14th Septmeber 2009

State Bank of India

CMP : Rs 1,918
Target price: Rs 2,109
Upside: 10%
Brokerage: Daiwa Securities

 The broking house believes that one of State Bank of India’s (SBI) biggest advantages is the high interest spread on its bond portfolio. The incremental cost of funds for SBI has fallen by almost 210 bps over the past nine months, whereas the incremental yield on its government-bond portfolio has remained more or less the same. Currently, if SBI buys a 10-year government bond, then it is making an incremental interest spread of 200-250 bps, compared with a negative interest spread six months ago and a positive spread of around 10 bps nine months back.

SBI moved almost Rs 35,000 crore of short-term cash to statutory liquidity ratio (SLR) securities in 1Q FY10, and this is likely to have a positive impact and reflect in the NIM in the latter half of FY10. The re-pricing of high-cost deposits in November-December 2009 would also give the NIM a further boost. SBI has underperformed both the broader and Nifty banking indices over the past six months, but this trend will reverse over the next six months. The six-month target price is revised to Rs 2,109 from Rs 1,043, based on a target PBR of 1.5x on FY10 consolidated BVPS forecast and adding Rs160 per share for the life-insurance venture.

Amtek Auto

CMP: Rs 183.85
Target price: Rs 254
Upside: 38%
Brokerage: Anand Rathi

The research house expects Amtek Auto to benefit from the relatively strong growth in automobile demand at home and the nascent recovery globally. Its amalgamation with five group companies would lead to integrated operations and greater efficiencies. Domestic auto demand has rebounded, and overseas markets, too, are showing signs of improvement. Amtek has a significant presence in the overseas markets through subsidiaries, which would boost revenue from its subsidiaries as well its joint ventures with leading global suppliers such as Magna and ARI. Given the secular growth in demand ahead, Amtek (ex-merger impact) to register a robust 50 per cent CAGR in earnings over FY09-12.

Amtek is amalgamating five group companies with itself, bringing all the forgings and castings units under the ‘Amtek Auto’ umbrella. This is expected to lead to better integration of operations, clearer efficiencies in sourcing and negotiations, and greater transparency in operations. Amtek Auto is valued at 15x FY11e earnings, which is a 25 per cent discount to the target PE multiple for Bharat Forge. The target price is Rs 254 (without considering the impact of its amalgamation with four other group entities).

Hindustan Unilever

CMP: Rs 255.95
Target price: Rs 304
Upside: 18.7%
Brokerage: IIFL

Hindustan Unilever’s (HUL) top management is pursuing volume growth and this is now visible in every brand in its portfolio. HUL is re-launching earlier de-focussed soap brands Liril, Hamam, Rexona and Breeze to regain share from regional players in specific geographies. The company has reintroduced key price points of Rs 10 and Rs 5 toothpastes and soap brand Lifebuoy.

With competition (GPCL, Wipro and Ghari) not reacting to price cuts in HUL’s discount brands, prospects of a recovery have improved. Channel checks suggest that the new re-launches/price points/price cuts have been well received in trade, though it is too early to judge consumer offtake at this stage. HUL has lost the maximum ground over the past 15 months in soaps, with its market share dropping by over 650 bps from 53 per cent to just over 46 per cent. Its old brands are being re-focussed after 2-3 years to take on competitors such as Godrej No 1 and Santoor, which have specific regions of strength.

Lanco Infratech

CMP: Rs 422

Brokerage: Edelweiss Securities

Lanco Infratech (LITL) currently has over 7,195 MW of new generation capacity under various stages of execution. Over half of this is already under construction and the balance has secured offtake agreements and fuel linkages and is likely to attain financial closure over the next 12 months. Post-commercialisation of RIL’s KG gas basin, Lanco has been receiving 1.6-1.65 mmscmd of gas, enabling its 368 MW Kondapalli power