Pick of the Week: Hindalco

FOR MEDIUM TERM BUY BUY BUY

HINDALCO

BSE Code: 500440, CMP: 53.05, Target: 62

Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into two strategic businesses Aluminum and Copper and is an industry leader in both. A metals powerhouse with a turnover of US$ 14 billion, Hindalco is the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia. Its copper smelter is today the world's largest custom smelter at a single location. Established in 1958, Hindalco commissioned its aluminum facility at Reunion in eastern U.P. in 1962 and has today grown to become the country's largest integrated aluminum producer and ranks among the top quartile of low cost producers in the world. With a strategic intent to achieve vertical integration in the copper business, Hindalco acquired two captive copper mines in Australia - Nifty and Mt. Gordon through Aditya Birla Minerals Limited.

The aluminum division's product range includes alumina chemicals, primary aluminum ingots, billets, wire rods, rolled products, extrusions, foils and alloy wheels. The company's copper product range includes copper cathodes and continuous cast copper rods. It also produces precious metals, sulphuric acid, phosphoric acid, di-ammonium phospate (DAP) and other phosphoric fertilizers, and phospho-gypsum. In May 2007, Novelis became a Hindalco subsidiary with the completion of the acquisition process. The transaction makes Hindalco the world's largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia, as well as being India's leading copper producer.

The stock has come down from over 200 levels to around 160-170. one can buy at current levels for a gain of 30-40 % upside in 6-8 months. Sales and NP for year ended 07-08 were 18982.6 Cr & 2812.9Cr. Sales and NP for latest Quarter 4647.5Cr & 696.8Cr. On YOY basis NP has increased by 11% & based on quarter latest its increased by 16% Dividend during year ended 07-08 was 185%

Pick of the Week: Larsen and Toubro

FOR MEDIUM TERM BUY : BSE Code : 500510, CMP : 760.35

BUY LNT @ 760 Target: 820

Larsen & Turbo

L&T is the best stock in current panic scenario, and at dips, for good upside in medium to long term. Few months back a study was done by Boston Consulting - BCG. They studied more than 3,000 companies from 14 developing countries to pick the top global contenders. L&T topped their lists. They primarily focused on corporations with annual sales of at least $1 billion, and atleast 10 % of their revenues coming from outside their home countries. Larsen & Toubro strength is to build infrastructure which is in short supply in India relative to demand. It is expanding its construction business overseas, primarily in the Middle East. Its global operations currently account for 25 percent of sales. Order book growth of 25% and 30% plus growth in topline over next few years is possible.

Larsen & Toubro (L&T) will set up a mini L&T' in the Middle East, in a bid to enhance its operations in the region. The company plans to increase the overseas share to 25-30% in the coming years and expecting $2-billion revenues from the region by 2010. It has many subsidaries.L&T Infotech IPO is likely in H2 2008. L&T Infra Development will go for IPO by 2009-10. Apart from this there are several triggers for L&T.

L&T will invest close to Rs3,000 crore to build the shipyard-cum-port facility. When fully operational, the shipyard is likely to employ close to 10,000 people.L&T plans to begin construction of ships by end-2009, with plans to deliver the first ship by 2010-11. L&T is the only entity in the private sector that holds a license from the government to build warship Larsen & Toubro Ltd (L&T) is exploring the possibilities of making components of passenger aircraft at its factory at Coimbatore in Tamil Nadu.ndia's demand for airlines at 1,100 aircraft worth $105 billion (Rs4.15 trillion), over the next 20 years, according to the Associated Chambers of Commerce and Industry of India. L&T signs 'favoured partner' deal with Chinese oil giant Sinopec.

Larsen and Tourbo Limited has now become the first Indian company to enter with such a deal with the oil and refining giant, the Sinopec group that is regarded as the largest Chinese company in terms of total sales. L&T has already signed MoUs, with Raytheon Space and Airborne Systems, Boeing Company and EADS N.V., for joint exploration of business opportunities in India's defense sector. The company will be competing with the state-owned Hindustan Aeronautics Ltd. The defence sector placing orders worth $120 billion in the next 10 to 15 years. Larsen & Toubro Ltd., India's biggest engineering company, plans to spend $5 billion on starting a power generation business to tap electricity demand in the world's second-fastest growing major economy.

Latest Results: - Larsen & Toubro's Q2 net profit was up 32.47% at Rs 461 crore as against Rs 348 in same quarter of last year. Its net sales stood at Rs 7682.20 crore as compared to Rs 5499.94 crore. Margins stood at 8.8% versus 10.7% (YoY

Pick of the Week: Suzlon Energy

FOR MEDIUM TERM BUY SUZLON ENERGY

Equity: 299.64 Cr, BSE Code: 532667, CMP : 54.55

BUY SUZLON ENERGY @ 55 Target: 62 to 64

Suzlon Energy is Asia's leading manufacturer of wind turbine generators (WTGs) having around 58% share of India's domestic installations (in 1HFY07). The company is also among the five largest manufacturers of WTGs globally in terms of annual installed capacity. It is the first Asian company to manufacture WTGs, which have MW and multi-MW capabilities. The products manufactured by Suzlon include rotor blades, control panels, nacelle cover and tubular towers. Suzlon enjoys cost advantages over its global competitors by way of operating manufacturing capacities in India. Also, the company has a subsidiary for technology development in Germany and an R&D facility in the Netherlands for rotor blade molding and tooling. These factors combine to provide Suzlon some kind of competitive advantage in the technology intensive and competitive global wind power equipment market.

