vengabeats
Nilesh Nagdev
Subhash Project
Research: Emkay
Recommendation : Buy
CMP: Rs 214 (Face Value Rs 2)
12-Month Price Target: Rs 294
SPML has a current order book of over Rs 2,100 crore (110% up from Rs 1,000 crore a year ago) to be executed in the next 24-30 months. This puts the order book at 5.8x FY06E revenues, higher than the industry average of 3-4x FY06E revenues. Further, lower execution period of 24-30 months as compared to 30-36 months for the industry, will result in a faster than average growth of its peer group for the next SPML has been executing water related projects and electricals transmission & distribution projects successfully for the past two decades. With the government stepping up spending in these segments through various programs, we believe that the company is on a firm footing to capitalize on the sizeable opportunity. Water management projects (including irrigation) constitute 62% and T&D projects make up for the remaining order book of Rs21bn. SPML's past EBIDTA margin of 5-6% (versus industry average of 8-10%) has witnessed remarkable improvement to over 7% in 9mFY06. We believe the trend will continue on the back of sizeable order book, better utilization of resources and constant flow of orders. We expect EBIDTA margin to improve to 7.7% in FY07E and further to 8.3% in FY08E, up from 7.2% in FY06E. This will drive the consolidated PAT by 110% CAGR for FY06-08E. At Rs199, SPML is trading at 14.6x FY07E EPS and 10.1x FY08E EPS, which we believe is attractive on a relative basis (industry average of 17-28x FY08E EPS), strong growth in the next 2 years (PAT to grow at CAGR of 110% for FY06-08E) and improvement in returns ratio to over 35% in FY08E. We thus initiate coverage with a BUY recommendation and place a target of Rs294 (15x FY08E EPS of Rs19.6 & 30% discount to industry average of 22x FY08E EPS).
Petronet LNG
Research: BRICS PCG
Recommendation : Buy
CMP: Rs 51 (Face Value Rs 10)
12-Month Price Target: Rs 90
Petronet LNG (PLL) has successfully tied up additional financing and insurance for the capacity expansion at its Dahej terminal from 5 MTPA (million tonnes per annum) to 12.5 MTPA, targeted for completion by FY08-end. Existing lenders to the Dahej project have reaffirmed their confidence in the company by signing loan agreements for an additional Rs 12.3bn and the non-fund based limits of Rs 4bn. The company has also secured Phase-I project insurance at a premium outlay of under 50%, and the Indian and overseas reinsurers have reduced PLL's year-on-year premium for operational policies at a compounded rate of 25%. Additionally, the company has signed a project management consultancy agreement with Engineers India along with Japan's Tokyo Gas Engineering for the Dahej expansion. With this, PLL has executed all contracts relating to the Dahej expansion.
Dr Reddy's Laboratories
Research: DSP Merrill Lynch
Recommendation : N A
CMP: Rs 1,472 (Face Value Rs 5)
12-Month Price Target: Rs 1,836
DRL recently announced closure of its acquisition of Betapharm Group (100%), the fourth-largest generic company in Germany, for an all cash sum of Euro 480m ($586m). We view the deal as strategically positive for DRL given the strong presence in the largest generic market in EU, its aggressive growth record, niche portfolio focus and differentiated marketing. We expect this transaction to be 20% (Rs 7) and 22% (Rs 10) accretive to DRL's FY07E and FY08E base earnings respectively. Potential launch of generic Allegra (fexofenadine, anti-histmine; $1.5bn) over the next few weeks and generic Proscar (finasteride, BPH indication, US$368mn) in June'06 as authorized generic for Merck will likely result in 28% (Rs10 EPS) and 7% (Rs3 EPS) earnings accretion to DRL's base earnings in FY07E and FY08E respectively. In case of generic Allegra we expect DRL to enjoy limited competition for a short timeframe (about 4 months) whereas in case of generic Proscar, DRL has tied up with Merck as authorised generic player during 6-month Dr Reddy's Laboratories April 10, '06 exclusivity period. Apart from these two products we expect more clarity on two other product upsides- generic Plavix (likely settlement with BMS/Sanofi) and generic Zofran (likely 6-month exclusivity). Potential settlement with BMS/Sanofi could add at least Rs 8 to earnings p.a till 2011 ($14-18mn PAT). We value DRL's core business at Rs1476/share on comparative P/E valuation (22x on FY08E EPS), in line with current US gneric valuation at 21x CY06E and Indian Sector average of 23x FY08E. Our valuation of DRL's research pipeline (Baaglitazone; Phase III entry) on NPV methodology is Rs360/share (including Rs50 for Perlican Pharma valuation), suggesting an overall fair value of Rs 1,836/share.
