Stock Idea of the Week
Pantaloon Retail India - Buy - CMP Rs615
Robust growth: Indian retail sector making a mark
The domestic consumption story of India is at a point of inflexion with penetration of organized retail as low as 2% and per capita income slated to rise from US$1,000 to US$1,250 by FY10. As per industry estimates 40mn square feet of retail space will be developed over the next 2-3 years, which would increase the penetration level to 15-20%. We expect the industry to witness a CAGR of 30- 35% over the next four years.
Company profile
Pantaloon Retail (India) Limited (PRL), incorporated in 1987, operates into multiple retail formats like value and lifestyle segment. The company operates over 5mn sq ft with a target of developing 23mn sq ft of retail space by 2010. Currently the company has over 450 stores spread across 40 cities in India. The company's leading formats include Pantaloons, Big Bazaar, Food Bazaar, Central and others. The company also operates an online portal futurebazaar.com. Home Solutions Retail (India) Limited, a subsidiary company operates Home Town and E-Zone catering to the consumer electronics segment.
Huge capex lined up to tap buoyant growthPRL secured around 23mn sq ft of retail space, which is likely to be operational by FY10. In the current year, it plans to add around 11 Pantaloon stores, 3 Central malls, 5 Brand Factory, 27 Big Bazaar hypermarkets and ~100 Food Bazaar chains. We believe such aggressive expansion could lead to increased foot falls translating into revenue CAGR of 65% for FY07-FY10.
New ventures: Diversifying revenue stream
PRL recently forayed into new business streams such as real estate, insurance, logistics and media through ventures like Future Logistics, Future Brands, Future Media, and many more. These initiatives are towards building an integrated system around its retail business. Entry into these segments would enable PRL not only to derive operational efficiencies in the existing business but also add new revenue streams.
Value unlocking via listing of subsidiaries
PRL plans to monetize its subsidiaries in the near future and any such value-unlocking move will provide substantial value enhancement to the shareholders. We believe that these subsidiaries could contribute around Rs250 per share. Over the next couple of months PRL is planning to list Future Capital, a 74% subsidiary, through an IPO. Future Capital manages real estate fund, private equity and selling financial products like credit cards and insurance. We recommend a BUY with a price target of Rs874.
Dark Horse
Patel Engineering Ltd - Buy - CMP Rs740
Patel Engineering Ltd (PEL) enjoys a 22% market share in hydropower construction in India, which continues to witness high spending. With only a handful of players prequalified in this space, PEL will continue to be a major beneficiary of the Rs150,000cr investment planned over the next six years. The share of hydro in PEL's order book of Rs5,400cr has been consistently rising and currently stands at ~60%. This not only provides revenue visibility for the next three years, but also ensures high margins in future.
PEL has a fully owned historical land bank of 1,183 acres in Hyderabad, Mumbai, Bangalore, Chennai and Panvel. It now plans to develop this land through its wholly owned subsidiary PRIL, which is expected to unlock value. We believe this business will help release sufficient money to finance future needs in its construction business and no further dilutions are envisaged. We value this land bank at Rs3,000cr, which translates into Rs503 per share of PEL (67% of the CMP). A large portion of upsides will come on account of unlocking of this business.
We expect PEL to witness 33.3% CAGR between FY07-09 backed by strong order book/FY07 sales of 4.1x. Besides, hydropower and real estate, the company also has a notable presence in irrigation, transportation and micro-tunneling, which are growing at a fast pace. Adjusted for real estate and one annuity project, the stock trades at a P/E of 9x FY09E earnings and EV/EBIDTA of 6.3x. Further upside is possible on account of its recent thermal foray, currently at documentation stage, not factored in order book or our estimates. We recommend a BUY with a target price of Rs1,017.
Heard it on the grapevine
Ballarpur Industries a flagship company of Thapar group plans to acquire paper companies for achieving its targeted capacity of 1mn tonne by 2009.
Power Trading Corporation plans to source 15mn tonnes of coal from Australia, Indonesia and Africa. It also intends to raise Rs1,200cr through placement to QIBs.
Amtek is on the verge of acquiring a UK based automotive machinery company, Triplex Ketlon Group, for approximately Rs600cr. Amtek plans to merge its two listed entities Amtek Auto and Amtek India.