We believe that, apart from the cost competitive advantage that is inherent in the wind generated power, the sector is also likely to benefit from countries' increasing move towards adopting the Kyoto Protocol towards reducing carbon-dioxide emissions by 2012. As far as Suzlon is concerned, the company's leadership position in the domestic market and rapid global forays on the back of manufacturing cost advantages and an integrated supply chain are likely to stand it in good stead over the long term. Suzlon strong business model in terms of in-house technology and superior design capabilities has led to a consistent increase in its market share. A bulk of Suzlon product requirements are manufactured at its Indian facilities, providing it a significant cost advantage. Further capacity expansion in the US and China will help the company cater to the strong global wind energy demand. It is also expanding capacity of Hansen Transmission, which obliterates concerns of gear box supply. With its people strength, aggressive vertical integration strategy, strong R&D program, expanding manufacturing capability and a clear focus on global high growth markets, Suzlon is poised for continuing its story of breathtaking growth the world over. Its primary customers in India include companies that have manufacturing facilities with high power consumption. These companies have high profitability and seek investment opportunities with stable returns. In India, Suzlon caters to leading corporate houses like the MSPL Limited, Bajaj Auto Limited, Tata Group and Reliance, to name a few. Suzlon order book position is a reflection of its strong market position and consistency in delivering to their customers. Our order book stands at around USD 4,335 million. Our domestic order book position is for a capacity of 441 MW and international orders for 3,726 MW.

Latest Results :- Suzlon Energy has announced its Q2FY09 numbers. Its Q2 standalone net profit stood at Rs 16.98 crore as against Rs 355 crore. The company's standalone revenues stood at Rs 2,226.25 crore versus Rs 1,687.46 crore.

Multibagger: 3i Infotech

3i Infotech
Cluster: MultiBagger
Recommendation: Buy
Price target: Rs79
Current market price: Rs45

Price target revised to Rs79

Result highlights

• 3i Infotech’s top line grew by 28.4% quarter on quarter (qoq) to Rs601.6 crore in Q2FY2009. The Regulus’ acquisition contributed 18.1% to the sequential growth in the top line and the organic revenues rose by 8.7% during the quarter.
• The operating profit margin (OPM) contracted 101 basis points to 20.8% sequentially in Q2FY2009 on account of unfavourable sales mix (higher revenue contribution from low-margin Regulus acquisition). Consequently, the operating profit went up by 22.5% qoq to Rs124.9 crore during the quarter.
• The net income was up 16.5% sequentially to Rs68.4 crore in Q2FY2009, slightly above our expectation of Rs66.6 crore. The net income was lower than the operating profit growth on account of higher interest and depreciation expenses.
• In terms of outlook, 3i Infotech has upgraded its revenue guidance and the fully diluted earnings per share (EPS) on account of Regulus’ acquisition and better than expected organic growth. The company has raised it revenue guidance to Rs2,200-2,300 crore from the previous Rs1,700 crore and has also raised the fully diluted EPS (including foreign currency convertible bonds [FCCBs]) to Rs14-Rs14.5 from the previous guidance of Rs13-13.5.
• The order book grew by 49.6% to Rs1,372.8 crore during the quarter. The order book includes Regulus’ order book of Rs300 crore. Adjusting for the same, the company’s order book grew by 16.9% to Rs1,072.8 crore in Q2FY2009. Though the strong order book provides visibility for FY2010, the uncertain demand environment from the financial meltdown in the USA and the anticipated slowdown in the Europe has put a question mark on FY2011 earning growth.
• On FCCB front, 3i Infotech did not provide for any foreign exchange (forex) loss or gain on outstanding FCCBs. The management has highlighted that the company has made investment in US Dollar, Euro and Pound Sterling from the proceeds of FCCBs, which provides natural hedge against FCCB borrowing. Moreover, the management has mentioned that there is no call option to the bondholder (ie the bondholder cannot redeem the debt before maturity) and there is no reset clause for the exercise price. However, we believe the redemption of FCCBs on maturity would increase the company’s leverage ratios significantly and is likely to remain an overhang on the stock.
• We have already incorporated the acquisition of Regulus in our estimates. Though the company has a strong order book, we have built conservatism in our estimates to reflect the uncertain demand environment. We have incorporated around 10% organic growth and incremental revenues from the acquisitions’ full-year impact in our FY2010 estimates. Consequently, we have revised downward our FY2009 earnings estimate by 1.1% and FY2010 earnings estimate by 10.2%.
• Given 3i infotech’s exposure in the banking, financial services and insurance (BFSI) vertical and the concern over the conversion of FCCBs, the sentiments toward the counter are expected to be weak in near term. However, the same is already reflected in 3i Infotech’s stock price. Considering the strong order book and the Regulus acquisition ensuring an earning growth of 27% during the period FY2008-FY2010, the stock is currently trading at attractive valuation of 3.1x FY2009 and 2.8x FY2010 earning estimates. In fact, the current valuation is the lowest since 3i Infotech’s listing in April 2005. Hence, we maintain our Buy recommendation on the stock with a revised price target of Rs79. We have also lowered our target price/earnings multiple to 5x to reflect the uncertainty on the demand environment in the BFSI vertical and the concern over the conversion of the FCCBs.