02 October 2010
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Aban Offshore Ltd (Aban) ranks among the top 16 offshore drilling
companies in the world with a significant presence in the high-end
offshore drilling market. The company operates a fleet of 15 jack-up
rigs, three drill ships and one floating production unit. The global
economic crisis and resultant decline in crude oil prices led to a drop in
exploration and drilling activities globally, which resulted in a drop in
utilisation levels for Aban’s fleet. High leverage post acquisition of
Sinvest and sinking of Aban Pearl further led to a dip in performance.
In the last few months, Aban secured long-term contracts for
deployment of its idle vessels leading to higher utilisation levels and
improvement in operating performance. Also, crude oil prices have
consistently sustained above $60/barrel for the last 15 months. This
would lead to increased spend towards offshore exploration and
Operating performance to gain traction
Currently, only two vessels out of its fleet of 19 are idle and under
marketing while out of the remaining 14 assets are already deployed
while three have secured contracts for deployment. This provides stable
earnings visibility over the next two years. Aban has also provided for
the loss of Aban Pearl and also for Petrojack bankruptcy. This means that
the recent setbacks have been factored in the stock price. High debt
levels are the single biggest concern for Aban Offshore. However, as
operating performance improves, debt/equity ratio is likely to moderate.
We have valued the stock on multiple valuation parameters and
recommend BUY with a price target of | 947.
Varun Shipping: Under pressure…
Varun Shipping Company Ltd (Varun Shipping) has a dominant
presence in the Indian LPG space and operates 10 LPG carriers. The
company also expanded its presence in the offshore segment with the
acquisition of high-end AHTS vessels. However, the economic downturn
and correction in freight rates had a cascading effect on the operational
performance of the company, which has been under pressure for the
last one year. The strain is likely to continue. A high debt level has also
compounded the problems. However, if there is a recovery in high-end
AHTS vessel rates it could enable the company to emerge from the
crisis earlier than expected.
Long road to recovery
Due to oversupply of LPG carriers combined with subdued demand, LPG
freight rates are expected to remain sluggish. As LPG constitutes 50% of
Varun Shipping’s fleet, the performance is expected to be subdued. We
expect crude tanker rates to increase marginally while AHTS rates are
expected to rise at a faster pace over the next two years. The operating
margin of the company is also likely to improve to 44% from the current
36% on account of a rise in high-end AHTS vessel rates.
However, the company is also highly leveraged and significant interest
outgo is likely to strain the performance. Due to high depreciation and
interest costs, Varun Shipping is likely to report a net loss from operations
We have valued Varun Shipping at 0.80x FY12E P/BV to arrive at a price
target of | 36. We maintain our SELL recommendation on the stock.
Great Offshore Ltd (GOL) is the most consistent player among Indian
offshore shipping companies with a steady rise in revenue, stable
margins and steady return ratios. The company also has a sizeable
presence in the Indian offshore space with a diversified fleet of 46
vessels consisting of 28 offshore support vessels, 12 harbour tugs, three
construction barges and three drilling rigs. The company has a
successful operating track record and long-term contracts with
domestic and foreign oil exploration and drilling companies.
Stable performance to continue
We expect revenues to grow by 21% in FY12E as utilisation levels of its
drilling rigs increases. Three of its drilling rigs (Badrinath, Kedarnath and
Amarnath have secured long-term contracts and will be operating at
100% utilisation levels in FY12. The company has a slightly higher debt
equity ratio of 2.1 but this is not a concern as the ratio is expected to
improve to 1.1 by FY12 as it has completed most of its capex spend with
very marginal new capex over the next two years while the earnings from
operations are expected to rise significantly over the same period.
We have valued Great Offshore on multiple valuation parameters and
recommend BUY with a price target of | 444.
Mercator Lines: Re-rating candidate…
In the last few years, Mercator Lines (MLL) has not only reported a
steady growth in its core business but has also diversified into related
areas. This has not only enabled MLL to scale up its business
significantly but has also reduced the exposure to the volatile shipping
business. MLL operates dry bulk carriers, crude and product carriers,
offshore jack-up rig and dredgers. The company also owns and operates
coal mines in Indonesia. In addition, it also carries out significant
quantity of coal trading. MLL is also entering into new business areas
such as floating production cum storage unit, which would get
operational in FY11. It is well placed to ride the volatility of the shipping
business on account of inherent advantages such as diversified revenue
stream, presence across segments, long-term charter contracts,
comfortable debt-equity ratio and strong management capability. MLL
would be the most likely outperformer among shipping stocks in case of
an upturn in the shipping cycle. The stock is trading at half its FY10 BV
of | 97 and is a likely re-rating candidate.
