STOCK UPDATE

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Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs210
Current market price: Rs129
Buy-back in the offing
The board of Crompton Greaves Ltd (CGL) has decided to buy back the company’s shares and will be meeting on March 24, 2009 to finalise the buy-back exercise. At the current market price, the CGL stock is discounting its FY2010E earnings by 7.4x. In our view, the valuation of the stock is compelling, as it clearly does not capture the growth prospects of the company, and this could have prompted the management to buy back the company’s shares. Furthermore, CGL’s strong balance sheet (a low debt-equity ratio at the consolidated level and net cash position at the stand-alone level) provides the company enough headroom to carry out the process smoothly.

Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs789
Current market price: Rs572
ATC-Xcel deal may help evaluate Bharti’s tower business

• As per media reports, American Tower Corporation (ATC) is all set to acquire India-based independent tower company, Xcel Telecom. The deal, if it materialises, can give us certain indications of the ruling valuation of the domestic tower company and be used as a yardstick to value Bharti Airtel’s tower business. 

• ATC is reportedly planning to acquire Xcel Telecom for a total of USD136 million (Rs700 crore). Xcel Telecom, established in 2006, provides telecommunications infrastructure services in India. The company is aiming to set up a portfolio of 25,000 towers in the next three years through organic and inorganic routes. For the proposed portfolio of towers, Xcel Telecom intends to make capital investment of over USD2.5 billion over the next couple of years. 

• As per the media reports, Xcel Telecom has a tower base of 1,350 towers as on November 30, 2008. Based on this, the value per tower works out to Rs0.52 crore (USD0.10 million per tower). The deal is at a 15% discount to the value of Rs0.61 crore per tower paid by Quippo Telecom to acquire a 49% stake in Wireless Tata Teleservices (WTT) for a total of Rs2,400 crore.

• If we use the Rs0.52 crore per tower valuation of Xcel Telecom to value the 61,355 towers of Bharti Infratel as on December 2008, the value for Bharti Airtel works out to Rs31,814 crore and that for Bharti Airtel’s 92% stake in its tower subsidiary works out to Rs154.2 per share. This is much ahead of the value of Rs112 per share taken by us in our price target for the stock based on the discounted cash flow method.

• At the current market price, the stock trades at 10.9x its FY2010 estimated earnings and 6.2x enterprise value/earnings before interest, tax, depreciation and amortisation. We maintain our Buy recommendation on the stock with a price target of Rs789 per share.

HCL Technologies
Cluster: Apple Green
Recommendation: Hold
Price target: Rs144
Current market price: Rs102
Reader’s Digest’s deal part of Q3 deal win

Key points

• HCL Technologies (HCL Tech) has announced that it has signed an information technology (IT) outsourcing engagement worth over US$350 million with Reader’s Digest Association spread over seven years. Our interaction with the management leads us to believe that this deal is a part of US$1 billion worth of deals the company had won in Q3FY2009.

• Though HCL Tech won record deals of US$1 billion in Q3FY2009, we highlight that the company is likely to incur an upfront transaction cost of US$25 million for clients. Hence, we see risk to the company’s earnings, as the upfront transition cost on some of the new deals may not be supported by increased volume from the clients in the current difficult environment.

• Further, the rupee has depreciated significantly, close to 5.2%, in the last one month and is expected to remain weak in coming days. In our view, the depreciation in the rupee is likely to again expand HCL Tech’s unrecognised foreign exchange (forex) losses. In Q3FY2009, the company’s unrecognised forex losses expanded to US$207 million from US$156 million due to the depreciation in the rupee.

• At the current market price, the stock is trading at 5.5x FY2009 earnings estimate and 5.8x FY2010 earnings estimate. Historically, HCL Tech has traded on an average of 20-25% discount to Infosys. However, the stock has de-rated in the last six to nine months and the discount has widened to 53% due to HCL Tech’s aggressive hedging policy causing huge pile of forex losses on its balance sheet and due to acquisition of Axon in the current difficult environment. Given the huge pileup of unrecognised forex losses and the risk to the company’s earnings due to upfront transition cost and the dilution of margin from Axon’s acquisition, we do not see any re-rating in HCL Tech’s price/earning (PE) multiple in the near term. Hence, we maintain our Hold recommendation on the stock with a price target of Rs144.

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