Bharti Airtel Ltd
BUY
The buyout of Hutch’s stake (51% direct holding, 67% total holding) in Hutch Essar has been in the media over the past few weeks. The 67% stake is up for grabs by several telecom majors like Vodafone, Reliance Communications, Verizon Communications and the Essar group. According to media reports, the floor price of the bid has been fixed at US$14bn. In the light of these developments, one company that is likely to seek higher valuations in the near term is Bharti Airtel.
We are considering three possible bid prices -US$15bn, US$16bn and US$17bn. We have used EV/Subscriber method to value Bharti Airtel. At US$16bn, Hutch EV/Subscriber works out to be US$717, which is at 11% premium to Bharti. We believe, Bharti should trade at least 10-12% premium to Hutch Essar considering Bharti’s
1. Pan India presence
2. Superior operating margins
3. Superior managerial skills
Consequently if the deal is valued at US$15bn, Bharti’s EV is likely to increase by 10-12% to US$30.5bn and the share price could rise to Rs700+ levels. At CMP of Rs635, the stock is trading at 33.5x FY07E EPS of Rs18.8, 25.2x FY08E EPS of Rs25 and 18.7x FY09E EPS of Rs33.75.
Indraprastha Gas Ltd
BUY
Indraprastha Gas Ltd (IGL) was setup in 1998 to supply CNG and PNG in the city of Delhi. Since then all DTC buses, taxis and auto rickshaws running on the street of Delhi have been converted to CNG and around 40,000 households have been connected with PNG. Going ahead with increased conversions of private vehicles and disallowance of registration of new diesel run LGVs (only CNG run LGVs to be registered) will drive growth for CNG. In the PNG segment the penetration is only at 4% and with real estate growth in Delhi PNG revenues are expected to clock a CAGR of 51.9%. Operating margins are expected to sustain over the current levels of above 40%. The company is also in initial stages of setting up city gas distribution infrastructure in the NCR region, which are expected to contribute to revenue in FY09. These factors will drive CAGR of 17.3% and 21.4% in revenues and PAT respectively. We believe that low business risk and growth prospects of the company will drive valuations for the stock and hence we recommend a BUY on the stock with a target price of Rs162.
Genus overseas electronics ltd
BUY
Genus Overseas Electronics Ltd (GOEL) is amongst the largest electronic meters manufacturers in the country and the pioneer in implementing Automatic Meter Reading (AMR) technology in metering. GOEL stands to be the largest beneficiary of the on going Accelerated Power Development and Reform Program (APDRP), under which the government intends to implement 100% metering. Coupled with this the government also plans to provide electricity to all households in the country, which will be metered. The company has an order book of Rs4bn, which comfortably covers it for FY07 with a partial spill over into FY08.
The meters division is expected to witness 111.3% CAGR over the next couple of years, which will be mainly driven by the governments focus on rural electrification and implementation of APDRP under which it emphasis on 100% metering. This division has an executable order book of about Rs2.2bn.
GOEL diversified into manufacturing inverters and undertaking power distribution projects where meter requirement is high. This exposes the company to huge investments in the T&D space that is being outlined by the government. Its access to sophisticated technology for AMR will give it an edge over its peers while bidding for metering projects.
We expect the company to register a topline and bottomline growth of 52.5% and 58.6% CAGR respectively over FY06-08E. GOEL is currently trading at 10.7x and 7.2x times its FY07E and FY08E earnings of Rs19.6 and Rs28.9 respectively. We recommend a BUY with a one year price target of Rs269, an upside of 39%.
Arihant Foundation and Housing Ltd
Chennai and its suburbs are fast turning into a hot spot for the IT/ITES sector. Skilled labour along with quality Grade A & B space is driving demand for real estate. Arihant Foundation and Housing Ltd (AFHL) with 2 IT Park projects and 15 residential projects in hand is well poised to benefit from the pick up in Chennai real estate demand. We expect the company to report 76% revenue and a 116% profit CAGR over F9/05-08 period respectively. We initiate coverage with a BUY rating and price target of Rs602, implying a 64% upside.
Most IT companies have started setting up shop in tier II cities due to the dwindling cost competitiveness in tier I cities. Chennai offers them with quality grade A & B real estate with abundant skilled manpower. We expect Chennai to fast grow into the next outsourcing destination in line with Hyderabad and Pune.
With 17 in hand projects, AFHL is well poised to benefit from the growth in the property boom in the Chennai market. 15 of the 17 projects are residential in and around the Central Business District (CBD) and Old Mahabalipuram road (OMR), while the remaining 2 are IT parks in the upcoming Ambattur and OMR area.
The company is fast adding size and has planned two townships, one out of which is a 50:50 JV with a national developer. We view the company’s slow evolvement in bringing bigger projects in its fold as a positive sign towards revenue sustainability. We estimate revenue CAGR of 76% over F9/05-F9/08.
Most old projects with low gross margins (GM) are expected to get completed in F9/06. New projects would improve GMs by 500bps in F6/07 to 37%, which is still 5-7% lower than current prevalent. This would aid a profit CAGR of 116% over F9/05-F9/08.
A major portion of the future revenues, 27% in F9/07 and 65% in F9/08 are expected to come from new projects, which are either recently commenced or would be launched in the next 8-12 months. Delays in launch and execution, could impact profitability and there by valuations.