by the end of December and the full 900MW will be ready by June 2012. Though this appears ambitious, we expect commissioning of the entire CPP by the end of 2QFY13.
Valuations attractive; maintain Buy: We maintain our earnings estimates for FY12 and FY13. We factor in incremental metal production of ~40k tons and no alumina production from Utkal in our FY13 estimates. Over FY11-14, we expect volumes of both alumina and aluminum to grow at a strong CAGR of 22%, driving earnings growth. The entire benefits of the ongoing expansions in India as well as Novelis are likely to come only in FY14. The stock is attractive at 1.1x FY13E BV, an EV of 5x FY13E EBITDA, and at a 44% discount to NAV. We value the stock at INR 226 (EV of 7x FY13E EBITDA). Maintain Buy.

Ambit Capital calls a ‘Buy’ on Redington India
CMP: Rs. 91    Target Rs. 112

Redington’s share price has weakened with rising worries about the Indian economy, elevated interest rates and sudden currency depreciation. Our channel checks across retail hardware and smart phone stores and wholesalers suggest robust sell through in IT products and sustained momentum in Blackberry Sales in India. Strength in the channel suggests stronger growth in Tier 2/3 markets. The sudden depreciation of the Indian Rupee has led to rising worries about Redington’s ability to negotiate currency volatility and the impact of rising costs on domestic demand. These worries are over and above worries on the sustainability of momentum in Blackberry in the face of success of Android handsets, HP’s loss of share and as the macro environment deteriorates. We spoke to IT hardware and smart phone stores and wholesale dealers to get a sanity check on demand levels. Our takeaways indicate the following:

Blackberry continues to gain share: Our discussions with dealers indicate that: a) Smartphones as a category are gaining share over cheaper feature phones as tariffs for data drop, b) Blackberry and Samsung are seeing strong demand relative to other brands, c) Blackberry in particular is enjoying strong positive network effect – in some cases 35% of smart phone sales at certain Large Format Retailers are Blackberry devices.

IT channel remains healthy and growing: Dealers and retail stores we spoke to indicated that there does not seem to be indications of excess inventory in the supply chain. We also interestingly heard that conversion rates had not fallen in IT as compared to other white goods. We found a sense that the large dealers and branded retailers are growing at a healthy double digit pace even as smaller players are struggling to grow.

Overall we heard positive feedback on Redington’s channel strength and a perception that Redington is growing faster than peers. Strong channel check feedback reiterates our thesis that Redington is likely to substantially benefit from rising penetration of IT hardware in India. Under-penetration in Tier 2/3 cities and a structural shift to smartphones continue to drive strong growth even in a weakening economy. Our triangulated FCFE valuation points to Rs 112, 24% upside, 15.5xFY12P/E. We reiterate our BUY recommendation.

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