Hold stocks of Grasim Industries; target of Rs 2898

"Grasim Industries Ltd. (GIL) will acquire the assets of TBP through a SPV (special purpose vehicle), AV Terrace Bay Inc, in which GIL will hold 40% stake and the remaining 60% stake will be held by Thai Rayon Public. GIL, which has valued the assets of TBP at US$110mn, would spend another US$250mn to upgrade and expand the plant. GIL would contribute US$44mn to the total equity of USD 110 million."

"TBP, owned by Buchanan Forest Products, has been shut since the past two months. The promoters were trying to sell the company due to a liquidity crunch. The TBP mill is capable of producing various blends of northern bleached softwood kraft pulp and northern bleached hardwood kraft pulp along with certain other by-products."

"The TBP mill is considered an anchor mill due to its location and its significant consumption of residual chips produced by regional saw mills. GIL plans to produce dissolving grade pulp from October 2012 until the conversion of the mill capacity to make rayon grade pulp. The conversion is expected to be completed in the next three years."

"In FY12, the company had acquired a 33% stake in Domsjo Fabriker AB, thereby assuring the supply of high quality pulp for its new greenfield capacity at Vilayat (Gujarat). With this acquisition, the company would also get assured pulp supply for its Karnataka plant, which is undergoing brownfield expansion."

Valuation

"At the current market price, GIL trades at a PE multiple of 8.4x and EV/EBITDA of 3.5x on FY14E earnings. We retain our target price of Rs2,898 based on SOTP valuation, but have downgraded our rating from Buy to Hold because of the recent surge in stock price. We have valued the 60% stake of the company in Ultratech Cement (UCL) at Rs2,016/share (after giving a 20% holding company discount to UCL’s TP of Rs1,496).The VSF business is valued at EV/EBITDA of 5x (Rs645/share), other business segments combined at EV/EBITDA of 4x (Rs43/share) and investments at a 20% discount to the CMP, at Rs 263/share," says Nirmal Bang research report.

Sell stocks of Rallis India; target of Rs 144

"Rallis has an extensive network across India through its distributors and retailers, covering around 80% of India’s districts. Through this network, it supplies innovative products and services to maximize crop protection and production in response to evolving needs of farmers. Rallis Kisan Kutumb (RKK) now has 700,000 farmers enrolled and the company has launched “Samrudh Krishi” program in FY12, as a means to leverage on this database."

"Domestic Agrochem industry witnessed a deceleration in FY12 and Rallis was no exception to this trend (domestic pesticides sales down 3.3% YoY). During the year, the company opted to focus on cash generation (reflected in prudent working capital management) over revenue growth. Also, the company discontinued red triangle products from the portfolio (10% of sales in FY11) which further weighed on topline growth. The downtrend was restricted by healthy growth in exports (up 49.5% YoY). We anticipate the ramp-up in Dahej facility to catapult export growth. Over the years, Rallis aims to expand its product offerings and scale up its newly added adjacent businesses (Metahelix Lifesciences and Zero Waste Agro Organics). The company is on course to transform itself from a mere agrochem company to a complete agri-service provider."

Industry Snapshot:

Rising world population and economic growth in developing nations have led to significantly higher global food demand. Domestic agrochemical industry declined during the year; global counterpart grew 17% to USD 44.9bn. The Indian seed industry, world’s sixth largest (>` 70bn) has grown at 12% p.a. in the past couple of years compared to 6-7% internationally. In India, commercial seeds account for only 25% of the potential, providing tremendous opportunity in this space.

Valuations

"We expect revenue growth from domestic market to moderate in the near term. Increased cultivation costs and low pest incidence is a cause for deceleration in volume off-take. Scale-up in Metahelix business and increased contribution from exports in the interim are growth drivers. The performance of Kharif season in course shall be an important determinant for future growth in domestic agro business. At CMP, the stock trades at 18.3x FY13E and 14.6x FY14E earnings. We believe there is limited upside from these levels and recommend Reduce on the stock, with target price of ` 144 (15x FY14E EPS)," says Dolat Capital research report.