MphasiS BFL
Research: ICICI Securities
Recommendation : Buy
CMP: Rs 202 (Face Value Rs 10)
12-Month Price Target: N A
After two quarters of strong growth, MphasiS BFL's results were marginally below expectations in Q4FY06. Revenue growth was weak and profit margins disappointing. However, for FY07, the management has hinted at robust growth on the back of strong project pipelines for the software services as well as BPO businesses. Considering EDS's open offer, the downside is limited at Rs 204.5. Trading at FY07E P/E of just 17x, we maintain Buy. Revenues grew by a disappointing 3.3% QoQ and 18.2% YoY to Rs2.5bn (i-SEC Rs 265 crore). More importantly, after two quarters of robust expansion (540bps), the EBITDA margin contracted 270bps QoQ (but expanded 220bps YoY) to 20.5% in Q4FY06. The margin contraction was due to: i) increase in onsite percentage of revenues in the software services business by 300bps to 60% ii) drop in offshore billing rates from $21/hour to $20/hour, and iii) drop in MsourcE employee utilisation (including trainees) by 300bps to 53%. On the back of the fall in margins, the company witnessed an 8.8% QoQ drop in EBITDA to Rs 51.3 crore. PAT was further impacted by higher taxes of Rs 4.3 crore as compared with a deferred tax credit of Rs1mn in Q3FY06. The PAT fell 14.1% QoQ, but rose 32.1% YoY, to Rs 35.1 crore (i-SEC Rs 46.9 crore). Annualised EPS for the quarter growth story remains intact. While the management refused to give guidance for FY07, it hinted at strong order pipelines for the IT services as well as BPO businesses.
Aban Loyd Chiles Offshore
Research: UBS Investment
Recommendation : Buy
CMP: Rs 1,178 (Face Value Rs 2)
12-Month Price Target: Rs 1,750
We believe robust demand growth, tight supply, lack of new discoveries and geopolitical issues will keep oil prices high, fuelling large exploration and production (E&P) capex—which we estimate will rise 50% in the next two years. In our view, the increase should lead to higher demand for offshore services. In India, ONGC and private companies are ramping up E&P capex. We believe Aban Loyd is well equipped to ride this strong upswing in global offshore E&P activity. High oil prices, low spare capacity and ageing fields are forcing oil firms in the Middle East to increase exploration capex. Saudi Aramco alone needs to hire 15 rigs. On the supply side, new rigs will take time to come on stream, as the gestation period is 27-30 months. Also, construction yards are facing capacity constraints because of equipment shortages. The tight demand-supply situation for offshore assets is leading to high rig utilisation and a sharp rise in operating rates.
Research: Emkay
Recommendation : Buy
CMP: Rs 214 (Face Value Rs 2)
12-Month Price Target: Rs 294
SPML has a current order book of over Rs 2,100 crore (110% up from Rs 1,000 crore a year ago) to be executed in the next 24-30 months. This puts the order book at 5.8x FY06E revenues, higher than the industry average of 3-4x FY06E revenues. Further, lower execution period of 24-30 months as compared to 30-36 months for the industry, will result in a faster than average growth of its peer group for the next SPML has been executing water related projects and electricals transmission & distribution projects successfully for the past two decades. With the government stepping up spending in these segments through various programs, we believe that the company is on a firm footing to capitalize on the sizeable opportunity. Water management projects (including irrigation) constitute 62% and T&D projects make up for the remaining order book of Rs21bn. SPML's past EBIDTA margin of 5-6% (versus industry average of 8-10%) has witnessed remarkable improvement to over 7% in 9mFY06. We believe the trend will continue on the back of sizeable order book, better utilization of resources and constant flow of orders. We expect EBIDTA margin to improve to 7.7% in FY07E and further to 8.3% in FY08E, up from 7.2% in FY06E. This will drive the consolidated PAT by 110% CAGR for FY06-08E. At Rs199, SPML is trading at 14.6x FY07E EPS and 10.1x FY08E EPS, which we believe is attractive on a relative basis (industry average of 17-28x FY08E EPS), strong growth in the next 2 years (PAT to grow at CAGR of 110% for FY06-08E) and improvement in returns ratio to over 35% in FY08E. We thus initiate coverage with a BUY recommendation and place a target of Rs294 (15x FY08E EPS of Rs19.6 & 30% discount to industry average of 22x FY08E EPS).
Petronet LNG
Research: BRICS PCG
Recommendation : Buy
CMP: Rs 51 (Face Value Rs 10)
12-Month Price Target: Rs 90
Petronet LNG (PLL) has successfully tied up additional financing and insurance for the capacity expansion at its Dahej terminal from 5 MTPA (million tonnes per annum) to 12.5 MTPA, targeted for completion by FY08-end. Existing lenders to the Dahej project have reaffirmed their confidence in the company by signing loan agreements for an additional Rs 12.3bn and the non-fund based limits of Rs 4bn. The company has also secured Phase-I project insurance at a premium outlay of under 50%, and the Indian and overseas reinsurers have reduced PLL's year-on-year premium for operational policies at a compounded rate of 25%. Additionally, the company has signed a project management consultancy agreement with Engineers India along with Japan's Tokyo Gas Engineering for the Dahej expansion. With this, PLL has executed all contracts relating to the Dahej expansion.
