India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
Contrarian calls
Stocks for investors with risk appetite
In this note, we profile six contrarian stock ideas - companies whose stock price
has taken beating but UBS analysts are still bullish. While we believe that our six
stock ideas offer excellent risk reward at current levels, adverse news flow in the
near term may potentially result in further weakness in some of these names.
Worst case analysis indicates margin of safety
We asked our analysts to perform worst case analysis on these stocks to ensure that
there is reasonable margin of safety.
Contrarian basket could outperform in the medium term
DB Realty is trading at 60% discount to our bear case net asset value (NAV). With
growth fundamentals intact on back of Mumbai's inherent residential demand, we
foresee an attractive risk-reward trade opportunity. For Indiabulls Real Estate
(IBREL), we believe at current levels concerns on regulatory risk on FSI increase
and higher provisioning for mortgage loans are priced in the stock price. Pantaloon
is trading at 1.9x PB FY12E vs. historic average of 4x. We like Pantaloon for its
attractive store locations and well established logistics. Our bullish view on
Reliance Communications (RCom) is based on an operational turnaround in the
wireless business under the leadership of Syed Safawi. Reliance Infra is trading at
40% discount to our SoTP valuation. We believe stock offers considerable upside
potential as a long-term asset play on India infrastructure growth story. On
fundamentals, Welspun looks compelling as the SEBI order may not significantly
impact company’s business prospects. We believe that our contrarian calss
portfolio has a good probability of generating alpha in the medium term.
DB Realty (Buy, PT-Rs560.00)
DB Realty has been amongst the worst hit realty stocks, which has corrected
50% in last 1-mth on back of concerns of
— controversy raised on 2G license allotment/likely penalties to DB's Group
company (Etisalat DB);
— potential involvement in loan syndication scam
— Potential delays/cancellation of projects awarded due to change in
Maharashtra chief minister.
With the management having clarified and denied any adverse impact on DB
Realty's core real estate business due to any of the above issues - we believe this
correction is an overreaction and unwarranted.
We believe the stock is trading at compelling valuations of i) 75% discount to
our net asset value (NAV) of Rs800 and ii) 60% discount to our Bear case NAV
(excluding recently awarded Bandra re-development project).
With growth fundamentals intact on back of Mumbai's inherent residential
demand and stock trading significantly lower than NAV (Rs320) for its
ongoing/pre-sold projects and at 1.4x FY11 P/BV, we foresee an attractive riskreward
opportunity with 50%-plus return potential over 12-mth period.
Indiabulls Real Estate (Buy, PT-Rs235.00)
Indiabulls Real Estate (IBREL) has witnessed a sharp (40%) correction over last
1-mth on back of negative news flows on likely reversal/delays in approval of
higher FSI available to Mumbai due to change in Maharashtra Chief Minister.
This apart, higher provisioning for mortgage loan over Rs7.5m seems to have
further dampened sentiments on Mumbai developers, with IBREL being one of
them.
That said, with stock trading at 60% discount to our sum-of-parts NAV of Rs315,
we believe concerns are more than priced in. Operationally, with leasing
recovery gaining momentum for IPIT assets, construction ramp-up across other
developments and increased progress for 58.6% power sub (setting up
5400MW) whose ownership structure post re-structuring could unlock value -
we believe the positives outweighs the risks at current levels.
Post the sharp correction, the stock is primarily valuing only its IPIT assets
(Rs68) and NTC mill land (Rs50); with its 58.6% power sub and other paid land
reserves of ~200msf available at option value. We foresee the stock offering a
compelling risk-reward trade with 50%-plus return potential over 12-mth period.
Pantaloon (Buy, PT-Rs600.00)
Pantaloon Retail India Ltd.(Pantaloon) has declined ~29% and 31% in absolute
and relative terms in last three months. The underperformance is mainly due to
its name being involved in the loan scam together with general nervousness
across market towards high risk stocks. The stock is trading at 1.9x PB FY12E
vs. historic average of ~4x.
We continue to like the stock due to 1) its attractive store locations, 2) well
established logistics and increasing integration with backend and 3) strong brand
equity. We estimate 8-10% same-store sales growth for Pantaloon in FY12. The
biggest catalyst for the stock would be potential opening up of multi brand retail
to FDI, which would give Pantaloon the opportunity to unlock value in its
"value retail business" by divestment or partnership with a foreign company.
The stock offers 21% forecast excess return (FER) on our bear case valuation of
Rs.470 where in we assume same store sales growth of 6-8% in FY12 (vs. our
base case assumption of 8-10%) and increase of cost of debt to 8.8% from our
base case assumption of 8.1%. We value Pantaloon’s core retail business using a
DCF methodology, assuming a WACC of 11%, medium-term growth of 12.0%,
and terminal growth of 4.5%. We value Pantaloon’s holding in Future Capital
Holdings at Rs35/share, based on its market value. We value Future Generali
Insurance at Rs23/share.
