BULLS'S EYE

RELIANCE PETRO
RESEARCH: CITIGROUP
RATING: BUY
CMP: RS 166
CITIGROUP has upgraded Reliance Petroleum's (RPL) rating to 'buy' with a target price of Rs 204 on 12-month forward EV/EBITDA of 7.0x and value of tax breaks at Rs 28 per share. The stock has fallen 25% since January '08. Notwithstanding fears of a slowdown, the current level of crack spreads and low-high (L-H) differential provides strong support to the margin assumptions. Based on average product spreads and L-H differential over the past 12 months, six months and one week, RPL would have reported gross refining margins (GRMs) of $16.6/bbl, $19.5/bbl and $30.9/bbl, respectively. This compares favourably against Citigroup's base case of $16.3-16.5/bbl FY09-10E. The inherent cushion available to RPL's GRMs justifies target EV/EBITDA at 7.0x. Even if diesel spreads come off and demand slows, RPL's gains from increase in L-H differential, will provide support. Downsides are a fall in global oil demand and potential valuation issues in case of a merger with RIL.
SATYAM COMPUTER SERVICES
RESEARCH: JP MORGAN
RATING: OVERWEIGHT
CMP: RS 508
JP MORGAN maintains 'overweight' rating on Satyam with a December '08 target price of Rs 650. Upaid has added new claims to its existing Texas fraud lawsuit against Satyam. The damages payable by Satyam can exceed $1 billion. Upaid employed Satyam in 1997 to develop a telecom platform and software. Disputes arose between the two companies, leading to termination of their relationship in '02. In '07, Upaid had to settle a patent infringement case against Qualcomm and Verizon after discovering that signatures of Satyam 'inventor' employees in assignment agreements were forged. Upaid filed a case against Satyam in April '07. In May '08, the London court upheld a prior HC decision to allow the case filed by Upaid against Satyam to proceed in a Texas federal court. The Texas court is yet to hear the case and the legal process is expected to take 2-3 years. Either party can appeal the court decision, delaying the judgment further. JP Morgan believes it is too early to draw any conclusions on the probability of Satyam losing the case or the size of any damages. JP Morgan has turned incrementally positive on Satyam, driven by non-operating factors and signs of business stability.
NEYVELI LIGNITE
RESEARCH: MERRILL LYNCH
RATING: NEUTRAL
CMP: RS 117
MERRILL Lynch maintains 'neutral' rating on Neyveli Lignite, despite good growth prospects from FY10E onwards. Neyveli's Q4 FY08 PAT was down 7% YoY on flat revenue at Rs 850 crore, higher staff costs of Rs 230 crore and maintenance expenses. Since clarity on its tariff is pending and much of the capex is likely to fructify in FY10E, the stock may move sideways, given expensive valuation of 15.7x FY10E EPS — 13% premium to NTPC. Neyveli's much-delayed capacity addition of 750 mw in Tamil Nadu and Rajasthan has started, with the placing of equipment orders with Bhel. These projects may be commissioned in FY10E, limiting growth in profits till then. Neyveli has also firmed up its 89:11 JV with TNEB for a 1-gw coal-based project, likely to be commissioned by FY12E. Merrill Lynch sees Neyveli's stock moving sideways due to: 1) Lack of tariff visibility, especially of lignite; 2) Slow earnings growth (9.7% CAGR FY08-10E) due to delays in capacity addition; 3) Falling RoE until FY09E; and 4) Expensive valuations (P/E of 16x FY10E).
WIPRO TECHNOLOGIES
RESEARCH: MORGAN STANLEY
RATING: EQUAL-WEIGHT
CMP: RS 505
MORGAN Stanley maintains 'equal-weight' rating on Wipro. The company hosted its annual analyst meet in Mumbai with a new management, which was confident about the company's long-term outlook, but cautious on the near-term situation. For FY09E, the management expects pricing to be stable and tax rates to be ~100 bps higher than in FY08. The management maintained its view that H2 is likely to be better than H1, as budgets have not been cut, but project starts will continue to be deferred to H2. Though the freeze on tech spending by banks has been relaxed, the management did not indicate any material change in the BFSI outlook since April '08. Contracts that have come up for renewal in '08 have seen better pricing for Wipro. Uptil now, the management has not experienced any pricing pressure from its clients and expects overall realisation to remain stable in FY09. Wipro expects to post flat to slightly better margins in FY09E. Improvement in margins for its recent acquisitions and currency should help cushion the impact of wage hikes. Morgan Stanley expects Wipro to post revenue and profit CAGR of 32% and 30%, respectively, in FY09E and 21% and 15%, respectively, in FY09-11E after adjusting for the rupee's depreciation. The stock trades at 17x FY09E and 15x FY10E EPS, a ~10% premium to Infosys. The management indicated that although overall outlook has not changed materially since April '08, there can be near-term challenges in a few verticals like BFSI and retail.
ABB
RESEARCH: INDIABULLS SECURITIES
RATING: BUY
CMP: RS 973
ABB's net sales for Q1 '08 rose by only 17% YoY, compared to consistent revenue growth rate in excess of 28% YoY over the past eight quarters. But effective cost management mitigated the effect of slow growth in sales and boosted margins. Net profit jumped 35.9% YoY. The lower rate of order execution seems to be a one-time phenomenon and is the result of longer completion cycle of orders received in early '07 and a slowdown in the power business due to reduced orders from Power Grid. The latter's fund constraints have eased, as it has secured loans worth $1.6 billion from the World Bank and ADB. As a result, ABB's T&D orders are expected to pick up. In addition, ABB is expected to bag orders from railways, automation and building technologies. Indiabulls expects the company to execute a larger chunk of the big projects in Q2 and Q3 of '08, thus posting higher revenue growth. But Indiabulls has lowered its earnings estimates by 6.1% and 6.8% for CY08E and CY09E, respectively, to factor in the long completion cycle of orders.
SUZLON ENERGY
RESEARCH: HSBC
RATING: NEUTRAL
CMP: RS 280
HSBC maintains 'neutral' rating on Suzlon Energy, but reduces the target price from Rs 400 to Rs 300, due to reduced long-term margin assumptions. HSBC upgraded the stock from 'underweight' to 'neutral' in December '07 after the capital increase, as Suzlon's stretched balance sheet had been fixed and HSBC had a strong outlook on the wind sector. HSBC's concern has been that EBITDA margins will decline as the business goes global. In addition, it had concerns over the robustness of Suzlon's international offering, the S-88 turbine, which have been well-founded. These concerns are now diminishing, but the technology remains largely unproven, and Suzlon's US order book has declined over the past nine months. In addition, HSBC is concerned there may be further costs associated with the blade remediation plan. Suzlon's aggressive expansion plans may put further pressure on margins during the ramp-up phase, and the company may end up with cost over-runs and manufacturing quality problems. In addition, both its CEO and CFO left the company in quick succession. The REpower acquisition remains potentially problematic, with the risk that Suzlon may have to pay 20-25% more than it originally thought. In the short term, HSBC believes these concerns will weigh on the stock price.