Dr Reddy's Laboratories
Research: DSP Merrill Lynch
Recommendation : N A
CMP: Rs 1,472 (Face Value Rs 5)
12-Month Price Target: Rs 1,836
DRL recently announced closure of its acquisition of Betapharm Group (100%), the fourth-largest generic company in Germany, for an all cash sum of Euro 480m ($586m). We view the deal as strategically positive for DRL given the strong presence in the largest generic market in EU, its aggressive growth record, niche portfolio focus and differentiated marketing. We expect this transaction to be 20% (Rs 7) and 22% (Rs 10) accretive to DRL's FY07E and FY08E base earnings respectively. Potential launch of generic Allegra (fexofenadine, anti-histmine; $1.5bn) over the next few weeks and generic Proscar (finasteride, BPH indication, US$368mn) in June'06 as authorized generic for Merck will likely result in 28% (Rs10 EPS) and 7% (Rs3 EPS) earnings accretion to DRL's base earnings in FY07E and FY08E respectively. In case of generic Allegra we expect DRL to enjoy limited competition for a short timeframe (about 4 months) whereas in case of generic Proscar, DRL has tied up with Merck as authorised generic player during 6-month Dr Reddy's Laboratories April 10, '06 exclusivity period. Apart from these two products we expect more clarity on two other product upsides- generic Plavix (likely settlement with BMS/Sanofi) and generic Zofran (likely 6-month exclusivity). Potential settlement with BMS/Sanofi could add at least Rs 8 to earnings p.a till 2011 ($14-18mn PAT). We value DRL's core business at Rs1476/share on comparative P/E valuation (22x on FY08E EPS), in line with current US gneric valuation at 21x CY06E and Indian Sector average of 23x FY08E. Our valuation of DRL's research pipeline (Baaglitazone; Phase III entry) on NPV methodology is Rs360/share (including Rs50 for Perlican Pharma valuation), suggesting an overall fair value of Rs 1,836/share.
MphasiS BFL
Research: ICICI Securities
Recommendation : Buy
CMP: Rs 202 (Face Value Rs 10)
12-Month Price Target: N A
After two quarters of strong growth, MphasiS BFL's results were marginally below expectations in Q4FY06. Revenue growth was weak and profit margins disappointing. However, for FY07, the management has hinted at robust growth on the back of strong project pipelines for the software services as well as BPO businesses. Considering EDS's open offer, the downside is limited at Rs 204.5. Trading at FY07E P/E of just 17x, we maintain Buy. Revenues grew by a disappointing 3.3% QoQ and 18.2% YoY to Rs2.5bn (i-SEC Rs 265 crore). More importantly, after two quarters of robust expansion (540bps), the EBITDA margin contracted 270bps QoQ (but expanded 220bps YoY) to 20.5% in Q4FY06. The margin contraction was due to: i) increase in onsite percentage of revenues in the software services business by 300bps to 60% ii) drop in offshore billing rates from $21/hour to $20/hour, and iii) drop in MsourcE employee utilisation (including trainees) by 300bps to 53%. On the back of the fall in margins, the company witnessed an 8.8% QoQ drop in EBITDA to Rs 51.3 crore. PAT was further impacted by higher taxes of Rs 4.3 crore as compared with a deferred tax credit of Rs1mn in Q3FY06. The PAT fell 14.1% QoQ, but rose 32.1% YoY, to Rs 35.1 crore (i-SEC Rs 46.9 crore). Annualised EPS for the quarter growth story remains intact. While the management refused to give guidance for FY07, it hinted at strong order pipelines for the IT services as well as BPO businesses.
Aban Loyd Chiles Offshore
Research: UBS Investment
Recommendation : Buy
CMP: Rs 1,178 (Face Value Rs 2)
12-Month Price Target: Rs 1,750
We believe robust demand growth, tight supply, lack of new discoveries and geopolitical issues will keep oil prices high, fuelling large exploration and production (E&P) capex—which we estimate will rise 50% in the next two years. In our view, the increase should lead to higher demand for offshore services. In India, ONGC and private companies are ramping up E&P capex. We believe Aban Loyd is well equipped to ride this strong upswing in global offshore E&P activity. High oil prices, low spare capacity and ageing fields are forcing oil firms in the Middle East to increase exploration capex. Saudi Aramco alone needs to hire 15 rigs. On the supply side, new rigs will take time to come on stream, as the gestation period is 27-30 months. Also, construction yards are facing capacity constraints because of equipment shortages. The tight demand-supply situation for offshore assets is leading to high rig utilisation and a sharp rise in operating rates.