BULLS'S EYE

TITAN INDUSTRIES
RESEARCH: HSBC RATING: OVERWEIGHT CMP: RS 900
HSBC reiterates 'overweight' rating on Titan Industries. The company's second-quarter FY09 results were quite good. It reported a 53% increase in sales and 88% net profit growth. Moreover, both the watches and jewellery divisions posted satisfactory sales growth and handsome margin expansion. HSBC expects that the effects of the slowdown will be reflected in Titan's results from Q3 onwards. Nevertheless, the risks to FY09E estimates are more to the upside than the downside. However, HSBC has cut the company's EPS estimate for FY10E by 3.5% to factor in slower demand next year. HSBC has identified the following growth drivers for Titan: 1) The company has recently forayed into the eyewear business with 30 stores, which may cross 150 stores by FY11E; 2) New designs and innovation across products should take wallet share; 3) Increase in charges for making jewellery; and 4) Increased preference of consumers for branded jewellery. HSBC values Titan at 20x FY10E EPS, with a target price of Rs 1,100 per share. The target price gives a potential total return of 31%.
PETRONET LNG
RESEARCH: INDIA INFOLINE RATING: BUY CMP: RS 37
INDIA Infoline upgrades Petronet LNG from a 'market performer' to a 'buy', with a target price of Rs 48 and upside of 22.8%. The company reported a flat sales growth, despite a near 10% fall in sales volumes to 75 TBTUs as one high-pressure pump was de-commissioned for repair. The fall in volumes was higher than expected as the repair work stretched over a period of 3.5 months. However, the volume decline was offset to some extent on account of higher realisations aided by depreciation in the rupee. Going ahead, the 5 mmt expansion at Dahej terminal is scheduled to commence operations in Q4 FY09, while the Kochi project is likely to go on stream in '12. With domestic gas supplies expected to increase, Petronet will find it tough to market the costlier regasified LNG. Further, with tightness in the international market, sourcing long-term LNG at affordable prices is difficult. However, the 35% correction in the company's stock price over the past couple of months is unwarranted and is steeper than the perceived risks.
CIPLA
RESEARCH: MERRILL LYNCH RATING: UNDERPERFORM CMP: RS 160
MERRILL Lynch maintains 'underperform' rating on Merrill Lynch, despite stable margin outlook, given rich valuations and lack of upside triggers. Cipla's Q2 net income was 7% lower than Merrill Lynch's estimates due to higher-than-expected forex loss (Rs 100 crore) despite 23% growth in topline and stable margins of 23.3%. Cipla trades at 21x FY09E and 16x FY10E earnings — over 25% premium to the average of the domestic generics sector. The stock has corrected in the past few weeks and it is expected to be range-bound, given lack of visibility on big product upsides. Within inhalers, Cipla has developed eight HFA inhalers for the European Union market, and six products have been submitted, which can involve a long clinical trial process. The company is setting up capacities at different places (four plants in Indore SEZ coming up in February '09); the full impact of this will be seen later. Work on the Goa SEZ remains stalled (Rs 150 crore has been invested so far). Cipla faces the risk of fluctuating margins in the coming quarters, given high contribution from low-margin HIV products (>30% of revenues) and pricing pressure in developed markets.
HERO HONDA
RESEARCH: EMKAY RATING: BUY CMP: RS 728
EMKAY maintains a 'buy' rating on Hero Honda. The company's Q2 FY09 results were in line with expectations. While net sales, at Rs 3,200 crore (yo-y growth of 36%), were in line with estimates, EBIDTA at Rs 440 crore (yo-y growth of 49%) was ahead of expectations by around 4%. However, significantly higher tax provision (Q2 FY09 tax rate was 32%, against expectation of 24%) resulted in net profit of Rs 310 crore (y-o-y growth of 51%), which was below expectation by 2%. The higher tax rate is due to reduction in target production at the company's Haridwar plant from 750,000 to 600,000 units. The required residual growth in FY09 and declining raw material prices warrant volumes/earnings upgrade in FY09, as well as FY10. However, considering the cautious stand adopted by the management, Emkay is leaving its estimates unchanged as of now.
CANARA BANK
RESEARCH: CLSA
RATING: UNDERPERFORM
CMP: RS 156
CLSA maintains 'underperform' rating on Canara Bank as the RoE is likely to be capped at ~12% for FY09-10 due to the sharp increase in loan loss provisioning costs. Canara Bank reported a 46% y-o-y growth in topline, led by 26% y-o-y loan growth and margin expansion of 24 basis points to 2.7%. Margin expansion was a reflection of: a) improving pricing power and increase in lending rates; and b) repayment of high cost deposits by Canara Bank in the previous year, which reduced cost of deposits from 6.8% in Q2 FY08 to 6.6% in Q2 FY09. Despite loan growth being sustained at +20% and margins likely to expand further, earnings growth in coming quarters and in FY10 will remain muted as Canara Bank will need to provide for: a) higher wage costs under the new wage settlement; and b) loan loss provisions as delinquencies pick up, since the bank has no cushion due to its dismal coverage levels. As a result, RoE is likely to remain at ~12%, justifying Canara Bank's low price-to-book multiple of 0.7x FY10 book.
ASHOK LEYLAND
RESEARCH: CITIGROUP
RATING: SELL
CMP: RS 18
CITIGROUP maintains 'sell' rating on Ashok Leyland and revises the risk rating to 'medium' because growth prospects for the company appear limited, and a rising capital outlay poses risks. Fundamentally, the key reasons for a healthy growth outlook in commercial vehicles include a sustained pick-up in economic activity, focus on infrastructure spending and a strong replacement cycle. Moreover, growth in agriculture, infrastructure and manufacturing sectors — all of which have positive linkages to the freight business — should remain positive over the long term. However, the near term looks challenging for Ashok Leyland due to sharp increase in interest rates, which will affect demand. A slowdown in the economy will also lead to a slowdown in the investment cycle, which will impact Ashok Leyland's profitability. The 12-month target price of Rs 19 for the company is based on 4x March 10E consolidated EPS, based on trough valuation multiples to reflect slower-than-expected earnings growth.