Buy stocks of Hindustan Zinc; target of Rs 151

“We took part in the visit organised by Hindustan Zinc (HZL) covering its Rampura Agucha mine (RAM), Sindesar Khurd mine (SKM), Chanderiya smelting complex and Dariba smelting complex, all located in Rajasthan. The company largely focuses on exploration and mining activities, but most of the benefits would accrue from FY14-15. In the interim, HZL is looking at higher lead and silver output and cost efficiency as major profit drivers. We retain our Buy rating on HZL with a TP of Rs151, which is 20% above the CMP.”

“The company largely focuses on exploration activity to increase its mining base. It has drilled around 95,000 metres in FY12 and expects similar kind of drilling in FY13 as well with an investment of around US$10mn. Apart from Rajasthan, it pays major attention to the Andhra Pradesh/Karnataka regions in respect of drilling and expects these regions to have significant reserves. Underground mining operations at RAM would commence at the beginning of 3QFY13 and the company expects production of around 1mt of ore through underground mining and 5mt via open-cast mining. Mining costs are likely to be similar, or marginally lower, compared to open-cast mining as the company operates at a peak stripping ratio of 14x. The stripping ratio is expected to remain the same in FY14 as well and thereafter it would start declining. By the end of FY18-19, the company expects its entire mining operations to be underground.”

“The company is evaluating tax efficiency, which would result in lower effective tax rate for the next couple of quarters, but it doesn’t materially lead to a change in our projections and valuations as the tax outgo (including MAT) would remain similar to our expectation. Rajpura Dariba mine’s output is likely to improve from 0.59mt to 0.75mt in FY13E and to around 0.90mt in FY14E. HZL is looking at integrated lead output of 100,000-110,000tn (without Zawar mine) in FY13E and register a run-rate of 150,000-160,000tn with the Zawar mine. The company is looking at integrated silver production of 350tn and total silver production, including custom, would be 450tn in FY13. The company maintained its FY13 capex guidance of Rs15-18bn, including sustainable capex of Rs3.5bn. It indicated the capex would remain high on RA mine as development of underground mining is almost like developing a greenfield project,” says Nirmal Bang research report.

Buy stocks of Allahabad Bank; target of Rs 196

“Allahabad Bank has witnessed sustained growth since last few years with continuous improvement in fundamentals, balance sheets and operational efficiency. Going forward, in a falling interest rate environment, efficient yield and cost management will help NIM to remain strong. Further, focus on fee based income will help RoA to move upward further. ALBK with relatively sound balance sheet, healthy return ratios, strong NIMs and stable asset quality is well positioned to benefit from economic revival. The bank has a strong track record of paying dividends and yield on current market price works out to ~4%.”

“ALBK has seen higher than industry growth in its advances in the last few years, the loan book grew at a CAGR of 28% during 2006-2012. In FY2012, loan book recorded a growth of 19%, ahead of industry averages. We expect credit off-take will continue to grow at a healthy pace of 18% in FY13E and FY14E each. Going forward, priority of the bank is to maintain the credit quality and margins over growth in coming years. MSME loan book has grown by 41% at a 4 year CAGR rate. Aggressive loan growth in MSME segment has positively impacted yield on funds of the bank. We expect strong growth in the SME loan portfolio in FY13E and FY14E as the bank is aggressively pursuing this segment and has taken various strategic initiatives in this regard. Most of the proposed 250 new branches are expected to be opened in CASA rich locations in Southern and Western India ALBK has planned to increase the footprint in South India by opening 100 branches out of the proposed new 250 branches in FY13E.”

“The Bank has continuously kept on increasing its dividend ratio barring FY07 and FY09. The dividend per share has doubled from Rs.3 in FY07 to Rs.6 in FY12, registering a CAGR of 19%. We are not factoring in earnings growth for this purpose and expect the bank to continue with maintaining the current dividend percentage of 60% for FY13E and FY14E. At the current price, the stock trades at an attractive dividend yield of 4.13%. At CMP of Rs.151.5, the stock is available at P/ABV of 0.79x and 0.63x of FY13E and FY14E respectively. We expect margins to remain at approximate current levels going forward for ALBK i.e. RoAE at 19.5% in FY13E and 21.1% in FY14E. We initiate coverage on Allahabad Bank with a price recommendation of Rs.196, an upside of ~29% from the current market price,” says FairWealth Securities research report.

