JSW Energy Ltd (Neutral)
JSW Energy Ltd currently has operational capacity of 995MW and is in the process of executing projects with capacity of 2,655MW. In addition, the company has 7,740MW power generation projects at an early stage of development.
A major portion (2,145MW) of JSW’s future capacities is expected to be operational by fiscal 2011, thereby providing near-term visibility. Out of the plants under construction, the company expects to commission 570MW by the end of the current fiscal. Another 1,575MW is expected to get operational in fiscal 2011. Thus, a robust portfolio and near-term revenue visibility is a major positive for the company.
JSW has also secured fuel for its new projects through long-term fuel supply agreements, coal linkages and acquisition of mines. The company intends to operate close to 30% of its near-term operational capacity under the merchant power route, hoping to capitalize on the huge power deficit prevalent in the country. The large scale power capacity addition is expected to reduce the power deficit and lower the tariffs in the long run.
We have valued all the new projects of the company individually and have arrived at a fair value of Rs107 per share, excluding all other initiatives in mining, equipment manufacturing and other projects totalling 7,740MW under implementation, as these businesses are at nascent stages. We believe that the initial public offering (IPO) is fairly priced and keep a neutral view on it.
Indian Overseas Bank (Sell)
We are downgrading Indian Overseas Bank to reduce from accumulate earlier since its stock price has moved closer to our target price. Currently, the stock is trading at cheap valuation vis-a-vis its peers. However, in our view, it will continue to trade at a discount with its peers due to sharp deterioration in its asset quality in last few quarters.
Therefore, we would advise our clients to look for better entry points. We recommend reduce on the stock with the target price of Rs122 based on P/ABV of 1.0x its FY11E adjusted book value.
Apollo Tyres Ltd (Buy)
Natural rubber, a key input for tyre makers, continues to surge with the prices currently hovering at Rs127 per kg (against the low of Rs85 per kg at the start of FY2010).
For Apollo Tyres Ltd, natural rubber constitutes around 58% of its total raw material cost. The company’s average rubber cost for H1FY2010 (which saw an operating margin of 16.4%) stood at Rs99 per kg. Since then, natural rubber prices have moved up to Rs127 per kg currently, which in turn will have a negative impact on the margins of the company.
We have fine-tuned our earnings estimates for FY2010 and FY2011 factoring in higher natural rubber prices and improved volume growth. Consequently, our consolidated earnings per share (EPS) for FY2010 and FY2011 stands at Rs7.1 and Rs7.4, respectively. We maintain our buy recommendation on the stock with a price target of Rs66.
Wipro Ltd (Hold)
Wipro Ltd has highlighted that the company’s revenue profile has changed considerably, as the share of long-term contracts in its overall revenues is increasing. This has improved the company’s optimism about its future revenue visibility.
The management also underscored that the company would continue to focus on improving its productivity, as the majority of contracts are long-term in nature with fixed pricing terms. In terms of demand environment, the company has seen stability in the business environment and now expects a volume growth going forward.
Additionally, the management has indicated that the technology, telecommunications and manufacturing verticals have bottomed out. In terms of pricing, the company now expects a stable price scenario going forward. We recommend a hold view for the stock.