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India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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Sectoral Impact
Banking and Finance Cement FMCG Healthcare IT/Software Infrastructure & Construction Oil and Gas, Petrochemicals Pipes Power Real Estate Steel Telecom
India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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State Bank of India Punjab National Bank Bank of Baroda Canara Bank Bank of India Union Bank of India Andhra Bank Corporation Bank ICICI Bank HDFC Bank UTI Bank
EPS FY08E 97.6 65.2 37.9 36.2 22.2 19.2 13.0 42.5 46.3 47.9 29.1
Impact change NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL
Target Price 1250 545 326 240 235 122 100 356 1200 921 575
Revision NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL
Rating HOLD BUY BUY HOLD BUY BUY BUY HOLD BUY SELL HOLD
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Cement:
Excise duty for cement has been increased from Rs400 to Rs600 per ton for a bag of 50kg where the retail price is above Rs190 and for price below Rs190 excise duty has been reduced from Rs400 to Rs350. This is against the expectation of the industry to reduce the excise duty across the table. Average cement price is below Rs190 in Andhra Pradesh, Orissa, Rajasthan and Madhya Pradesh and marginally above Rs190 in Gujarat and Tamil Nadu. As the price in other states is above Rs190 we expect higher excise duty would be applicable for sales in these states. We expect the higher excise duty to be passed on, as the demand is high but the upside is limited for improvement in realization. There are some positives like increase in allocation for Bharat Nirman by 31.6% to Rs246bn and increase in provision for National Highway Development Programme by 7.3% to Rs107bn We have reduced our EPS estimates as we expect appreciation in cement prices to be muted going forward. We have reduced our 5% price improvement for FY08 to 3% which reflects the current realization for cement companies. We have also reduced our target PE estimates for all the companies to reflect the realization cap. We find the recent fall (10-24% in one month) in cement company stocks has made these stocks attractive and with demand supply balance still favouring the producers for another 12-18 months the fall is overdone. We are upgrading our rating on India Cements from HOLD to BUY with a lower target. We are retaining our BUY rating on Kesoram Industries, Madras Cement and Shree Cement and retaining HOLD on ACC, Chettinad Cement Corporation and Ultratech Cement. The key concerns of rising inflation and interest rates however remain.
Company ACC* Chettinad Cement Corp India Cements Kesoram Industries Madras Cement Shree Cement Ultratech Cement * For ACC CY07 and CY08 Old EPS FY08P 76.6 51.6 25.5 66.7 340.5 143.8 86.6 FY09P 71.8 49.5 22.6 71.4 355.9 160.1 90.1 Revised EPS FY08P FY09P 73.5 68.6 48.3 45.9 23.8 20.8 64.0 67.2 321.1 330.6 136.5 150.3 81.2 78.3 Change (%) FY08P FY09P (4.0) (4.5) (6.4) (7.3) (6.7) (8.0) (4.0) (5.9) (5.7) (7.1) (5.1) (6.1) (6.2) (13.1)
Company ACC* Chettinad Cement Corp India Cements Kesoram Industries Madras Cement Shree Cement Ultratech Cement
Target Old Revised 1077 960 584 482 271 218 668 538 4270 3637 1726 1503 1212 1018
PE Old Revised 15 14.0 11.8 10.5 12 10.5 10 8.0 12 11.0 12 10.0 14 13.0
India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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We maintain our BUY recommendation on ITC and Marico and HOLD on Nestle.
Company ITC Marico Nestle - F12/07E EPS FY08E 8.6 2.8 44.9 Target Price 202 85 1,123 Target PE 20.0 21.8 21.6 CMP 172 61 970 Upside % 17.5 38.9 15.8 Rating BUY BUY HOLD
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150% weighted average tax deduction for R&D expenses extended for 5 years is a positive for research driven pharma companies-Ranbaxy, DRRL, Sun Pharma, Cadila Healthcare, Biocon, Glenmark. The budget has proposed to increase healthcare allocation by 21.9% to Rs152.9bn, a positive for Apollo Group and Max India. HIV eradication to gain momentum a positive for MNC companies, Cipla, Wockhardt and Ranbaxy. Medical insurance deduction u/s 80D increased to Rs15,000, a positive for Apollo Group, Max India as more population would be covered by medical insurance. The reduction of peak customs duty from 12.5% to 7.5% is likely to impact API manufacturing companies positively.
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Outlook We believe the post Budget battering of 5-10% for most of the sector stocks has opened up attractive buying opportunities into the large cap IT space. Though revising our 12-month target price downwards in line with reduction in EPS forecast, we remain buyers for the Top 5 companies considering reasonable to significant upside potential from current prices. Amongst other stocks, we downgrade Infotech to SELL in the light of limited medium term price appreciation potential while we maintain HOLD on Allsec.