Buy stocks of Persistent Systems; target of Rs 450

“Persistent is one of the leading and the listed Indian player in the outsourced software product development (OPD) space and primarily caters to the large Independent Software Vendors (ISVs), Telecom and Enterprise clients, such as, Citi Bank, Wells Fargo, Samsung, Nokia and Motorola. The company has service offerings across the various stages of product lifecycle. Persistent designs, develops and maintains software systems and solutions, creates new applications and enhances the functionality of the existing software.”

“Based on our recent interaction with the management, we believe, though the overhang of macro-economic uncertainty on client spending still remains and the linear OPD business is under some pressure, the ISVs are investing in new technology areas to stand in competition and also gain new market share. Persistent’s niche presence and expertise in the software engineering space, marquee clientele and focused approach in new technological areas would help them to register better growth in tough times. Moreover, higher revenue contribution from the IP-led initiatives would aid better growth and higher margin profile in the medium to long term. We upgrade our EPS estimates for FY13E to accommodate higher IP contribution and INR depreciation against USD and consequently revise our recommendation upward to ACCUMULATE,” says Way2Wealth research report.

Buy stocks of Graphite India; target of Rs 102

“Graphite India Ltd is the largest producer of graphite electrodes in India and one of the largest globally, by total capacity. Its first Plant at Durgapur in East India in collaboration with Great Lakes Carbon Corporation of USA was commissioned in 1967. The company its combined manufacturing capacity of approximately 78,000 tonnes per annum is spread over four plants - 3 in India at Durgapur (34KT), Bangalore (13KT), Nashik (13 KT) and the 4th in Nurnberg, Germany (18KT). The Company accounts for approximately 6.5% of global electrode capacity. The Company has over 40 years of expertise in the industry and is globally competitive. With its corporate office in Kolkata, India, the Company services its clients in over fifty countries. Graphite India manufactures the full range of graphite electrodes but stays focused on the higher margin, large diameter, ultra-high power (‘UHP’) electrodes. Approximately 85% of the Company’s total capacity is currently UHP.”

“Graphite India is well poised in the global graphite electrode industry through its quality, scale of operations and low cost production base. The Company also has facilities designed for the manufacture of Calcined Petroleum Coke (30 KT), Impervious Graphite Equipment and Glass Reinforced Plastic Pipes and Tanks. It has an installed capacity of 33 MW of power generation through hydel and multi-fuel routes. Graphite India Ltd conducts business with a respect for the environment at every stage of its product cycle across all its plants. As a result, the company is committed to sustainable development. The Graphite India Ltd products are produced at state-of-the-art ISO 14001:2004 and DIN EN ISO 9001:2008 certified manufacturing facilities.”

“Graphite India Ltd has reported net profit of Rs 1029.60 million for the quarter ended on March 31, 2012 as against Rs 445.40 million in the same quarter last year, an increase of 131.16%. It has reported net sales of Rs 4521.70 million for the quarter ended on March 31, 2012 as against Rs 3030.50 million in the same quarter last year, a rise of 49.21%. Total income grew by 48.19% to Rs 4740.70 million from Rs 3199.10 million in the same quarter last year. During the quarter, it reported earnings of Rs 5.27 a share.”

“At the current market price of Rs.90.50, the stock is trading at 5.94 x FY13E and 5.12 x FY14E respectively. Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.15.23 and Rs.17.67 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 23% and 26% over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 3.94 x for FY13E and 3.44 x for FY14E. Price to Book Value of the stock is expected to be at 0.95 x and 0.80 x respectively for FY13E and FY14E. We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs 102 for medium to long term investment,” says Firstcall Research report.

Buy stocks of Power Grid Corp; target of Rs 133

“PGCIL has already commissioned assets worth Rs25bn in the first two months of FY13E and is likely to commission Rs15-20bn in June 2012. It is also targeting capitalization of Rs200bn+ for FY13. Huge investment approval over the last 2-3 years (~Rs360-400bn), huge capital WIP and regulatory support gives confidence on the improved capitalization trend. It also highlighted that renewable and subtransmission network for state building would provide additional opportunity in the XIIth plan. The company is also confident of winning projects even through ICB route due to inherent advantage of low funding cost and presence throughout the country.”

