Analysts' Picks: Bank of India, Suzlon Energy, Orchid Chemicals, IDFC, Hinduja Foundries

Bank of India
CMP: Rs 269.3
Target price: Rs 466

Macquarie has retained its positive view and outperform rating on BOI and the bank remains its pick among state-owned banks. The broking house says that the scare on its forex derivatives portfolio is clearly overdone and the sharp sell-off in the stock is an opportunity.

"It's FY3/09E PBV of 1.3x, with a PER of 5.2x, is very attractive, given its ROE of 26–28% over the next two years," the report said. The brokerage also added that the derating is far more severe than the bad news warrants. It also said that the farm loan waiver may affect future NPL slippage in the agriculture lending sector, but opined that it will not be large enough to warrant significant earnings revisions at this stage.

Suzlon Energy
CMP: Rs 269.9
Target price: Rs 450

Broking house Morgan Stanley is overweight on Suzlon Energy. However, it has lowered its price target to Rs 450 from Rs 498.6 earlier. "We would be buyers on the weakness generated by Suzlon's announcement of a one-time write down of Rs 1 billion for the strengthening of the blades for its 2.1 MW turbine.

While the one-time provision would wipe out 8% of our F2008 earnings for the company (if it were not one-time), we believe that the market is more concerned about the issue becoming a recurring expenditure," says the brokerage in a note to its clients. It believes that the market has overreacted on fears that the provision will become a recurring expenditure.

Our revised price target of Rs 450 implies a 79% return from current levels, reflecting our belief in the company's strong growth story backed by its vertically integrated business model," it says. "It is one of the cheapest capital goods stocks in India. We reduce our target because of the downward revision in earnings for financial year 2009-10," the brokerage said.

Orchid Chemicals
CMP: 219.4
Target price: Rs 386

Citigroup has put a buy rating on the pharma major, but warned that it is raising its risk rating to high, to factor in Orchid's heavy dependence on Tazo-Pip.

"Given the high visibility into its key product launches and its record of good market share in the US, we expect Orchid to record an EPS CAGR of 48% (FY07-10), which should raise valuations. We cut estimates to factor in a stronger INR, launch delays, higher interest cost and the latest equity dilution," the broking house said.

However, it feels that the concerns over its balance sheet and inconsistent delivery are fair but priced in at the current valuation of 10x FY09E EPS
 
 
IDFC
CMP: Rs 167
Target price: Rs 236

Prabhudas Liladher has reiterated its out performer rating on the stock as the news of IDFC acquiring Standard Chartered Bank's asset management business in India came in. The deal valued StanChart MF at Rs 8.3 billion, i.e. 5.8% of AUM.

This acquisition will take IDFC's total AUM to $4.2 billion, which is now expected to rise to over US$7.5 billion in the coming two years, it says. Although it points out that although the deal is cheaper compared to Reliance-Eton deal, it is still fairly steep.

Through it back of the envelope calculations, PL says that valuation of over 12 times current revenue run rate is justifiable only if IDFC is able to significantly accelerate AUM growth at the fund, which has been underperforming the industry growth considerably.

Hinduja Foundries
CMP: Rs 174.9
Target price: NA

Edelweiss has initiated coverage on the company by asking its clients to accumulate the stock. The broking house says that there is growing demand for automotive castings from the domestic and overseas markets and the company being a industry leader will benefit.

"Revenue CAGR of 23% during FY07-10E with increasing customer diversification has helped the company. HFL has gradually reduced its exposure to the domestic CV market by moving into segments like passenger cars and tractors and is now targeting overseas markets," the brokerage said.

HFL's EBITDA margins are likely to improve in the next two years, given higher margins from its new foundry and better margins at the existing foundry at Ennore. Edelweiss estimates an EPS CAGR of 33% between FY08-10E, taking into account the dilution on account of the GDR issue that HFL is about to close