Scrips Research.

Bank of Baroda
Bank of Baroda has a strong presence in western India —a key zone for retail and industrial growth—with equally good rural network.

Further, the bank is one of the few banks having a substantial international presence, which contributes 18-20 per cent to total business and 30 per cent to profits. This business is expected to rise further with the bank growing its global presence.

The bank has improved its fundamentals over the past several years on key parameters such as net interest margins (NIMs) and asset quality despite growing at a robust pace (asset growth CAGR of 19 per cent in FY04-07). Going ahead, the bank's focus on NIMs backed by moderate growth augurs well.

Besides, its initiatives such as online trading services, and joint ventures in insurance and asset management, will help it create value for its shareholders.

Additional triggers could be in the form of consolidation within the public sector bank space. All this put together makes this stock, which is reasonably valued at 1.4 times its FY09 estimated book value, an attractive investment opportunit

Adlabs Films
With a strong presence across the entertainment industry value chain of content production, distribution, and exhibition, Adlabs becomes the choicest pick.

Domestic consumption and leisure spends will remain buoyant as disposable incomes rise across the country fuelling growth at Adlabs.

Adlabs produces and distributes films, and is a dominant player in the multiplex segment. It has also acquired 51 per cent stake in television content producer Synergy Communications, the maker of Jhalak Dikhhla Jaa and Kaun Banega Crorepati.

In the FM radio business, its subsidiary, which runs Big FM has 44 FM licenses across India. This could also become a value unlocking opportunity going forward.

Over the past three years, Adlabs has impeccably delivered a top line growth of over 100 per cent y-o-y, along with high profitability. In the September 2007 quarter, it raked in a whopping 69 per cent operating profit margin.

But going by the past numbers, operating margins have remained in excess of 50 per cent consistently, with net profit margins at over 22 per cent. The stock has appreciated three-fold since January 2007 and should do well.

Bhel
Today, the biggest constraint in the power sector is the supply of equipment, especially the critical power equipment required for the larger projects.

But, for Bhel, which commands about 65 per cent market share in the domestic power equipment industry, this provides long-term earnings visibility.

While competition is rising with new players like L&T and Chinese companies vying for a share, Bhel's order book of Rs 62,400 crore, almost 3.6 times its FY07 revenues, instils confidence. The successful acquisition of orders for super critical boilers and high technology gas turbines required for the bigger projects would only improve its order book further.

Considering the huge order backlog and the orders in pipeline, Bhel is expanding its capacities by 67 per cent to 10,000 mw by January 2008, which will further increase to 15,000 mw by December 2009.

Bhel is also expanding its forging and casting capacities and a new fabrication plant to help reduce its dependence on imports. These should also help lower costs in the years to come. Overall, a better industry outlook, strong order book and expansion of existing capacities will drive the stock from the current levels.

Bharti Airtel
With a mobile subscriber base of 51 million, Bharti Airtel is India's largest mobile service provider. While it has added an average of 2 million subscribers a month in Q2, it is expected to crack the 100 million subscriber mark by FY10.

While the company has experienced good growth, its ARPU has fallen by 10 per cent over the last three quarters, much ahead of the 4 per cent decline experienced by Reliance Communications. Even then, operating margins have improved, on the back of higher margin in broadband business and cost reduction.

Going forward, increase in scale of operations will keep costs in check. Capital and operating expenditure is also likely to come down after the formation of Indus, a tower infrastructure company, which will manage the tower infrastructure of Bharti, Vodafone and Idea.

A trigger for the stock could be the listing of Bharti Infratel, the tower division and which holds 42 per cent in Indus. Bharti Infratel already has 20,000 towers and plans to set up more.

RCOM will be the biggest threat for the company if it manages to soon roll out its GSM services across 15 circles. Additionally, any unfavourable outcome over the spectrum issue will have its impact; it could lead to increased investments in upgradation of existing equipment.

To conclude, Bharti's revenues should grow by 35 per cent in the next two years on the back of subscriber expansion, start of Sri Lankan operations by March 2008, and launch of IPTV and DTH. A sum-of-parts valuation puts the per share value of Bharti at Rs 1,200, a 27 per cent upside from the current levels.

Educomp Solutions
Educomp, the market leader in Kindergarten-12 education products, is a successful niche player. It has made some smart acquisitions, entered new areas. and garnered a client base of almost 6,000 schools across India besides, a small presence in Singapore and the US. Its first mover advantage makes it difficult for competition to catch up anytime soon.

Besides, the company has so far acquired and built the abilities to design and create content for schools, learning and school infrastructure management solutions, online teaching solutions, community building solutions and more recently into setting up its own schools.

Financially, Educomp's top line has almost doubled every year and operating margins have been maintained above 50 per cent.

Considering the growth potential in the Indian education industry, Educomp is likely to keep its juggernaut rolling for the coming few years. In FY09, Educomp will double its top line again and grow its earnings by 75 per cent. Although there has been a concern over valuations, the consistent earnings growth justify the same.

Larsen & Toubro
Reinventing itself and successfully developing new businesses are among L&T's key strengths. That, along with the domestic infrastructure and global hydrocarbon investments, is responsible for the rising revenues and order book. It is now targeting a turnover of Rs 30,000 crore by FY10 as compared with Rs 18,363 crore in FY07.

