Sharekhan Investor's Eye dated November 28, 2006

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Sunil

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Nov 28, 2006, 7:59:09 PM11/28/06
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Investor's Eye
[November 28, 2006] Please see the attachment for details
Summary of Contents
 

Top Picks

w Apollo Tyres
w Ceat

SHAREKHAN SECTOR REPORT

The tyre industry

Roll on good times
Tyre stocks are back in the reckoning and look very attractive considering the stable rubber prices, better pricing power with the tyre majors and a tight demand-supply scenario in the industry. In view of the strong volumes in the original equipment manufacturer (OEM) segment and a robust replacement demand (triggered by brilliant OEM sales recorded in the past two years), we believe the tyre industry is in for good times. We expect the overall volumes of the industry to grow at a compounded annual growth rate (CAGR) of 10% over the next two years. Softening raw material prices along with price hikes should improve the profitability of the tyre companies, restoring their margins to 9-10% levels. Apollo Tyres and Ceat are our top picks in the sector. Goodyear and Balkrishna Inustries operate in niche segment and both would benefit from the demand growth and lower raw material prices. We are gathering detailed information on these and if found attractive would be covered subsequently.

Sharekhan sector top picks valuation 
Company   EPS PER EV/EBIDTA
CMP Target Upside
FY2007E FY2008E FY2007E FY2008E FY2007E FY2008E (Rs) price (%)
Apollo Tyres 20.1 31.3 17.1 11.0 7.4 5.0 344.0 425.0 23.5
Ceat 6.1 15.6 20.0 7.8 6.7 4.1 122.0 190.0 55.7


STOCK IDEA

Indo Tech Transformers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs280
Current market price: Rs199

Powered by power reforms

Key points

  • The fortunes of Indo Tech Transformers are all set get transformed, thanks to India�s mission to achieve power for all by 2012. As part of this programme the government plans to almost double the country�s installed power generation capacity from 115,000MW to 200,000MW by the end of the 11th Five-Year Plan. 
  • This initiative is expected result in an additional demand of around 570,000MVA of transformer capacity over FY2005-12 or of 80,000MVA per year. Another 15,000MVA of demand is expected from the replacement market every year, leading to a total annual demand of 95,000MVA. That is a huge opportunity for the transformer industry whose annual capacity stands at a mere 75,000MVA. 
  • Indo Tech already stands to gain from this opportunity, as it has built a strong relationship with the SEBs in the south over the years. Now to make the most of this demand explosion, it is tripling its capacity from 2,450MVA to 7,450MVA. 
  • Indo Tech has signed an MoU with DuPont (USA) to set up a 100MVA plant to manufacture dry-type transformers for industrial and corporate customers. These transformers are higher in realisation and installed in the basement of hotels, IT parks, malls etc. We believe this will further boost the top line of the company.
  • As a result of these initiatives we expect its revenues and net profit to grow at CAGR of 52% and 49% respectively over FY2006-08E. 
  • At the current market price of Rs199, the stock is quoting at 8.6x its FY2008E EPS and 4.8x its FY2008E EV/EBIDTA. Considering the future growth potential of the company and the stock�s attractive valuations, we recommend a Buy on the stock with a price target of Rs280.
Regards,
The Sharekhan Research Team
myac...@sharekhan.com  

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