Stocks to pick: Reliance capital,Axis Bank, Moser Baer, Shree Cement
14 Jan, 2008,
CMP: Rs 2,768
Macquarie has initiated coverage on Reliance Capital with an ‘outperform’ rating and a target price of Rs 3,392, with a 23% potential upside. The company looks set to make a serious breakthrough into multiple segments of retail financial services. Macquarie believes the domestic financial services sector is in a period of high structural growth. The retail side of this is being driven by chronic under-penetration, which is being unlocked by changing demographics and greater availability and reach of products. The wholesale segment is being driven by significant acceleration in investment activity in the economy. Reliance Capital is entering a critical phase in most of its businesses, where it will start to grow aggressively and give a massive push to break into the top three.
It has already established its credentials by surging to the top spot in the mutual fund league tables, and is now starting to make an impact in insurance and broking/wealth management as well. Its core strengths remain its strong brand name, aggression in the market, deep pockets and execution capabilities. The stock looks expensive at >11x P/BV, even on a consolidated basis, but its holding-company-like structure makes it difficult to view it on traditional valuation parameters. Also, the market is factoring in its large unrealised gains on the equity portfolio, some of which include strategic holdings in other group companies.
Research: JP Morgan
CMP: Rs 289
JP Morgan retains its negative view on Moser Baer with a sum-of-the-parts based June ’08 price target of Rs 250. Risks to the target price include a sharp price increase in optical media. Monthly sales of Taiwanese optical media manufactures fell 15% month-on-month. December monthly sales also fell 36% year-on-year (YoY), indicating continued original equipment manufacturer (OEM) pricing pressure. Optical media sales fell 14% quarter-on-quarter (QoQ) and 30% YoY during the second quarter. JP Morgan expects subdued pricing to continue, especially in DVD-R, leading to weak margins. On January 4, ’08, Warner Brothers (WB) announced that it will exclusively support the Blu-ray format. This is a major positive for the Blu-ray format as WB has the largest market share (18-20%) in the US and earlier supported both formats. As greater clarity emerges on the next-generation DVD format, JP Morgan believes that adoption will accelerate, but expects significant volumes only in late ’09. The photo voltaic business may face significant margin pressure going forward, led by higher poly-silicon prices in the near term and rising competition in the long term once the supply tightness eases.
CMP: Rs 1,167
Axis Bank can trade up to 25x 12-month forward P/E based on its strong growth trajectory, and reiterates ‘buy’ rating on the stock with a price target of Rs 1,300. Axis Bank’s Q3 FY08 profit grew 66% YoY to Rs 310 crore, ahead of estimates, led by strong growth in core operations and higher treasury gains. Despite moderation in sector loan growth, Axis Bank’s loan book grew 50% YoY led by corporate and agricultural credit. Retail loans as a percentage of total loans fell to 25% (29% in December ’06). Despite strong loan growth, asset quality improved, gross non-performing loans (NPLs) fell 5% YoY, while net NPLs declined 12% YoY. Gross NPLs are now at 0.8% of advances and coverage has improved to 50%. Net interest margins (NIMs) expanded 90 bps to 3.9%, of which, 30 bps was due to the bank’s recent capital-raising.
Cost of funds declined by 45 bps QoQ due to capital-raising and aggressive growth in low-cost demand deposits. Cost pressures for Axis Bank continue; while employee costs have increased 51% YoY, other operating costs have risen 75% YoY (partly due to rising rentals for new branches). Treasury gains also increased sharply due to a buoyant equity market and some reversal of mark-to-market hit on the bank’s bond portfolio. Axis Bank, with Tier-1 capital of 12.6%, is well-capitalised to leverage on rising credit demand.
Research: Merrill Lynch
CMP: Rs 1,325
Shree Cement’s operating performance in Q3 FY08 was a tad better than expectations due to lower-than-expected rise in costs. Q3 EBITDA/tonne was up 2% QoQ versus flattish forecast. Contrary to expectations, Shree’s power and fuel costs fell 8% QoQ in Q3 FY08. Shree stated that higher blending had offset the impact of rising pet-coke prices. Overall, operating cost per tonne was up 3% QoQ, in line with the improvement in cement prices. Reported net profit fell 66-67% YoY to Rs 35 crore, due to accelerated depreciation. For the industry, the window of opportunity to increase cement prices is short (1-2 quarters), as nearly 49 million tpa (mtpa) of new capacity is expected to be commissioned by March ’09. Merrill Lynch is also uncomfortable about the recent uptick in clinker inventory across the industry, including North India.
The upside to cement prices in the North may be capped in the near term due to recent large capacity expansions by both Binani and Shree Cement. Merrill Lynch expects Shree to post flattish earnings in FY09E. Despite likely strong volume growth of ~30% YoY, FY09-EBITDA growth may be modest at ~8% YoY due to forecast of a downturn in cement prices by end-CY08. Shree is evaluating greenfield capacity expansion in Madhya Pradesh as part of its long-term plans. This is unlikely to impact cash flows over the next year or so. In the next six months (by Q1 FY09E), Shree will commission further 1.5 mtpa expansion at Ras, thereby taking its composite capacity to 9 mtpa versus 7.5 mtpa currently.