Going forward, there is more business to come, as the government has estimated an infrastructure investment of $500 billion during the Eleventh Five Year Plan. Besides, a lot of money will also be spent by domestic players in the metal, oil and gas, power and other industries.

Little wonder, L&T's order book has been rising. As of September 2007, the engineering and construction division had an order book of Rs 42,000 crore.

Going forward, L&T is also focusing on the overseas markets and has targeted exports to increase to 25 per cent of 2010 sales. It is entering shipbuilding, railway locomotives, power generation and power equipment as well.

While all these investments in different businesses will help sustain future growth, the medium term continues to be robust. Some of it is already rubbing off positively on the share price. Although the stock seems richly valued, it can fetch good returns.

ONGC
Oil exploration companies are set to benefit from the current high oil prices and firm outlook. India's largest oil exploration company, ONGC is the best bet in this space. ONGC with interest in 85 domestic blocks including 52 offshore fields, has made 28 discoveries in the past two years, of which, 14 were made in FY08 itself.

Further, its 100 per cent subsidiary, ONGC Videsh has stakes in 26 blocks across 15 countries and is expected to be the key growth driver with its share in ONGC's consolidated revenues and profits expected to rise to 20 per cent (14 per cent now) and 14 per cent (9 per cent now) respectively.

ONGC's substantial interests in MRPL, Petronet LNG, GAIL and Indian Oil Corporation are the topping. Moreover, the IPO of Oil India in the next few months could provide further triggers.

What also makes ONGC attractive is that it is the cheapest among its Asian peers trading at 10.1 times estimated FY09 earnings and enterprise value per barrel oil equivalent of about 7.5 times for FY09.

Going ahead, exploration successes especially in the KG basin and favourable announcement on various issues like sharing of subsidy burden, cess and deregulation in gas prices will be big positives.

Reliance Communications
Reliance Communications (RCOM) has a mobile telephony market share of 18 per cent and subscriber base of 38 million, which is rising by a million every month. And this should continue to rise as RCOM penetrates into smaller towns.

What's more interesting is that despite concerns over declining, operating margins have improved to 42.2 per cent in Q2 FY08, thanks to the benefits of larger scale.

This is expected to improve further if RCOM gets the go-ahead to operate an additional 15 GSM circles as 65 per cent of passive infrastructure such as telecom towers, is common to both GSM and CDMA technologies and the investments in its existing networks will be incremental.

Additionally, it is the value unlocking in its subsidiaries that are likely to provide further triggers.

In 2008, RCOM is likely to announce a stake sale and subsequently list its tower subsidiary, Reliance Telecom Infrastructure, list its submarine cable subsidiary, FLAG Telecom, hive off of its SEZ and BPO businesses and the launch IPTV and DTH services by the first quarter of 2008.

Analysts estimate that a conservative sum-of-parts valuation based on FY09 numbers for RCOM comes to Rs 850-Rs 900 per share, which indicates an appreciation of 17-24 per cent from current levels.

Reliance Industries
In 2008, Reliance Industries' (RIL) exploration and production (E&P) division, which accounts for 50 per cent of its sum-of-parts valuation, will start selling gas from the KG Basin. The only ambiguous aspect here seems to be the pricing of gas and settlement with the ADA group and NTPC.

Within a few months, Reliance Petroleum will also start operations, all of which should lead to a jump in RIL's profits.

Also, the bids for NELP VII will be awarded by July 2008. While further wins will add to reserves, new discoveries at existing reserves should further add to valuations and the possible de-merger of RIL's E&P division would unlock value.

While the company is yet to prove its mettle in its retail and SEZ initiatives, given its track record managing mammoth projects, one can hope to see positive results here as well.

Notably, analysts maintain their bullish outlook on the core businesses. Refining margins for RIL, already the best among global players, should remain firm until FY11, while petrochemical margins are expected to be stable with good growth in volumes. At a P/E of under 12 times FY09 estimated core earnings, RIL is a worthy investment.

State Bank of India
SBI's move to merge State Bank of Saurashtra with itself has the potential to trigger the re-rating of public sector banking stocks by pushing the much needed consolidation process.

To further expedite consolidation, the boards of SBI and its other six associate banks are meeting in January to consider merger. Should that happen, SBI's standalone balance sheet size will grow 1.5 times to Rs 8.20 lakh crore, almost double the size of ICICI Bank's.

Also, its branch network will jump 50 per cent to 14,400 branches. But, the improvement in valuations (re-rating) should get a boost when the merged entity is able to rationalise costs and extract benefits from the merger.

SBI will raise Rs 17,000 crore through a rights issue that should provide fuel for future growth. In a competitive Indian banking business, it is important for banks to achieve size and scale to be globally competitive.

And for investors, it is more important to find such banks at reasonable valuations. SBI meets both these criteria. SBI's stock trades at 2.2 times and 2 times its estimated consolidated book value for FY08 and FY09 respectively.

Further, SBI has investments in mutual fund and life insurance subsidiaries, which make valuations more compelling.
Source:-brokersreport.(blog)