Market Outlook
The key Indian indices may continue to remain lackluster amid lack of interest among the traders as well as investors. The recent trend of light trading volumes underscore a general lack of participation for the time being. A clear direction might emerge once the Nifty manages a decisive break out from the current trading range.
Technical Calls
Buy Patel Engg. 159.50 target 165
Buy H.T. Media 160.00 target 170
Buy Bombay Dyeing 364.00 target 370
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Momentum Calls
Buy Saint Gobain 42.45 target 50
Buy Federal Bank 458.55 target 465
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Investment
Motilal Oswal has recommended `Buy` on Lanco Infratechwith a price target of Rs 55 as against the current market price(CMP) of Rs 33 in its report dated June 10, 2011. The broking house gave the following rationale:
Capacity addition looks up but fuel/PPA uncertainties remain
Lanco Infratech`s (LITL) operating capacity will rise from 3.3GW to 5.3GW by FY14 as it commissions new units. However, LITL faces PPA issues for Unit-2 at Amarkantak, and the lack oftransmission line and fuel security have imapcted returns on its capacity at Udupi (600MW) and Anpara (1.2GW). Merchant capacity is exposed to fuel availability/cost risks and its Unit-2 at Amarkantak faces a tariff cap of Rs2.34/unit, which is under contesting. LITL recently acquired stake in Griffin Mines with a view to fulfilling its long term fuel requirements but the benefits are unlikely before FY13/Y14.
EPC business: Captive in-house business offers equity cash flow
A robust in-house project pipeline and large third-party contracts contributed to LITL`s
Engineering, Procurement and Construction (EPC) division`sorder book, which was Rs 301 billion in March 2011. More than half of this is from three large in-house projects. The in-house power segment contributes 70% of LITL`s outstandingorder book. However, we expect moderation even as it provides LITL with strong upfront cash flow.
Capacity addition leads earnings growth
LITL will post consolidated PAT of 37% CAGR over FY11-13, and the power sector will account for over 80% of earnings in FY12 and FY13. We expect a decline in the contribution ofmerchant earnings to total PAT, as we assume Amarkantak-I on a regulated returns basis from mid-FY12. We expect LITL`soperating cash flow to be sustained at over Rs30b a year and DER is unlikely to taper off in the near term, as debt for new projects is added. We have not assumed consolidation/contribution from Griffin Mines, given lack ofclarity on their operational/financial details.
Valuations offer comfort, initiating coverage with a Buy,target price: Rs 55
LITL`s stock has corrected by 60% over the past 12 months (relative under-performance of 54%), due to a lack of clarity on PPAs, fuel security issues, accounting policy changes, higher gearing and funding issues. Although these concerns have not all receded, a price correction has largely discounted them. Our estimates are based on a conservative stance on various issues/operating rates and so we believe current valuations offer comfort. We initiate coverage with a Buy rating and atarget price of Rs55.
Investment
SKP Securities has recommended `Buy` on Rainbow Papers with a price target of Rs 89 as against the current market price (CMP) of Rs 63 in its report dated June 10, 2011. The broking house gave the following rationale:
Forward integration into value added product segment…:
> RPL is venturing in to consumer products segment such as notebooks, copier paper, office stationery etc. These products are high margin, value added products.
> The company has made the capital investment plan of Rs 250 million for the same which will be spent upon gathering assets and brand building.
> We expect the expansion to be completed by Q2FY12.
> The target market for the company will be Gujarat,
> We expect the revenue of Rs 80-100 million from the segment y-o-y.
Phase-II expansion under implementation…:
> Phase -II of the ongoing expansion plan of the company is still under implementation which we expect to get commissioned by the end of Q2FY12.
> The capacity will get increased by 122,000 MTPA with commissioning of PM -III and SM -VIII machines. PM- VIII will manufacture paper
Whereas SM-VIII will provide value addition:
> Commissioning of these machines will provide the company the access to various value added products such as glazed news print, light weighted coated paper, non-carbon paper etc, increasing its share from the current 6% to 44% in the product mix.
Strategic location of manufacturing unit…:
> RPL`s manufacturing unit is strategically located near Ahmedabad having access to near-by ports like Mundra etc, which provides the company advantage in terms of saving offreight cost, taxes etc. as compared to its peers.
> This also provides RPL easy access to markets like Middle East and
By-products of paper manufacturing are used to produce innovative products…:
> RPL has adopted the policy of near zero wastage of raw material by using sludge, plastic waste and fly ash for manufacturing of innovative products such as paper board, plastic sheets and bricks having application in varied industries.
> The plant for the above products was installed in December 2010.
> We expect that these products will contribute to the revenues of RPL by Rs 130-140 million y-o-y.
At the current market price(CMP) of Rs 63. RPL seems to be under valued based ondiscounted free cash flow approach. We maintain our `Buy` rating on the stock with a target price of Rs 89 (41% upside) in 12 months.
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Disclaimer : This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. And not soliciting any action based upon it. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. We or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report
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