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Stock Analysis: Bajaj Auto, Gayatri Projects, Oil India

Sharekhan Research/Mumbai 27 Jun 13 | 08:57 AM
 Gayatri Projects Ltd
tradenow

BSE   01 Sep 14 | 01:02 PM

131.35  -6.9 (-4.99%)

NSE   01 Sep 14 | 12:53 PM

131.90  -6.9 (-4.97%)

Bajaj Auto
Recommendation: Hold
Price target: Rs2,028
Current market price: Rs1,788

The workers at Bajaj Auto’s Chakan plant resorted to a strike, thereby impacting production. The plant employs 925 permanent workers besides 1,000 temporary and contractual workers. The workers are demanding a wage hike of 25% and also permanent employment for the contractual workers. Apart from this, the workers are also demanding an option that would entitle them to subscribe to 500 equity shares of the company at a discounted price of Rs1 per share.

Production to be impacted in near term
The Chakan plant produces 3,000 units/day and produces the premium range of motorcycles Pulsar, Avenger, Ninja and KTM brands. The Chakan plant contributes about 25% of the overall production capacity of the company.

Out of the striking workers about 200 employees reported to work and the production was recommenced. However, the production would be sub-optimal. The management estimates the production to dip by 1,000 units/day due to the strike. It expects the plant to produce 50,000 units/month in June 2013 and July 2013 as against the normal capacity of 75,000 units/per month. Overall the production impact is likely to be 50,000 units.

Valuation and view: Maintain Hold but would carefully watch on developments
We assess the production loss of 50,000 units due to the strike. The company, however, has an inventory of four to five weeks, which would shield from an immediate loss in sales. However, the sales may get impacted if the strike persists for a longer period. We are keeping our earnings assumptions unchanged as of now. We maintain Hold recommendation on the stock with a price target of Rs2,028. However, we would be carefully watching developments for any deterioration in the situation.



Oil India
Recommendation: Buy
Price target: Rs650
Current market price: Rs560



Oil India Ltd (OIL) and ONGC Videsh Ltd (OVL) have signed a definitive agreement with Videocon Mauritius Energy to acquire 100% of shares in Videocon Mozambique Rovuma 1 Ltd, the company (Videocon) holds 10% interest in the Rovuma Area 1 block in Mozambique. According to the agreement, OIL and OVL will pay $2.47 billion to acquire a 10% stake in the Rovuma 1 gas field in Mozambique. The acquisition will be under a special purpose vehicle, where OVL will take 60% stake and OIL 40%. The transaction is expected to be closed in the fourth quarter of 2013 through an escrow account. The Rovuma project has estimated recoverable resources of 35-65 trillion cubic feet (tcf) of gas. It has the potential to become one of the world’s largest liquefied natural gas-producing hubs with first output expected in 2018.

We continue to hold our bullish stand on OIL because of its huge reserves and a healthy reserve-replacement ratio (RRR), which would provide a reasonably stable revenue growth outlook. Further, the recent acquisition, move to deregulate diesel prices and a likely revision in the natural gas prices augurs well for the company. In terms of valuation, the fair value works out to Rs650 per share (based on the average fair value arrived at using the discounted cash flow [DCF], price earnings [PE] and EV/EBIDTA valuation methods). Hence, we maintain our Buy recommendation on OIL with a price target of Rs650. At the current market price, the stock trades at PE of 8.9x its FY2014E earnings per share (EPS) of Rs62.8 and 7.7x its FY2015E EPS of Rs72.7.



Gayatri Projects
Recommendation: Buy
Price target: Rs275
Current market price: Rs65



The total order book of Rs8,036 crore as on March 2013 includes Rs3,000 crore in the irrigation segment in Andhra Pradesh, which had been stuck. Out of Rs3,000 crore, the Dummugudem irrigation project comprises of over Rs2,100 crore, which is expected to start from October this year. The delay in clearances for the execution of large-sized irrigation projects in Andhra Pradesh could add to the incremental revenues of Rs400-500 crore annually and remove one of the overhangs on the stock.

Issues in Nagaland road project persist but could get sorted out soon

GPL has witnessed an increase in debtors from Rs598 crore in FY2012 to Rs818 crore in FY2013 owing to few major projects in the irrigation and road segments. An increase in debtors is on account of Rs250 crore getting stuck in a contract for a 300-km stretch of road worth over Rs1,100 crore in Nagaland. The company has already executed over Rs600 crore work in Nagaland while the project got stuck due to a delay in earthworks. Currently, the central government has appointed an independent body to monitor the project, which is expected to take around two months. Subsequently, the management expects to receive the amount. In Mizoram too the company is stuck with a road project worth Rs545 crore. The company has executed over Rs100 crore work there. The project has gone for an approval after which the work will resume.

We have valued GPL’s stake in the two power projects cumulatively at Rs98 per share of which NCC power project (Rs 54) and TPCL (Rs44) are at a 50% discount to the book value. We have a Buy rating on the stock with a price target of Rs275.






Source: Sharekhan Research

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