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80IA benefits withdrawn for pure contractors: The biggest negative for the ones claiming it Our interpretation of the fine print suggests that section 80IA benefits will no longer apply to cash contracts. It is also not applicable to a contractor, who has been sub-contracted work for building a BOT/infrastructure asset belonging to another company or SPV. The amendment is with retrospective effect from April 2000. Estimated one time tax outgo on withdrawal of 80IA
700 600 500 (Rs mn) 400 300 200 100 Gammon HCC NCC IVRCL Patel 335 493 419 583 485
HCCs reserves include claims recoverable from IT department. to the tune of Rs420mn impact may be a non cash one
Negative for: Gammon, HCC, NCC, IVRCL, Patel, Madhucon No impact for: L&T, JPA, Simplex, Valecha, Gayatri (These have not availed of section 80IA) Infrastructure thrust maintained
The thrust on infrastructure development was continued. The Finance Minister stated that the Golden Quadrilateral is nearly complete, the targeted completion for NSEW is 2009 and NHDP phase-III, V and VI are in advanced stages.
key positives National Highway allocation increased to Rs126bn from Rs99.55bn Allocated Rs40bn for rural roads Additional 2.4mn hectares of irrigated area to be created by FY08 Outlay for accelerated irrigation benefit programme at Rs110bn Scheme to use forex reserves for infrastructure development Mutual Funds allowed to launch dedicated infrastructure funds
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CMP P/E (x)* Revised target Company (Rs) FY08E price (Rs) Gammon 318 16.2 365.7 HCC 103 19.9 107.2 NCC 156 11.2 246.6 IVRCL 291 17.1 331.1 Patel 348 12.0 489.1 Simplex 338 22.2 301.9 Gayatri 282 4.8 517.0 * P/E adjusted for value of investments and BOTs EPS excluding extraordinary items Source: India Infoline Research
Our view and recommendation We spoke to 6-7 construction managements post the budget. While the verdict on section 80IA is seen as a negative, all reiterated their bullish outlook for the industry for the long term. Rise in cement prices too, at worst would affect margins by 20bps as many have escalations in place. EPS impact on account of withdrawal of section 80IA tax benefits for some construction majors is in the region of 7-22% during FY07E and FY08E. While the sentiment seems affected in the near term, we believe that most of the bad news is factored in the price as many construction counters declined by 10-20% on budget day-more than the reduction in profitability of the companies due to the tax issue. Taxation benefits for the construction industry was a hanging sword and the worst seems over. The amount of one time outgo of tax for previous years seems manageable given the current sizes of these companies. With enhanced budget allocation, we strongly recommend NCC, Patel and Gammon among the bigger players and Gayatri Projects among the mid caps.
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Infrastructure status to cross-country gas pipeline projects has been provided for distribution of gas, which means a 10 year tax holiday for companies such as GAIL and Reliance Industries Ltd. Apart from income tax holiday, project costs would also be reduced. There is opaqueness as to whether the status is extended to distribution companies such as Gujarat Gas Company Ltd, Indraprastha Gas Ltd and Gujarat State Petronet Ltd. If extended, these companies would benefit in a similar fashion. Petrochemicals Custom duties on plastics reduced to 7.5% Custom duties on PSF reduced from 10% to 7.5% Custom duty of polyester filament yarn reduced from 10% to 7.5% Customs duty on DMT, PTA and MEG also reduced from 10% to 7.5%.
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Power:
The government aims to award two more Ultra Mega Power Projects by July 2007, in addition to the two, Sasan and Mundra, which were awarded recently. Allocation of coal blocks to government companies and approved end users will enable faster execution of new power generation plants. With infrastructure status being awarded to natural gas cross-country pipelines, gas-based power plants lying idle could be revived over a period of time. Other initiatives include facilitating setting up of merchant power plants by private developers and also private participation in transmission projects. APDRP is restructured to cover all districts and town (with population above 50,000) coupled with increase in budgetary support to Rs8bn from Rs6.5bn. The government has also increased the allocation under Rajiv Gandhi Grameen Vidyutikaran Yojana to Rs39.8bn from Rs30bn. This will add to the robustness of the sector and players in transmission and distribution and transformers will stand to benefit. There is no revision in EPS estimates for our coverage companies. We reiterate BUY on Indo Tech Transformers, EMCO, RPG Transmission and Apar Industries. We revise our recommendation for Genus Overseas to HOLD from BUY. We upgrade our recommendation for Bharat Bijlee and Voltamp to BUY from HOLD.
