Indian Hotels Research: Morgan Stanley Rating: Overweight CMP: Rs 137 Morgan Stanley has maintained its ‘overweight’ rating on Indian Hotels. It believes that trends in the hospitality industry remain strong, with increase in average room rate (ARR) leading growth in revenue per available room (RevPAR). Further, room supply from other industry players seems to have been pushed into FY10/11, and hence, the demand-supply mismatch may continue for at least the next 18 months. While Citigroup forecast a 29% a compound annual growth rate (CAGR) in earnings for FY07-09, earnings per share (EPS) will be diluted due to the planned rights offering. Subsidiary companies constituted about 36% of consolidated revenue in FY07, but recorded very low profitability, largely due to international properties. Any improvement in the financial performance of these properties can boost the overall profitability. For instance, a turnaround in Pierre Hotel alone can push up overall net margins by more than 180 basis points. The company intends to raise Rs 1,440 crore through a rights issue of equity shares and non-convertible debentures. Further, it will issue warrants that will be convertible into equity 12 months after the rights offering. This should raise an additional Rs 780-90 crore. However, these rights offerings will dilute earnings by 30%. The stock has underperformed by 35% year-to-date (YTD) and in the past 12 months, largely due to acquisitions of international properties. IHCL’s valuations are cheaper than that of its Asian peers on most metrics. Tata Motors Research: CLSA Rating: Buy CMP: Rs 715 CLSA has maintained its ‘buy’ rating on Tata Motors. However, near-term risk for the stock continues to be the potential acquisition of Jaguar and Land Rover. Freight rates witnessed an improvement in October. CLSA’s Index of Freight Rates went up 2% in October on a month-on-month basis. The index tracks freight rates across 25 major routes across India. While part of the improvement can be attributed to the pick-up in construction and industrial activity after the rainy season, CLSA also believes that demand-supply in the commercial vehicle (CV) industry is returning to normal after the lacklustre volume growth in the first half (H1) of FY08. Improving freight rates typically act as an incentive for truck operators as the latter start buying trucks and the rates also point toward an improvement in the CV cycle. Historically, CLSA’s Index of Freight Operator Profitability has acted as a good leading indicator of the CV cycle. Truck finance rates have dropped ~ 300 bps in the past 2-3 months to about 11% from a peak of 14% in April. Large truck operators are even getting deals at 10%. The conducive factors for CV industry recovery are now in place. CLSA maintains its view that the current weakness in medium and heavy CV (M&HCV) sales will be limited to the current fiscal and that the industry will return to growth in FY09. Rico Auto Research: Merrill Lynch Rating: Buy CMP: Rs 33 Merrill Lynch has reiterated its bullish stance on Rico Auto, albeit it has lowered its price target to Rs 60 from Rs 66. Negatives related to high input costs (aluminium, power, labour), exchange fluctuations and low capacity utilisation will be largely reflected in this fiscal performance. |
Growth will be driven by a ramp-up in exports to outsource requirements by Honeywell, Caterpillar, Volvo and an increase in domestic share through new parts such as crankcases, cylinder head and blocks, and new customers like Tata Motors. New JVs with global vendors such as Continental, Zhejiang Jinfei and Magna Powertrain will also help.
The price target of Rs 60 is based on 12.5x 1-year forward P/E multiple, which is the same as earlier. This represents a ~40% discount to larger auto part companies like Bharat Forge, which is warranted, given its relatively smaller scale and erratic track record.
Hindustan Zinc
Research: Citigroup
Rating: Buy
CMP: Rs 685
Citigroup has maintained its ‘buy’ rating on Hindustan Zinc with a price target of Rs 1,007. Citigroup’s global forecasts for FY08-09 have been lowered for zinc (by 15-20%) and raised for lead (by 16-22%) based on recent price trends and future expectations.
Following these changes and cost adjustments, Citigroup has reduced its EPS estimates for HZL by 11% in FY08-09E, and increased EPS estimates by 7% in FY10E. Zinc prices have fallen 32% since January ’07 on concerns about increasing mine supply, Chinese supply worries and speculative selling.
Citigroup’s new forecast prices in these concerns. However, China does not appear to be a threat, inventories remain low, and uncertainty on a smooth ramp-up of new mine production remains. Any delays to mine supply will lead to a deficit in ’08E and an upward trigger to prices. Lead prices are expected to benefit from strong Chinese demand in the auto and electric bicycle segment.
Supply has been disrupted in western Australia and the US. The upgrade in lead prices partially offsets the impact of the downgrade to zinc forecasts. In addition, HZL will benefit from higher volumes as its zinc smelting capacity will increase by 63% to 669,000 tpa by Q1 FY09 and from the company’s continued focus on cutting initiatives. Citigroup continues to value HZL at 10x FY09E EPS.
Vijaya Bank
Research: Macquarie
Rating: Outperform
CMP: Rs 75
Vijaya Bank is now emerging as a mid-sized bank, a change from its earlier image of a smaller bank. Over the longer term, Macquarie remains positive on the growth prospects of the bank; and has raised the target price to Rs 92. It has also maintained its ‘outperform’ rating on the bank.
It has increased its loan book by 11% YoY, with strong growth in small and medium enterprises (SME) and the retail segment. The bank expects loan demand to remain strong — the low growth was due to a spike of Rs 5,000-6,000 crore in undisbursed sanctions. It expects these to be disbursed in H2 FY03-08, which should drive loan growth of 28% for FY03-08.
The bank was caught on the wrong side of the liquidity squeeze late in FY03-07, leading it to rely on wholesale deposits. It suffered margin erosion in the first two quarters of FY03/08. However, the bank is making a conscious effort to reduce its dependence on wholesale deposits (from 30% of total deposits) to 25% by the end of FY03/08E. Non-interest income growth in Q2 was a surprise, primarily led by equity sales and bad debt recoveries.
Given the continued buoyancy in the equity market, coupled with a favourable environment for recoveries (due to high real estate prices), the bank will be able to record strong numbers in H2 FY03/08E. The bank plans to increase the number of branches by 5%, taking the total number of branches to 1,050 by FY03/08E. Though this will put pressure on its operating expenditure, the lack of significant employee additions (as the bank plans to reallocate existing employees to these branches) should act as a cushion.