Monday, March 16, 2009

Analysts' Picks: ONGC, HDFC, Sterlite Industries, Dr Reddy's Laboratory...

ONGC
RESEARCH: HSBC

RATING: OVERWEIGHT

CMP: Rs 706

HSBC recommends `Overweight’ rating on ONGC with a target price of Rs 958. At the end of FY08, ONGC had a proven reserve life of 15 years, significantly ahead of the European oil majors’ average of 10 years. In the last four years, ONGC has been able to achieve reserve replacement of more than 100% on the back of acquisitions in the international space. ONGC achieved annual production growth of 1.7% over FY04-08 by arresting a decline in its domestic matured fields and it added 2 ppt to its annual growth figure through international acquisitions.


While the company has cut its FY09 crude output target by 3.5% compared to its earlier estimate, it has increased its guidance for FY10 production by 17 Mbbl/d. HSBC expects projects planned until ‘13 to add around 2 ppt to its growth over the next five years. The implied valuation of ONGC’s core proven reserves at the current stock price is at a 13% discount to our valuation at an oil price assumption of $45/bbl, close to the current spot level. HSBC expects any rise in crude price to act as a catalyst for the stock, in view of the oil production of 700 Mbbl/d and ability to retain a substantial portion of crude upside up to $55/bbl.


HDFC BANK

RESEARCH: MACQUARIE

RATING: OUTPERFORM

CMP: Rs 835

Macquarie maintains `Outperform’ rating on HDFC Bank. The business of the bank remains stable, and the strong deposit base gives the bank the flexibility to move across product lines while keeping profitability intact. The valuation, at 2.2x PBV, is at the lower end of the stock’s historical ranges. The integration with Centurion Bank of Punjab is complete, with the erstwhile CBOP branches moving to a common core banking platform on 26 January. Macquarie revises its loan growth estimates downward on management’s reaffirmation that growth will slow on market share gains given the uncertainty in the environment.


On the other hand, CRR cuts and sharply falling deposit costs are offsetting these factors - and savings deposits have started to grow. There are no shocks in asset quality - incremental delinquency and credit losses are likely to remain reasonably stable from here on. Incrementally, the portfolio that is showing stress is the SME book, both in the HDFC Bank-originated book and the erstwhile CBOP book. In the medium term, credit quality should improve given the current focus on large corporate loans.


STERLITE INDUSTRIES

RESEARCH: CLSA

RATING: UNDERPERFORM

CMP: Rs 283

CLSA maintains `Underperform’ rating on Sterlite Industries as the outlook for base metal prices remains weak. The Asarco acquisition has also lowered visibility and increased risks to near-term earnings. However the Vedanta Aluminium (VAL) expansion projects at Lanjigarh and Jharsuguda in Orissa are progressing well. Supply of bauxite from the Niyamgiri mines will commence by May ‘09 and by October ‘09. Post supply of captive bauxite, VAL will be able to produce alumina at $90/ton - even lower than Nalco. VAL’s second phase of smelting capacity expansion at Jharsuguda will get its power supply for Sterlite Energy as VAL has temporarily deferred plans to set up a captive unit of 1980 MW.


Work was proceeding in a satisfactory manner at Sterlite Energy’s (SEL) 2400-MW project site at Jharsuguda, Orissa. The first unit of 600 MW is on track for commissioning in 3QFY10. The balance three units (600 MW each) will be commissioned in each subsequent quarter. SEL has currently obtained coal linkage for only 600 MW. Sterlite sits at the top of CLSA’s pecking order in the metals sector owing to its low cost of production in most businesses, clean balance sheet and superior growth prospects. The site visits have also increased the confidence of timely completion of the various expansion projects.


DR REDDY’S LABORATORIES

RESEARCH: CITIGROUP

RATING: HOLD

CMP: Rs 413


Citigroup recommends `Hold’ rating on Dr Reddy’s Laboratories (DRL) with a target price of Rs. 547. After a series of concerns related to its business in Germany and the Russia/CIS markets, a favorable US court ruling on Prilosec OTC comes as a positive catalyst for the stock. Citigroup expects the product to add Rs 3-4 per share to earnings and help offset the pressures in Germany and emerging markets to a large extent. The court ruling will vacate the 30-month stay on approval of DRL’s ANDA filing and paves the way for a launch over the next few months. This is likely to be the third product in DRL’s OTC portfolio in the US.


While omeprazole is off patent, Omez OTC is a reasonably steady opportunity for DRL, with annual sales of $300m. DRL will be only the third player (after AZ and Perrigo) in the market. Besides strengthening its OTC foray in the US market, this launch could generate annual sales of $25-30 m and add Rs 3-4 per share to earnings. Citigroup’s cautious outlook on the stock reflects the mixed trends in DRL’s businesses over the medium term. While the US market will remain a key growth driver and India should recover in 2HFY10, Germany (14% of sales) and Russia /CIS (11% of sales) will be challenging on the back of lower pricing and currency volatility, respectively.



GATEWAY DISTRIPARKS

RESEARCH: EDELWEISS

RATING: REDUCE

CMP: Rs 48

Edelweiss maintains `Reduce’ recommendation on Gateway Distriparks (GDL). Growth in container volumes is a function of global trade. Therefore, in the absence of any uptick in the EXIM trade, GDL container volumes are expected to be under pressure in H2FY09. Management expects a decline in volume in the fourth quarter to be steeper, to the tune of 20% q-o-q . In a declining volume scenario, realisation for the company in the past few quarters has been increasing.


The company expects that, with train operators increasing their services and providing last mile connectivity, there will be a shift in volumes from the traditional roadways to transportation of goods by railways which is 30% cheaper vis-à-vis road transportation. Current market share for railways is 35%, which is expected to be 55% in the coming few years. At current market price, the stock is trading at a P/E of 6.0x and 5.2x FY09E and FY10E EPS of Rs 7.3 and Rs 8.5, respectively. Though the valuation looks attractive, with container volumes expected to decline in the coming few quarters, high realisation is unlikely to sustain.


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