“PGCIL expects to award tenders worth ~Rs200-220bn for FY13. The ratio of segment will continue to remain the same with TL at ~45%, Transformers at ~10-15%, SS at ~15% and rest at ~25%. It also highlighted that prices of the 765KV transformer has seen an improvement of ~10% in the tenders/bids opened in the last two months. Also, participation of Chinese players in the transformer market has reduced in the recent tenders (large orders bagged recently were bid earlier). PGCIL has put additional conditions on the Chinese suppliers like 5-year warranty (normal being four years), additional bank guarantee, insisting in keeping extra spare than normal and linking payment to progress achieved in building factories in India.”

“The stock is trading at 1.5x P/B FY14E. We expect the stock to deliver earnings CAGR of 16.2% over FY12-17E, with core ROE of ~17.6% over the same period. We believe that the stock remains a safe play in the Indian utilities space. We maintain ‘BUY’ on the stock,” says Prabhudas Lilladher research report.

Buy stocks Alkyl Amines; target of Rs 111

“Alkyl Amines Chemicals was incorporated in 1979 with the idea of making India selfsufficient in aliphatic amines. The first plant was commissioned in 1982 at Patalganga to make ethylamine and cyclohexylamines with technology from Leonard Process Company, USA. The capacity was expanded in 1986 in the existing plant and another plant was set up in 1992 to make methylamines. Alkyl Amines Chemicals is a global supplier of amines and amine-based chemicals to the pharmaceutical, agrochemical, rubber chemical and water treatment industries, among others. Alkyl's commitment to customer satisfaction by delivering quality products and services has helped it to become one of the world's leading amine manufacturers.”

“The company has standards, the ISO 9001 certification has been awarded to our both sites, Patalganga & Kurkumbh for the manufacturing sites. The plant set up in technical collaboration with Leonard Process Co Inc, US, in 1962. A second plant was set up in 1991 to manufacture ethyl and methyl amines in technical collaboration with Acid Amine Technologies Inc, US. AACL's products find applications in agro chemicals, pesticides, rubber chemicals, water treatment chemicals and other specialty chemicals. Some of the new products developed by the company are diethyl hydroxylamine (DEHA), dim ethyl cyclohexylamine (DMCHA), specialty intermediates and insect repellents such as diethyl toluamide (DETA), besides dim ethyl amino propylamine (DMAPA), various hydrochlorides and specialty corrosion inhibitors.”

“Alkyl Amines Chemicals Ltd has reported net profit of Rs 65.10 million for the quarter ended on March.31, 2012 as against 25.10 million in the same quarter last year, an increase of 159.36%. It has reported net sales of Rs 809.00 million for the quarter ended on March.31, 2012 as against Rs 646.40 million in the same quarter last year, a rise of 25.15%. Total income grew by 25.14% to Rs 814.30 million from Rs.650.70 million in the same quarter last year. During the quarter, it reported earnings of Rs 6.38 a share.”

“At the current market price of Rs.98.20, the stock is trading at 4.81 x FY13E and 4.13 x FY14E respectively. Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.20.42 and Rs.23.79 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 16% and 32% over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 1.99 x for FY13E and 1.77 x for FY14E. Price to Book Value of the stock is expected to be at 0.91 x and 0.75 x respectively for FY13E and FY14E. We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs 111 for medium to long term investment,” says Firstcall Research report.

Buy stocks of HDFC; target of Rs 720

“Housing Development Finance Corporation (HDFC) since Febuary’12 had declined in a descending channel pattern which was successfully breached recently with tall white candle formations. The stock prior to the breakout formed a higher bottom which was successfully defended couple of times around the Rs630-Rs635 levels. The prices have managed to exceed their May’12 high which is a bullish Dow signal indicating a start of a higher high and low formations. The MACD has given a bullish crossover and has entered into the bullish territory. The indicator has also exceeded the descending trend line drawn from the January’12 highs which bullish.”

“The RSI indicator is currently rising and is above its March-April’12 highs indicating bullish momentum in the stock. The prices in short term are likely to test the falling window pattern which coincides with the short term rising channel drawn from the May’12 low which is around the Rs690-Rs695 levels. Decisive close above the Rs700 levels would fill the falling gap and would increase the possibility for the stock to test its previous all time high,” says Nirmal Bang research report.