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Friday, March 27, 2009

Analysts' Picks: Cairn India, Tech Mahindra, Voltas, Axis Bank, Apollo Hospitals

CAIRN INDIA
RESEARCH: MERRILL LYNCH
RATING: BUY
CMP: Rs 176

Merrill Lynch maintains `Buy’ rating on Cairn India (CIL) with a target price of Rs 219. CIL recently revised guidance on development cost and production ramp up from its main Rajasthan block RJ-0N-90/1. It led Merrill Lynch to upgrade Rajasthan development cost and peak production rate. However, the ramp up to peak rate is now slower than earlier assumed. Gains from higher production rate are largely neutralised by the slower ramp up. CIL now plans a production facility with a 205 kb/d capacity. There are several other indications suggesting peak production rate would be higher than the earlier guidance of 175 kb/d. Oil production is to start in 3Q09E as against 2H09E earlier. However production ramp up is likely to be slower than earlier assumedFY11E Rajasthan oil output is therefore 26% lower than that assumed for ‘10E. FY12E output is also lower than ‘11E by 5%. ‘10E is to be the first full year of Rajasthan production. EPS of first full year now FY11E is therefore 28% lower than that of ‘10E, the first full year earlier. Merrill Lynch expects CIL’s FY11E profit at $1.2bn (‘10E estimate was $1.6bn). FY12E EPS would be higher than ‘11E EPS despite lower output. The higher profit is due to lower share of government in profit petroleum in FY12E than in ‘11E.

TECH MAHINDRA
RESEARCH: HSBC
RATING: OVERWEIGHT
CMP: Rs 276

HSBC initiates `Overweight’ rating on Tech Mahindra at a target price Rs 320. The fact that Tech Mahindra focuses on IT and BPO solutions for telecom service providers (TSPs) is to its advantage. Although capex and opex rationalisation for telecoms is inevitable, the resulting downside risk to IT spending seems limited compared to other sectors. Declining revenue from the core British Telecom (Core BT) business is partly offset by the enhanced contribution from BT’s Barcelona and Andes deals, which offer high visibility for FY10. The fact that TechM is a preferred vendor with BT, and can increase its share in a shrinking pie, further caps the downside for Core BT.HSBC’s FY10E EPS estimate factors a 44% drop in Core BT revenue as key BT initiatives approach closure, a 16% increase from the Barcelona deal, $70 million from the Andes contract, and a 6% decline in non-BT revenue. Risks to the ramp-up of the large deals is low as BT Global Services (BTGS) is likely to accelerate the rationalisation of its systems and vendors to save costs and improve cash flow. Additionally, concerns about upfront payments for winning these deals seems overstated, as the deals offer better earnings over the period of the contract compared to a typical outsourcing contract. TechM stock has derated to a PE of 4.2x on our FY10E EPS and the perceived risks, even after consensus EPS declined 19% from the peak, seem overdone.

VOLTAS
RESEARCH: EDELWEISS
RATING: ACCUMULATE
CMP: Rs 39.45

Edelweiss maintains ‘Accumulate’ recommendation on Voltas. In the electro-mechanical projects (EMPs) business segment the company is focused on execution, even as enquires have been increasing over the past three months. In view of the uncertain economic environment, the company has been circumspect in taking up new orders. Order backlog for the EMPs business was Rs 56 bn at the end of Q3FY09. The company expects significant orders in this business from the Middle East, especially from Abu Dhabi, Qatar and Saudi Arabia in FY10E. Voltas’ engineering and agency services (EAS) and unitary cooling (UCL) businesses reported decline in revenues (down 31% and 5%, y-o-y respectively) in Q3FY09. EAS has been impacted by slowdown in the mining and construction activities; although strain emanating from these activities is lower compared with Q3FY09. The management believes any significant recovery in the segment is unlikely over the next six months.In UCL, there are likely to be upsides from payouts pertaining to the Sixth Pay Commission to government employees in Q1FY09, which could result in higher sales in Q1FY10. However, even in this segment, any significant recovery is unlikely over the medium term due to lack of consumer confidence in the uncertain macro environment. At current prices, Voltas is trading at 5.4x and 5.2x our revised FY10E and FY11E earnings respectively. We believe downsides from these levels are unlikely; however, in the absence of indicators pointing to recovery in capital expenditure for the economy, upsides to valuations could be capped over the medium term.

AXIS BANK
RESEARCH: UBS INVESTMENT
RATING: BUY
CMP: Rs 343.05

UBS Investment Research has upgraded Axis Bank’s rating to `Buy’ with a target price of Rs 540. The Axis Bank stock has corrected 35%, and has underperformed the Sensex by 26% in the last three months. UBS finds value in the stock at current valuations (upside of 65% to our target price), despite long-term concerns and are upgrading to `Buy’ from `Neutral’. UBS remains wary of:: 1) the exit of the dynamic CEO in July 2009; and 2) the equity overhang as SUTI, a key shareholder, plans to offload its stake. Total advances grew 55% and retail by 30% in the face of a slowing economy.While the net non-performing loan (NPL) ratio of .4% is not a concern for now, we expect the growth in SME (small and medium enterprises) advances (57%), unsecured personal loans (41%) and credit cards (30%) may lead to pressure on asset quality in the coming quarters. The valuations assume a 200% increase in NPLs and a provision coverage ratio of 80%. We expect 18% growth in earnings and an average ROE of 17-18% in FY09-11 against a three-year earnings growth of 31%. Risks to our earnings could come from change in strategy from new management, impacting continuity and thus operations. In the short term, higher NPL provisions could put a pose risk to earnings. We base our price target of Rs 540 on a residual income model, assuming cost of equity of 12.5%, long-term sustainable ROE of 16% and terminal growth of 5%. UBS estimates a book value per share of Rs.280 and an adjusted book value per share of Rs 255 for FY09.

APOLLO HOSPITALS
RESEARCH: CITIGROUP
RATING: BUY
CMP: Rs 379.45

Citigroup maintains `Buy’ rating on Apollo Hospitals with a target price of Rs. 457. Citigroup remains positive on the long-term prospects of Indian healthcare with Apollo as preferred play given its scale, national footprint, and presence in multiple disease/delivery segments. Most of its hospitals are profitable, and it appears well funded to execute its expansion plan. Apollo continues to benefit from its large set of mature hospitals. Revenues in 9mFY09 were up 23% y-o-y and PBIT margins were up 124 bps to 18%. Margin expansion was driven by improved ALOS (average length of stay) (5.08 days in 9m09 v/s 5.2 days in 9m08) and higher occupancy at new hospitals. Revenue/bed day rose 10% y-o-y to Rs 9,500. It has also outlined an aggressive expansion plan which would maintain its position as India’s leading corporate hospital. Apollo’s pharmacy business, while growing at a rapid pace, continues to be a drag on margins given that each store takes 12-18m to break even.Citigroup expects profitability to improve with the number of new pharmacies being set up and slowing from FY10 and a ramp-up in profitability of existing pharmacies. Apollo’s balance sheet remains strong, with cash position of Rs 380 crore and undrawn lines of credit of Rs 44 crore and a net D/E of 0.2x. It intends to fund its expansion plan through a combination of internal accruals and fresh debt. Apollo plans to add about 3,000 beds (an investment of Rs 1,400 crore) over the next 18-24 months including about 800 beds in eight secondary hospitals as a part its REACH initiative.

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