Analysts' corner S I Team / Mumbai April 6, 2009, 0:44 IST SUZLON ENERGY Reco price: Rs 47 Current market price: Rs 50.75 Target price: Rs 60 Downside:18.2% Brokerage: India Infoline Suzlon has won a 43MW repeat order from Duke Energy, USA. Over the past two months, it has received orders aggregating 387MW from leading international players, increasing its order book to 2,303MW; 1437MW is executable over FY10. Such constant order inflows should help allay concerns on quality issues, and the company’s ability to get new orders. Suzlon has underperformed the broader markets by 27 per cent in the last three months, primarily because of concerns on quality issues and high leverage on its books. While the recent move in the stock price can be attributed to a pick-up in order intake, challenges in fund-raising remains a key concern. The company intends to meet this funding gap through equity dilution at Suzlon/Hansen level and reduction in the working capital. Also, it has initiated a programme to restructure debt covenants on its FCCBs. While the stock is currently trading at a modest valuation, it reflects the funding issues Any further re-rating would depend on the company’s ability to mobilise funds. Possible postponement of payment to Martifer would alleviate pressure on Suzlon to mobilise funds immediately and act as a catalyst for the stock. PIRAMAL HEALTHCARE Reco price: Rs 194 Current market price: Rs 201.80 Target price: Rs 261 Downside: 29.3% Brokerage: Emkay Research Piramal Healthcare’s decision to discontinue its Huddersfield facility will mean a one-time hit of Sterling pound 10.1 million. The company will be shifting these contracts to Digwal (India) and Morpeth (UK) facilities. On the operating level, the company expects an expansion of 6-8 percentage points (or 600-800 basis points) in margins mainly driven by the close down of Huddersfield facility, increase in early phase pipeline, cost improvement and clinical packaging offerings at Morpeth, and strong commercial projects pipeline at Digwal. However, because of shifting of contracts and temporary slowdown in CMG space, the company has indicated that its revenues from the pharma solution business will be lower by five per cent in FY10 as compared to FY09. While the brokerage believes that restructuring of the pharma solution business is a long term positive, it has downgraded revenue estimates by 11 per cent each for FY10 and FY11 and earnings estimates by 9 per cent and 8 per cent, respectively. The stock is traing at 8.6x estimated FY10 EPS of Rs 22.6. JINDAL SAW Reco price: Rs 175 Current market price: Rs 182.35 Target price: Rs 476 Downside:161 Brokerage: Sharekhan Jindal Saw Ltd’s (JSL) Q4CY08 numbers are ahead of expectations on the back of a strong top line. With the hive-off of the US division, the results are not strictly comparable. The revenues declined by 3.9 per cent year-on-year (yoy), but marked a growth of 4.2 per cent quarter-on-quarter (qoq) to Rs 1,548 crore. As expected, operating margins were lower at 12.5 per cent even on sequential comparison (13.4 per cent in Q3) due to higher execution cost of Cairn Energy India’s order, which was taken at lower margins. Higher interest and taxes led to a decline of 21.3 per cent yoy and 13.4 per cent qoq in its profits to Rs 86.7 crore. JSL’s order book has fallen from about $1 billion to $840 million. It has participated in various bids and is in the final stages of closing a significant order for HSAW pipes, which is likely to boost its order book going forward. However, in the scenario of slackening orders, players in the space are likely to cut on their margins to boost order books. Thus, EPS estimates for JSL are reduced by 11.2 per cent for CY09 to Rs 79.3. The stock is trading at attractive valuations of 2.2x its CY09E earnings and at an EV/EBIDTA of 1.5x. Historically, it has reached the trough valuations seen in 2002-2003. RELIANCE INDUSTRIES Reco price: Rs 1,523 Current market price: Rs 1,662.50 Target price: Rs 1,710 Downside: 2.9% Brokerage: Edelweiss Securities Crude oil and natural gas prices are denominated in dollar. The $/Re is estimated to be weaker by 1.6 per cent to 45.8 in FY09 and by 11.5 per cent each to 49.0 and 47.5 in FY10 and FY11, respectively. Thus, Reliance Industries’ (RIL) earnings are expected to improve on account of higher crude and natural gas realisations and gross refining margins (GRMs) in rupee terms. Further, KG-D6 gas price assumption has also been revised upwards from $ 3.75/mmbtu to $ 4.2/mmbtu. In line with weaker $/Re outlook and neutral impact of change in KG-D6 basin gas pricing assumption, RIL’s post-merger EPS estimates for FY10 and FY11 have been revised by 12.3 per cent and 16.9 per cent to Rs 135.9 and Rs 173.0, respectively. Likewise, the sum-of-the-parts estimate has been increased to Rs 1,710 per share (Rs 1,525 per share earlier). The long-term view on the stock remains positive and, RIL’s portfolio of blocks could give significant upsides. However, any rupee appreciation and reduction in duty differential may affect GRMs and are key risks, going ahead. At Rs 1,523, RIL trades at FY09E and FY10E P/E of 16.3x and 11.2x, respectively, and at FY09E and FY10E EV/EBITDA of 11.8x and 7.7x, respectively. CADILA HEALTHCARE Reco price: Rs 271 Current market price: Rs 274 Target price: Rs 350 Downside: 27.7% Brokerage: Angel Broking The recent R&D collaboration deal of Cadila with Eli Lilly involves discovery and development of potential molecules primarily in cardiovascular research. Cadila will initiate drug discovery, lead identification, conduct pre-clinical studies and clinical trials up to Phase IIa (Human Proof-of-Concept). Cadila will receive milestone payments during the development process up to a maximum of $300 million and royalties on sale of products ultimately launched. However, Cadila will incur the upfront costs and will be reimbursed once the specific milestones are achieved. The deal is positive as it corroborates Cadila’s capabilities, although material cash flow would come over long term, and may further unlock value for its R&D business. While overdependence on Nycomed has been a major concern for Cadila, new client additions in the segment would aid de-risking. Further, the Hospira joint venture is expected to commercialise in April 2009 and start contributing to the company’s bottom line from FY10. Excluding any upsides from the JVs and factoring in a decline in the profitability of Nycomed, the brokerage expects Cadila to post a CAGR of 24 per cent in net profit over FY 2008-10E. The stock is trading at 11.3x FY2009E and 9.3x FY2010E earnings. Current market price as on April 2, 2009 source : business-standard
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