Broker’s Call

Analyses of selected stocks by broking firms

ALLIED DIGITAL
Broking firm: JP Morgan Price at the time of recommendation: Rs 780 Target price: Rs 1,200
Rationale: We initiate with
OW and a Dec-08 PT of Rs 1,200; potential share price upside of 54%: ALDS is a play on the strong domestic demand for IT services with more than 90% of its revenues coming from India. After the 4x share price jump since its IPO in July-07, we expect the stock to deliver more sedate gains over the next 9-12 months, backed by high growth potential and management’s decent execution track record.
Domestic IT services is a US$5 billion industry, expected to grow at a CAGR of 23% over the next five years to over US$10 billion. We believe domestic IT exposure shields ALDS from a US slowdown, rupee appreciation, and expiry of tax benefits in FY10. Share price drivers: (1) Strong financial performance with an industry-leading 71% revenue CAGR and 78% EPS CAGR over FY08-10E; (2) possible acquisitions for around Rs350 million using a part of the IPO proceeds; and (3) increased capacity utilisation of its remote IT management centers as ALDS demonstrates its capability and the cost and time benefits to clients. Valuation, PT and risks: Our DCF-based Dec-08 PT of Rs 1,200 assumes a 39% revenue CAGR over FY07-17E, a terminal growth rate of 3%, long-term EBIT margin of 18%, and ROIC of 27%. Key risks to our PT and view are: (1) Weakness in the projectbased SI business; (2) supply-side tightness; (3) wage inflation; and (4) muted offtake in remote IT management services.
Closing price on Friday, March 14, 2008: Rs 741

LAKSHMI ENERGY
Broking firm: Parag Parikh
Price at the time of recommendation:
Rs 200
Target price: Rs 280
Rationale: Rice is witnessing a demand growth of 5% against an expected production growth of just 2%. Processed food is experiencing a higher demand growth. These are extremely profitable times for farmers & agro-processors like LEAF. We like LEAF’s preference for a stable & higher margin business of nonbasmati v/s basmati and to deal with FCI, which ensures high volumes. Post expansion, it will continue to derive 85-90% of its earnings from the non-basmati and FCI sales would remain high.
Revenues grew at 41% CAGR & profits at a rocketing 164% CAGR over FY03-07 period; this growth primarily being led by increasing expansion & increasing integration.
Apart from the expansion led growth (20% CAGR, FY07-11E), the return ratios remain attractive in the range of 25-30%. The scrip attractive at 7.1x FY09E & 5.2x FY10E earnings. The stability in business in terms of volumes & pricing gives LEAF an edge over other listed food processing companies. We recommend BUY based on our DCF calculations with a price objective of Rs. 280 (=7.3x FY10E EPS).
Closing price on Friday, March 14, 2008: Rs 214

RELIANCE CAPITAL
Broking firm: Indiabulls
Price at the time of recommendation: Rs 1,441
Target price: Rs 1,962
Rationale: We are optimistic about the life insurance and asset management businesses. The life insurance business is going to be an important growth driver. Reliance Capital has recorded a 231% yoy increase in new business premium to Rs. 13.9 bn. The asset management company is consistently beating industry growth in assets under management. We see bright prospects for the two new businesses – Microfinance and Portfolio Management Services (PMS). The company is building a strong distribution network.
We used sum-of-the-parts method to value Reliance Capital. The various divisions are valued at P/B, P/E, New Business Achieved Profit (NBAP) multiple, and % of AUM, depending on the particular business. On the basis of our valuation and the recent price correction, we upgrade our rating on the stock from Hold to Buy with a target price of Rs. 1,962 for FY09E
Closing price on Friday, March 14, 2008: Rs 1,327