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ITC:
The stock currently trades at an earnings multiple of 22x FY13E and at EV/EBITDA multiple of 16x FY13E
Not yet out of the woods SBIN IN, mcap US$28.1bn, SELL, TP `1,775, 19% downside)
Analyst: Krishnan ASV, vkrishnan@ambitcapital.com, Tel: +91 22 3043 3205
Asset quality challenges unlikely to be surmounted: Challenges from asset quality and the uncertainty around equity infusion have been widely known and acknowledged by SBI and the investor community alike for some time now. We continue to view incumbent asset quality and the uncertainty around equity infusion as key challenges for SBI to surmount. While we acknowledge the impressive core performance as reflected in recent NII performance, we do not judge the P&L performance in isolation. We remain cognizant of the balance sheet risks that SBI is vulnerable to, especially in light of the sectors that have contributed to SBI's incremental loan book growth (Iron & Steel, Other Metals, Infrastructure, Gems & Jewellery, Engineering and Textiles are the highest contributors to incremental loan book growth). Given that these sectors are heavily dependent on domestic as well as global growth outlook (on which we remain reasonably bearish), we see further stress building up in SBI's books. Over and above this, SBI is especially vulnerable to further stress from its exposure to the large domestic business conglomerates. Such big ticket corporate exposure further accentuates our asset quality concerns vis a vis SBI (even AAA-rated corporates can and do slip). Incremental pressure on earnings from relatively low provisioning coverage: With its reported provisioning coverage ratio (PCR) diluted over the last two quarters to ~62%, we expect incremental loan loss provisioning to exert a downward pressure on earnings. Valuation: Quoting at 1.9x our FY13E standalone ABVPS of `1,150, we remain SELLers with a valuation of `1,775.
Ambit Capital Pvt Ltd 21 March 2012, Page 1
Maruti Suzuki:
Competitive headwinds persist (MSIL IN, mcap US$7.7bn, SELL, TP `1,000, 25% downside)
Bank of Baroda:
Most defensive play among state-owned banks (BOB IN, mcap US$6.3bn, BUY, TP `930, 18% upside)
Margins to remain under acute pressure (LICHF IN, mcap US$2.2bn, SELL, TP `184, 25% downside)
Analyst: Pankaj Agarwal, CFA pankajagarwal@ambitcapital.com, Tel: +91 22 3043 3206
Despite disappointing quarterly results over the last two quarters, LICHF has outperformed its peers over the last two quarters as: (i) The ongoing equity capital raise through preferential allotment to the promoter LIC followed by a QIP has been taken favorably by the street due to it being BVPS accretive (~15% BVPS accretive assuming all new cash comes at the current price of `250/share) despite being 5% EPS dilutive and reducing the RoE from 21% to 18%; (ii) Moreover, expectation of a sharp increase in net interest margins in FY13 to 2.8%-3.0% has helped valuations of the company. However, we believe that the company will miss consensus FY13 EPS expectations by ~15%-20% as NIMs of the company will continue to remain under pressure due to: (i) cost of funding continuing to remain high due to elevated bond yields and the liability profile of the company; (ii) Increased competition from banks and the regulatory changes on removal of penalty on prepayments and uniform rates for old and new borrowers will continue to put pressure on yields; (iii) The company will repay `7.5bn of interest free liabilities back to its parent by the end of FY12, which will mitigate to some extent the impact of additional equity on NIMs and; (iv) We do not see the developer portfolio growing any time soon based on recent disbursal trends and interaction with the management. Hence the companys EPS growth will not be able to meet consensus high expectations and will miss expectations by 15%-20% in FY13. This will lead to derating of the stock, which is currently priced at 11.7x FY13 P/E and 1.8x FY13 P/BV after taking into consideration dilution at `250/share.
The pioneer is well placed to benefit from excess demand (PLNG IN, mcap US$2.4bn, BUY, TP `190, 17% upside)
Analyst: Dayanand Mittal, dayanandmittal@ambitcapital.com, Tel: +91 22 3043 3202
PLNGs competitive positioning in the LNG regasification business due to its pro-active capacity expansion, that too at lower capex, makes it our preferred play on the domestic gas consumption story. We expect LNG demand from the industrial segment to likely remain strong, as LNG prices are 11%-25% lower than the prices of alternative liquid fuel. PLNG has high earnings visibility as it does not bear any pricing, volume or margin risk for 80%-85% of its regas volumes, as they are based on long term (+20 years) and back-to-back contracts with LNG suppliers and gas offtakers. We have a BUY rating on the stock with a target price of `190/share (17% upside). The key trigger for the stock is the signing of the 2mmtpa-3mmtpa of long term/short term LNG contract, which could provide volume growth visibility for its upcoming Kochi capacity. Our interaction with the management as well as industry sources suggest an increasing likelihood of: a) the company entering into an LNG supply agreement with US-based LNG exporters and b) conversion of its existing 2.5mmtpa LNG supply MoU with Gazprom into a legally binding agreement. The stock is currently trading at an attractive valuation of 11.6x FY13 EPS.
PLNG:
Thermax:
Challenges in core and new businesses (TMX IN, mcap US$1.1bn, SELL, Last Published TP `429, 10% downside)
Valuation: Based on our DCF model (assuming WACC of 13.5% and a terminal growth rate of 4%), our last published valuation for Thermax was `429 implying an FY12 P/E of 12.4x and an FY13 P/E of 13.3x respectively. On a relative basis, Thermax trades at a ~30% premium to BHEL which we believe is unjustified primarily because BHEL has a far more superior order coverage ratio (~3x of FY12 revenues v/s ~1x for Thermax). In a scenario wherein orders are hard to come by, it is preferable to invest in a company which at least has a good order book coverage as this implies good visibility in terms of future revenues. This coupled with the fact that Thermax is under pressure to maintain a negative working capital cycle (one of the main reasons why investors preferred hermax) is likely to reduce its premium to BHEL.
Gujarat Gas:
Eicher Motors:
A new commercial vehicle powerhouse (EIM IN, mcap US$1.0bn, BUY, TP `2,051, 8% upside)
Jubilant Foodworks:
A call option on the recovery (KMB IN, mcap US$8bn, BUY, TP `609, 13% upside)
A solid, sensible contractor developer (SADE IN, mcap US$460mn, NOT RATED)
Analyst: Nitin Bhasin, nitinbhasin@ambitcapital.com, Tel: +91 22 3043 3241
Sadbhav is a strong and a sensible contractor developer with superior cash flow generation profile, no immediate equity dilution risks and a strong balance sheet for capturing growth when the Indian infrastructure and construction sector recovers. In our competitive mapping of the Indian construction sector, Sadbhav not only stands as the strongest player, it has continuously gained competitiveness over the last theree years as its steady gross block turnover, lower fixed and financial costs make it a leader on cost competitiveness . Amongst the developers, it stands out as the strongest in terms of execution, and moderately, in terms of core profitability (RoCEs). We expect consolidated returns (RoCEs and RoEs) to improve with rising cash flow generation and profitability of the operational BOT assets and the large assets getting commissioned over the next quarter. The stock presently trades at 1.8x FY13 book vale and 7.8x FY13 EBITDA and despite no dilution risk and expected improvement in profitability, the stock trades at a discount of 40% to its five-year average of one-year forward book and EBITDA.
Sadbhav Engineering:
Sobha Developers:
Ticks all the right boxes (SOBHA IN, mcap US$600mn, BUY, TP `462, 53% upside)
Buy Sell
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ot Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form.
Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone: +91-22-3043 3000 Fax: +91-22-3043 3100 21 March 2012, Page 11