Reliance Communications (Buy, PT-Rs270.00)
Reliance Communications (RCom) stock price has fallen by 32.4% in the last 58
days on concerns regarding:
The findings of the CAG report which has highlighted
— irregularities with RCom's cross ownership in Swan Telecom (now called
as Etisalat DB)
— RCom got GSM licenses and 2G spectrum ahead of others in the queue
General sentiments that Raja's departure may result in policies that are anti-
RCom and pro-Bharti, Vodafone & Idea.
While the news flow surrounding the CAG report and investigation in to the 2G
scam may create further weakness in RCom stock, we believe RCom stock
presents excellent risk-reward based on:
An operational turnaround in the wireless business under the new
management of Syed Safawi.
RCom management is focused on gaining revenue market share and
improving profitability of the business by
— Revamping mobile distribution network and enhancing customer
experience and network quality
— Empowering ground level managers to improve site level profitability,
and revamping brand.
Already, the data points emerging out of RCom from 2QFY11 results are
encouraging with rev. per min. realization stabilising and margins improving.
From a valuation perspective the stock is trading below its replacement cost.
Any regulatory reform that could accelerate consolidation in the sector is
likely to benefit RCom as well.
We have derived worst-case valuation for RCom by estimating the replacement
cost of all its assets. The stock is trading at 36% discount to its replacement cost.
Reliance Infra (Buy, PT-Rs1,325.00)
We believe the recent underperformance is clearly not related with the
fundamentals of the company. There are no adverse developments for the
company structurally as we the think the key reasons for the recent
underperformance of the stock is due to,
— the negative sentiment on infrastructure companies,
— the Sum-of-the-Parts valuation companies have been impacted more, and,
— the perceived liquidity crunch and more difficult environment for debt
funding availability.
We continue to like the strong infrastructure portfolio of the company; it
consists of eleven road projects, five airports, five transmission projects, three
metros, and one sea link. We also like the diversified nature of the infra business
as the company has no particular preference for any sub-sector. In our view,
Reliance Infra is a good long-term asset play on the India infrastructure growth
story.
We use a Sum-of-Parts valuation to arrive at our price target (Rs1325). The
stock is currently trading at more than 40% discount to SOTP valuation. We
believe the risk-reward is favourable at current market price as we believe our
assumptions of valuation multiples in our SOTP valuation are very reasonable.
We believe that the investors must also appreciate the fact that in India,
infrastructure companies face significant execution challenges, which include
land acquisition, approvals and clearances, financial closure, and availability of
skilled manpower.
Some of the key factors which allowed Reliance Infra to successfully meet these
challenges are:
— a captive engineering, procurement, and construction (EPC) division
— strong in-house capabilities in different verticals such as metro, roads and
transmission
— a strong balance sheet
— synergies with the other group companies.
We maintain our PT of Rs1325. However, our worst case valuation is Rs1,050.
We have considerably lowered our valuation multiples for various businesses
(table enclosed) to arrive at this. We think Reliance Infra’s valuations are
attractive at its current price. Our valuation for Reliance Power is based on our
fair value estimate of Rs140/share.
Welspun Corp (Buy, PT-Rs250)
Welspun Corp’s (WCL) stock price has corrected significantly in last 2 months.
The stock price has fallen by 43% from Rs 272/share on 05 October 2010 to Rs
155.8/share on 10 December 2010. The sharp price decline has come on the
back on a SEBI ex parte order (02 December 2010) indicating preliminary
findings on alleged trading by the Dangi/promoter entities to possibly influence
WCL price. This has dented investor sentiment and perception, and has taken
the stock to near historical low valuations.
SEBI has directed promoter/promoter group entities not to buy, sell or deal in
WCL shares till further notice. Entities can file their objection within 21 days
and request a hearing. Post this event, WLC has clarified that the SEBI order has
no bearing on any of its business/financials. Also, some promoter entities are
taking professional advice and will seek to resolve the same.
On fundamental basis, the risk reward seems favourable, as the SEBI order may
not significantly impact the company’s business prospects, as its has a
reasonably large capacity, we expect operating leverage, order book is at
925,000 MT and company has delivered on quality projects.
Further, in the potential event of restriction on capital raising, WLC seems to
have limited capital requirement, going forward. WLC is trading at FY12E P/E
and EV/EBITDA of 4.2x and 2.6x, significantly below peer valuations of 9.5x
and 5.6x, respectively. This is also significantly lower than its historical average
P/E and EV/EBITDA valuations of 9.0x and 5.3x. On a P/BV, stock is trading at
0.7x FY12 estimates, at near historical low valuations.
While we don’t expect a significant risk to our medium term earnings estimates
or its business prospects, valuations could decline further (potentially to 0.5-0.6x
BV; this is lower historical BV range) due to weak sentiment on any negative
surprises related to the SEBI order.
Worst case scenario for WLC is restriction on capital raising ability for a
stipulated period (potentially 3-5 years). We await more clarity on the outcome
of the enquiry. We continue to maintain Buy on fundamentals and a PT of Rs
250, incorporating a high WACC of 15.4% (higher required cost of capital).
No comments:
Post a Comment