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Players in the capital goods space viz. BHEL, ABB and Alstom Projects India Ltd could also benefit with thrust being laid on Ultra Mega Power Projects
EPS (Rs) FY06 Indo Tech EMCO Bharat Bijlee Voltamp RPG Transmission Genus Overseas 10.4 25 59.6 22.7 6.4 14.7 FY07P 19.6 41.1 75.1 36.4 13.1 19.6 14.9 FY08P 24.1 62.8 94.7 51.5 17.8 28.9 19.7 FY09P 37.5 88.9 124.4 68 21.9 FY06 26.5 32.2 17.5 25.6 29.3 18.1 7.3 P/E (x) FY07P 14.1 19.6 13.9 16 14.4 13.5 9.8 FY08P 11.4 12.8 11.1 11.3 10.6 9.1 7.4 FY09P 7.4 9 8.3 8.6 8.6 BUY BUY BUY BUY BUY HOLD BUY 375 1,067 1,661 816 231 318 197 36.1 32.6 35.8 40.3 23.2 20.3 34.8 Reco Target Price (Rs) Upside (%)
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Real Estate
Impact of change in Sec 80 IA only on construction companies and not on real estate developers Impact- Neutral The government has amended the long debated 100% tax deduction under Sec80 IA for developers of infrastructure facility, Industrial park and Special Economic Zones. However, most construction companies to whom the construction work has been sub contracted were claiming the deduction as well. The government has removed ambiguity in the Act by excluding construction companies executing the sub contracted works on such projects. No Change in Sec 80 (IB) 10 phase out Impact- Neutral Only those projects valid under this segment*, which have received approval from the local authority before March 2007 can avail 100% tax deduction provided the project is completed within 4 years. Eligible projects approved post March 2007, will not receive any tax deduction under this section. Removal of this section would bring most of the real estate developers in the industry tax bracket of around 30% from the existing 12-15%.
*1:- Minimum developable area of 1 acre and 2:- 1000sq ft built up area within Mumbai and Delhi or within 25kms from the municipal limits of these cities, while 1500sq ft area in all other areas. 2000 sq ft built up area or maximum 5% of aggregate built up area for shops and commercial developments included in the housing projects.
Tax holiday on for building, owning and operating hotels and convention centres in the NCR region under new Sec 80 ID Impact- Positive Many NCR based real estate developers are in the process of developing 3-4-5 star hotels over the next 2-3 years. The government has provided a 5 year tax holiday for companies developing 2-3-4 star hotels and convention centres with minimum sitting capacity of 3000 persons and constructed and operational between 1 April 2007 and 31st March 2010 in the NCR region. The amendment will be effective from 1st April 2008 and apply to assessment year 2008-09. Company level impact- Positive for Anant Raj Industries (not rated) Service tax on commercial space rentals Impact- Negative more from a demand perspective The Union Budget has among other services included rentals paid by commercial property users like Retail, Multiplexes, Advertisers etc under the Service Tax net. We do not foresee a direct impact on real estate developers for two reasons: Developers would be able to pass on the service tax to the end users. Most developers of commercial property keep commercial property on their books for 18-24 months and sell out once demand picks up. However, this is likely to hurt demand for commercial property which has already grown by 20-25% over the past one year and are currently at life time highs. Eg. Many commercial properties in Metros like Mumbai and Delhi quote commercial rentals of Rs300-350 per sq ft per month.
India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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India Infoline Ltd, 15 Floor, P.J. Towers, Dalal Street, Mumbai- 01. Tel: +(91 22) 6749 1700
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Steel
Policy Initiatives Custom duty unchanged at 5% on prime steel - On expected lines Custom duty on second and defective steel reduced from 20% to 10% Custom duty fully exempt on all coking coal imports irrespective of the ash content No impact for steel manufacturers as almost all of them import coking coal of <12% ash content with respect to which the import duty was already 0%. Imposition of export duty of Rs300/MT on iron ore Negative for Sesa Goa (Not Rated) but Positive for nonintegrated steel manufacturers. Imposition of export duty of Rs2000/MT on chrome ore Negative for Rohit Ferro (Not Rated) but positive for stainless steel manufacturers. Impact Neutral for steel makers but Negative for miners Outlook Remain cautious on the sector, we maintain our by rating on JSW Steel.
Telecom:
The finance minister has asked the department of telecom to constitute a committee to study the present structure of levies on telecom industry. We believe the committee will work towards uniformity of licensee fee to 6% from the current range of 6-10%. We believe this will be a positive for the entire telecom sector. We maintain BUY on Bharti Airtel with a target price of Rs983. Bharti and Airtel Financials
Period to (Rs Mn) EPS (Rs) P/E (x) FY04 (12) 3.1 231.6 FY05 (12) 6.5 110.5 FY06 (12) 10.7 67.1 FY07P (12) 21.6 33.3 FY08P (12) 30.3 23.7 FY09P (12) 39.7 18.1
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Published in February 2007. India Infoline Ltd 2006-7. This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report.
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