Bull's Eye

MARICO
RESEARCH: BNP PARIBAS RATING: BUY CMP: RS 58.85
BNP Paribas initiates coverage on Marico with a `Buy' rating and a price target of Rs 70. Marico generates 75% of its revenue from domestic FMCG, which has been largely unaffected by the current slowdown. BNP expects strong volume growth with margin expansion to drive an EPS growth of 22% in FY09-11. Marico's "Parachute" brand has maintained market share over the past two years, with volume growth of 11-12% pa driven by the consumer shift from loose unbranded oil to branded oil. The positioning of "Saffola" edible oil has been successfully transformed from a 'curative' product to a 'preventive' measure, thus driving increased penetration. Although premium skin care is discretionary spending and likely to slow in the current environment, it provides Marico with a strong long-term growth avenue. BNP expect Kaya clinics to grow to 8% by FY11 from 5% of revenue in FY08 on aggressive new clinic additions, and contribute 7% of net profit versus almost 0% in FY09. Marico is also exploiting the power of its two key brands by extending them to new products/variants, although our estimates do not include any revenue from these new products. The target price based on 20x FY10 EPS, based on a PEG (price earning to growth ratio) of 0.9x, is in line with the historical 4-year average.
HINDUSTAN UNILEVER
RESEARCH: JP MORGAN
RATING: UNDERWEIGHT
CMP: RS 224
JP Morgan downgrades HUL to `Underweight' and cuts the March 2010 target price from Rs 275 to Rs 230. In the long term, an Underweight rating on Hindustan Unilever seems straightforward, due to a dearth of growth, intensifying competition, and lack of operating leverage. JP Morgan expects earnings to grow in line with revenue and believe they are unlikely to grow fast enough to justify a multiple more than 2x that of the local market. Despite these well-accepted long-term concerns, the stock has outperformed year to date. This is because the market views HUL as a great defensive stock, and expects strong earnings growth in FY10 from margin expansion due to commodity deflation. Even the parent Unilever, which derives most revenue from developed markets, could see a margin decline in 1H09 from substantial down-trading. And on margins, despite assuming liberal benefits from commodity, JP Morgan estimates are in line with consensus. The new price target is based on 20x forward earnings, which is a sufficiently liberal premium to the market's multiples to reflect HUL's inherent strengths of a dominant market share, unleverageed balance sheet, and the quasi-staple demand for its products.
BAJAJ AUTO
RESEARCH: MERRILL LYNCH
RATING: NEUTRAL
CMP: RS 487.50
Merrill Lynch maintains 'Neutral' rating on Bajaj Auto, however, it has raised the target price by 11% to Rs 585, as it expects valuation multiples to expand on improved earnings visibility. This follows an upward revision to domestic bike sales and EPS forecasts by 3/4% over FY10/FY11. Following positive customer response to the XCD 135cc motorcycle, Merrill Lynch has greater confidence for four upcoming launches by September. While the management maintains a positives stance for exports next year, albeit with slower growth trajectory, Merrill Lynch estimates 10% decline in twowheelers and 5% in three-wheelers. Recent trends are cause for worry, with sharp contraction in sales in Latin America (~30% of exports), and there could be downside risk to our forecasts. Despite a steep discount on valuations (30/35% on FY10E P/E and EV/EBITDA) and similar potential upside on price target, Merrill Lynch prefers Hero Honda, on (1) differential growth prospects, and (2) more consistent track record of profitability. Also, Hero Honda's dividend payout policy appears more liberal.
ASIAN PAINTS
RESEARCH: EDELWEISS
RATING: ACCUMULATE
CMP: RS735
Edelweiss maintains 'Accumulate' rating on Asian Paints. According to the management, Asian Paints' volume growth during Q4FY09 so far has been better than in the previous quarter (Q3FY09 volumes were flat). However, the company expects to post 8-10% volume growth in FY10E in decorative paints, based on historical trends. Though some of its markets such as Caribbean and Middle East could have been impacted by recession, the company expects its international business to grow in higher single digits in volume terms owing to expansion in South Asia and the Egyptian market. However, it expects industrial and automotive paints volumes to remain under pressure on account of the economic slowdown and build up of inventory in the automobile industry. Since the automotive and industrial paint segments contributes less than 10% to the consolidated top line, the impact of the same will be limited. The government has recently effected a further cut in excise duty from 10% to 8%; however, the company will take pricing action based on volume demand and further softening of raw material prices. Correction in input prices is likely to improve margins and could propel the company to take price cuts to boost volumes and maintain its market share. Asian Paints products command 5-8% premium over competitors. At current market price, Asian Paints trades at a P/E of 19.1x and 15.7x and EV/EBITDA of 12.0x and 9.8x on for FY09E and FY10E, respectively. It is likely to remain under pressure in the short term owing to slower volume growth, though downsides from current levels look restricted.
JSW STEEL
RESEARCH: CITIGROUP
RATING: SELL
CMP: RS 174
Citigroup maintains `Sell' rating on JSW Steel. The company has enhanced its crude steel capacity from 4.8m tpa to 7.8m tpa in Feb 2009. It expects FY10 volumes of 6.0-6.5m tonnes, implying a growth of more than 75% y-o-y. JSWSL has changed its strategy to: 1) work on substituting imports (~12% of domestic demand); 2) capitalise on rural demand; 3) maximise sales of value-added products; 4) focus on bulk orders in the oil and gas sector; and 5) decrease its export presence. JSWSL's standalone debt is Rs 9,700 crore and consolidated debt is ~Rs 14,700 crore. While JSWSL has not breached its standalone debt covenants (Debt/EBITDA at 3.25x and D/E at 1.75x), it is in discussions with banks to revise these covenants. It expects to meet its interest and debt repayment obligations based on its cash flow estimates. JSWSL's US plate/pipe mills are running at 20% utilisation. 4QFY09 will continue to be weak, but it hopes for better order inflow in FY10. Citigroup values JSWSL at a 12-month forward EV/EBITDA of 5.5x and maintains `Sell' recommendation based on an extended global slowdown, decline in international steel prices, declining margins and its high leverage.