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Monday, February 05, 2007

Stocks you can pick up this week


Aurobindo Pharma
Research: Edelweiss
Rating: Buy
CMP: Rs 720 (Face Value Rs 5)
12-Month Price Target: NA

Aurobindo Pharma continued with its growth momentum in Q3 FY07 with Y-o-Y sales growth of 29%, EBITDA growth of 35% and net profit growth of 130%. While sales and net profit were in line with the estimates, EBITDA was significantly below estimates on account of: (1) Higher pen-g prices pulled down overall gross margin by 300 bps; and (2) some operating income was reported as other income.

The sharp 38% increase in pen-g prices did not allow Aurobindo to increase realisations on an immediate basis. However, in Q4 FY07E, realisations may improve to partially compensate for the loss, although the net impact on margins will still be negative.

The traction of growth drivers continues with formulations sales growing 19% Q-o-Q. Going forward, the US generics business is likely to see greater momentum with launches of Simvastatin and Sertraline in Q4 and likely launches of a couple of Cephalosporins in Q1 FY08E.

Sales of anti-retrovirals are also proceeding as per expectation and are on track to achieve a total of $100 million in FY07E. At current market price, the stock trades at a P/E of 13.9x its FY08E earnings.

Bhel
Research: Angel Broking
Rating: Neutral
CMP: Rs 2,509 (Face Value Rs 10)
12-Month Price Target: NA

Bhel reported net sales of Rs 4,339.7 crore in Q3 FY07 (Rs 3,326.7 crore). This was on account of 28.6% and 33.2% Y-o-Y growth recorded by the power and industry segments, respectively. For the nine months ended December ’06, the company posted 33.8% Y-o-Y growth to Rs 10,317.8 crore.

The company’s order book till December ’06 has risen 38.2% Y-o-Y to Rs 46,700 crore. It has announced an investment of Rs 3,200 crore for expansion of brownfield capacity and modernisation of existing facilities. It will further expand its annual equipment manufacturing capacity to 15,000 mw.

Bhel is an ultimate power play. The government’s initiative of ‘Power for all by 2012’, APDRP and rural electrification programmes augur well for Bhel’s future growth. But competition from foreign companies and timely execution of projects pose a threat to growth.

Given the company’s track record, as well as its technological tieup with global power majors like Alstom and Siemens, Bhel may be able to counter these risks. At the current market price, the stock trades at 21.6x and 19.2x its FY08E and FY09E EPS. Though the valuation looks stretched, considering the sustained earnings momentum for the next few quarters, Angel Broking is neutral on the stock.

Bihar Tubes
Research: Religare Securities
Rating: Buy
CMP: Rs 116 (Face Value Rs 10)
6-Month Price Target: Rs 190

Bihar Tubes is a leading manufacturer of galvanised steel tubes, structural pipes, black pipes and pre-galvanised pipes. The company operates in a steel tubes industry which is likely to grow 30-35% in the coming years due to the government’s thrust on infrastructure development.

The company has been looking to cash in on this opportunity and is expanding its production facilities to a significant extent. Bihar Tubes has been making structural shifts in the production of pipes and is diversifying into specialty pipes manufacturing.

The company has already increased its production capacity and its fourth tube mill will be operational in the last quarter of FY07. Also, with the rise in demand for steel tubes, it is likely to post operating profits of Rs 11.5 crore and Rs 19 crore in FY07 and FY08, respectively.

The structural shift in products by entering into specialty products will allow the company to increase its operating profit margins to 5% in the coming years.

Due to increase in sales and margins, the company will be able to increase its PAT margins to 2.7% and 2.4% in FY07 and FY08, respectively. It is currently trading at P/E multiples of 6x and 8x of its FY07 and FY08 earnings. Hence, the stock is a good pick with a price target of Rs 190 with a time period of six months.

ITC
Research: SSKI
Rating: Outperformer
CMP: Rs 176 (Face Value Rs 1)
12-Month Price Target: NA

ITC continues to traverse a high growth trajectory, with Q3 FY07 revenues growing 24% to Rs 3,170 crore. EBITDA margins have remained stable at 34.2%. Adjusted PAT has increased by 23% to Rs 720 crore. The cigarettes business reported 13.8% growth during the quarter (fifth consecutive quarter of double-digit growth and over 7-8% volume growth).

ITC’s stock has underperformed the Sensex by 22% over the past three months, mainly due to the fear of bringing cigarettes under VAT net. While levying of VAT on cigarettes looks more probable this year (during the state budgets in April), there is lack of clarity over the rate (between 4% and 12.5%) and assessable value (MRP or net of excise).

While this will continue to drag stock performance in the near term, sustained volume growth of 7-8% in the cigarettes business indicates the strong traction and ability to take price hikes. SSKI believes that 7-8% of sustainable volume growth in the cigarettes business can potentially redefine the growth traction for ITC.

The company continues to scale each of its noncigarettes portfolio – this includes portfolio expansion in foods, hotel room addition through organic, as well as inorganic route, and capacity augmentation in the paper business.

Tata Steel
Research: JM Morgan Stanley
Rating: Overweight
CMP: Rs 463 (Face Value Rs 10)
12-Month Price Target: Rs 564

JM Morgan Stanley is cutting its target price to Rs 564 to reflect the post-Corus acquisition scenario, but is maintaining the overweight stance.

This implies about 21.5% upside potential for the stock. While the Corus acquisition can be a good long-term strategy for Tata Steel, the transaction valuation leaves little margin for error and poses risk.

Tata Steel is one of the fastest growing steel companies globally, with a strong geographical mix. Tata Steel has won the auction for Corus at an enterprise value of $12.9 billion (cash outflow $11.3 billion). At EV/EBITDA of more than 8x CY06E on consensus estimates and replacement value of $679/tonne, the valuation for the deal looks stretched.

However, if steel prices hold strong and Tata Steel can begin slab supply by early CY2010, the company could gain in the long term. Having acquired Corus, Tata Steel need not look outward for growth; instead, it can focus on integrating Corus and implementing its greenfield projects in India.

Tata Steel’s stock has underperformed its domestic peers by 46.1-71.6% since the first news of this transaction. This implies a $3.2-5. billion range for Tata Steel’s market capitalisation.

The net profit valuation analysis of the likely cost synergies indicates that Tata Steel shareholders are hit to the tune of $1.4 billion. JM Morgan concludes the stock has been penalised more than it deserved to be as a result of this deal.