Bull's EyeW

JET AIRWAYS
RESEARCH: CLSA
RATING: UNDERPERFORM
CMP: Rs 302.65
CLSA maintains `Underperform' rating on Jet Airways with a 12-month target price of Rs. 200. Jet reported a net profit of Rs 53 crore for Q4FY09 against a loss of Rs 220 crore in Q4FY08. What is encouraging is the aggressive cost cutting, which the management believes is sustainable and its bold decision to cut capacity in an attempt to return to sustainable profitability even as the company ceded its market share leadership position. But the results included Rs 350-crore cenvat credit, without which the company would have remained in the red. The recent launch of Jet Konnect, a low cost brand within the fold of Jet Airways is perplexing because now Jet has three different brands or product offerings in the domestic market. While the management has said that the brands will not compete with each other and complement the offerings and routes, CLSA believes that in the long run this is not a sound strategy. Balance sheet concerns remain as debt has increased to near unsustainable levels and urgent capital infusion is a must.
SHREE RENUKA SUGARS
RESEARCH: HSBC
RATING: OVERWEIGHT
CMP: Rs 125.95
HSBC recommends `Overweight' rating on Shree Renuka Sugars with a price target of Rs. 150. The company has contracted raw sugar for its Haldia Refinery at competitive prices during December '08 to February '09 and is likely to benefit from any sugar price increase. Besides this, Haldia also offers a location advantage, in terms of proximity to those markets which are likely to see the sharpest price increase. The target price is the average of price to book value and EV/EBITDA multiples. Higher refining margin and increase in levy price are the potential upside earnings triggers. Thus, HSBC has increased PB (price to book)multiple to 4x which is the average PB during the last downturn of 2006-07 from 3x to factor in the above mentioned triggers. Renuka has been trading at a premium to Bajaj Hindusthan and Balrampur Chini due to better return ratios. HSBC expects this premium to continue as it estimates the return ratios will continue to be better compared to peers Bajaj and Balrampur for FY09E.
JINDAL STEEL & POWER
RESEARCH: MACQUARIE
RATING: OUTPERFORM
CMP: Rs 2092.40
Macquarie maintains the `Outperform' rating on Jindal Steel & Power by increasing the target price to Rs 2,571 from Rs 2,104 to reflect the increased earnings and also the transition to FY10E. JSPL reported FY09 results, which beat the full year estimates by 10%, driven by strong profitability from its merchant power division and in spite of large provisioning. Net sales at Rs 1760 crore is up 16% y-o-y driven by better volumes and product mix. The adjusted operating margin is at 46% against the reported 25%. Net profit at Rs 360 crore is down just 8%, helped by the sharp drop in net interest costs. Macquarie has upgraded the earnings estimates for FY10, FY11 and FY12 by 10%, 2% and 19%, respectively, driven by better profitability in the steel business. JSPL remains Macquarie's preferred pick due to its domestic-focussed business. Its increased exposure to stable earnings from the power generation business makes a strong case for re-rating. In fact, its unsung steel business, with is predominantly long steel products, is also well placed to capture the buoyant construction demand.
CIPLA
RESEARCH: INDIABULLS SECURITIES
RATING: HOLD
CMP: Rs 222.95
Indiabulls Securities downgrades Cipla to 'Hold' with a fair value of Rs 246. In Q4FY09, Cipla posted a 21.8% y-o-y growth in sales to Rs 1370 crore, delivering in-line domestic growth and lower-than-expected growth in exports. The net profit increased by 40.9% y-o-y to Rs 250 crore and the net profit margin expanded by 251 bps y-o-y to 18.5%. The domestic revenues are likely to remain robust and exports may come under threat due to FDA deviations. Indiabulls expects Cipla's exports to come under threat if the company fails to rectify or comply with the nine deviations pointed by USFDA in its manufacturing processes at the Bangalore plant. Thus, non-compliance would put 27% of Cipla's total sales at risk. Furthermore, Cipla's 20-year supply arrangement with Cipla MedPro in South Africa, which contributes 7% of total exports, may be impacted due to built-in marketing and sourcing conflicts if the latter is acquired by Adcock. Moreover, Indiabulls remains concerned on account of deviation in manufacturing processes at Bangalore, which can significantly impact the export revenues.
UNITECH
RESEARCH: MORGAN STANLEY
RATING: EQUAL WEIGHT
CMP: Rs 79.75
Morgan Stanley upgrades the rating on Unitech to `Equal Weight' in view of the initial repair of the balance sheet and improving macro conditions. The worst may be behind us, but are not yet out of the woods. Portfolio of ongoing projects (27 million square feet (msf)) appears weak. Therefore, reliance on new launches and sales to generate earnings/cash is high. Even after significant fund raising (Rs 2,400 crore odd), balance sheet will remain stretched. Valuations appear rich and seem to be already discounting revival in business cycle. Early monetisation (regulations/Telenor permitting) of balance stake (32.75%) in telecom business could further fix the balance sheet. Morgan Stanley sees deep value in Mumbai projects, though given the task of slum rehabilitation, Morgan Stanley expects slow delivery of land parcels (1-2 msf launches in FY10, 50% share). There may be more equity dilution (preferential warrants to promoters, another QIP), economic recovery might be elusive, and low (YTD 2.5 msf) sales contracted.
BAJAJ AUTO
RESEARCH: ABN AMRO
RATING: SELL
CMP: Rs 1028.60
ABN Amro reiterates `Sell' rating on Bajaj Auto with a target price of Rs. 705. Bajaj's Q4FY09 numbers beat the estimates by a mile, but this will likely be difficult to sustain over the medium term. The large currency gain on exports is a one-off, which will be used to launch new products in the domestic market to recoup market share. The key reason for margin expansion was a 340-bp q-o-q saving in raw material costs to 68.8% of net sales. PAT was better than the forecast of Rs 183 crore, as Bajaj surprised on EBITDA (18.3% higher) and taxation rate. Bajaj's stock price has tripled since December '08 on the back of rupee-depreciation gains and hopes of growth revival from new launches. ABN believes the currency gain is short term, given the trend reversal recently. Also, it remains concerned about medium-term product weakness in the backdrop of weak exports, given Bajaj's poor success rate historically on executive motorcycle launches in the domestic market and with no major technology change on offer. ABN finds Bajaj's valuations too rich, following the significant rally in the stock on the back of a one-time currency gain anticipated in FY10, which will be utilised to recover domestic market share through new products and promotions.

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