Shriram Transport Finance Company the largest asset financing NBFC in India, is likely to raise US$100-150mn through private equity.
Petronet VK, the company controlling pipeline infrastructure, is likely to have a management control upto 26% stake taken over by RIL or Essar Oil through free bidding.
Reliance Industries and Essar Oil are in a race to take 26% equity stake of Petronet VK, the company that controls the pipeline infrastructure to evacuate petroleum products from RIL's Jamnagar refinery and Essar's Vadinar refinery in Gujarat. Ess Dee Aluminum is on the verge of acquiring Amco India for about Rs35-40cr. The deal size is nearly 3.5-4x of Amco India's market capitalization.
M&M's component business arm Systech likely to pick up stake in German company which is into forged and machine component for approximately 20 million Euros. The new deal will add high value and improve margins of the company. This will add forging capacity of 20-25,000 tones.
Market Overview
The markets extended its losing streak for third consecutive week amid concerns of turmoil in global market. Tapering off in FIIs inflows in recent trading sessions along with string of bad news from the US housing sector and rising international crude oil prices played the spoilsport this week, preventing the bulls from climbing higher on Diwali.Also concerns grew on Dalal Street that RBI and the Government could unleash fresh round of measures to stem the losses for the exporters, due to rise in Rupee. Finally BSE Sensex over the week fell by 4.5% or 904 points to close at 19059 and NSE Nifty lost 4% or 234 points to close at 5699.
The BSE sectoral indices closed the week in red investors opted to book profits at higher levels. Metal, IT and Banking stocks were among the major losers. IT stocks were the worst hit as Rupee appreciated to its highest level since March 1998 over the week. Auto stocks were also on the lower side on back of lower than expected monthly sales figures and on expectation of fuel price hike.
Global markets also had a tough week as issue of subprime mess again resurfaced on Wall Street. US stocks fell sharply over the week after Citigroup said it will report as much as $11bn in additional writedowns, heightening concern that financial companies face more losses tied to subprime home loans. Even Asian Markets lost ground over the week after the Dollar fell sharply and US Financial Companies continued to disclose credit-market losses.
Corporate Action
Company Record Date Purpose
Alfa Laval 11-Nov-07 Interim Dividend
Greaves Cotton 19-Nov-07 Interim Dividend
Prime Secur. 23-Nov-07 Interim Dividend
Colgate 03-Dec-07 Interim Dividend
Stocks in No Delivery Period
Company From To
Gujrat Mineral D. 08-Nov-07 15-Nov-07
Gujrat State Finance 14-Nov-07 20-Nov-07
Federal Bank 19-Nov-07 23-Nov-07
Subros 20-Nov-07 26-Nov-07
Technical Stock Ideas of the Week
IOC Accumulate - CMP Rs513
The stock has underperformed the broad markets over the past few months.
The price movements have been range bound between the Rs525,370 levels since February 2007 till date. This range bound movement has taken the shape of an Inverted Head & Shoulders pattern. This is a Bullish reversal pattern suggesting strong upsides in the future.
The neckline for this pattern is placed at the Rs525 levels.
The Volumes have shown an increase in the past few weeks suggesting accumulation.
The Weekly RSI is mimicking the price moves whereas the Medium term MACD is in a Buy mode.
Keeping in mind the above mentioned technical evidences we recommend accumulating the stock between the Rs488,515 levels for targets of Rs550 and Rs575. All long positions should be protected with a stop loss of Rs475 levels.
Surya Roshni Ltd Accumulate - CMP Rs68
The stock has corrected from a high of Rs112 in May 2006 to a low of Rs45 in August 2007. The stock has been range bound between the Rs4,568 levels sinceApril 2007 till date.
This is suggestive of a strong base formation at the Rs4,550 range.
The Weekly RSI and the medium term MACD are indicating a reversal of trend.
The price movements of the past few weeks have taken the shape of an Inverted head & Shoulders formation. This is a Bullish formation indicating reversal of trend. The neckline for the said pattern is placed at the Rs6,870 levels. A Breakout past the neckline will see the stock heading to minimum targets of Rs95,100 in the coming weeks.
Keeping in mind the above mentioned technical evidences we recommend accumulating the stock between the Rs55-65 ranges. We expect the stock to test targets of Rs90-95 and/or Rs110-115 in the coming weeks. A stop loss of Rs48 is recommended on all long positions.
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