Diversified operations to insulate MLL from volatile shipping business
FY11 is likely to be a very volatile year for the company as earnings are
likely to be volatile on account of wide fluctuations in freight rates. A
majority of dry bulk revenues is derived from long-term contracts, which
insulate the company from volatile freight rates. However, its tanker fleet
is deployed on medium-term contracts ranging from 6-12 months. This
can drag down the performance as crude and product carrier rates have
been extremely subdued. However, the company is ramping up its coal
trading and mining activities, which would result in an improvement in
the topline and bottomline in FY12.
We have valued MLL on a P/BV and P/E multiple basis to arrive at a price
target of | 63 and recommend BUY rating on the stock.
Garware Offshore Ltd (Garware Offshore) currently operates a fleet of
12 vessels, which consists of seven AHTS vessels, four PSVs and one
construction barge. The fleet is a combination of small and mid-sized
vessels, which provide stable revenues for the company. Garware
Offshore acquired two vessels in Q2FY10. The company has on order
one platform support vessel, which is under construction and is
expected to join the fleet by the end of FY11. It has a reasonably good
revenue visibility as 71% of its fleet is deployed on long-term charter
contract, which ensures higher utilisation level for its fleet.
Operating performance to recover after a dip in FY11
Except one platform support vessel, which is expected to join by the end
of FY11, it is through with its fleet expansion programme. This would
imply that topline and bottomline growth for the next couple of years
would be muted. Further, the company is also slightly more leveraged
with a debt-equity ratio of 1.9, which would compel it to consolidate its
position over the next two years. After a small dip in net profit in FY11, it
is expected to recover significantly in FY12.
We have valued Garware Offshore on multiple valuation parameters and
recommend BUY on the stock with a price target of | 139.
160 to 165
46 to 49
11 to 13
Ramky Infrastructure Ltd.
24 to 27
Orient Green Power
1 to 1.10
1 to 2
395 to 425
4 to 5
40 to 45
23 to 26
Sea TV Network
10 to 15
95 to 102
8 to 9
125 to 127
5 to 7
225 to 250
10 to 12
Raise target price post Satyam financials disclosure; retain REDUCE. We raise our
end-FY2012E target price on TM to Rs735/share (Rs705 earlier). We now use our target
price for Mahindra Satyam (MS) to value TM’s stake in the company; we were assigning
an ‘uncertainty’ discount to the market price earlier. TM consolidated (with MS) EPS for
FY2011E/12E works out to Rs69/Rs68 respectively. TM will likely trade on merger ratio
speculation in the near-term; we retain our REDUCE rating on fundamentals.
Raise target price to Rs735/share (from Rs705) post Satyam FY2009/10 financial disclosures
We revise our target price on TM to Rs735/share from Rs705 earlier. We now use our target price
for Mahindra Satyam (MS) to value TM’s stake and remove the 20% discount we had attached to
the same earlier, given visibility on MS financials and expected merger of the two companies. Our
SOTP-based target price comprises
Rs353/share fair value estimate for the core business. We value TM’s core business based on a
PE multiple of 10X FY2012E adjusted EPS of Rs35.3/share. We adjust our EPS estimate for the
deferred revenues being booked for the Rs9.7 bn payout received from BT, being recognized at
the revenue line (for 19 quarters, starting 1QFY10).
Rs74/share for the cash received from BT.
Rs306/share from TM’s 42.7% stake in MS. This is based on our fair value estimate of
Rs80/share for MS. We have reinitiated coverage on MS and forecast an EPS of Rs5 for FY2011E
and Rs5.4 for FY2012E for the company.
Lots more to do. We reinitiate coverage on Mahindra Satyam with a REDUCE rating
and end-FY2012E, DCF-based target price of Rs80. Satyam faces multiple challenges,
including operating with a reduced addressable market, lack of competitive
differentiation, loss of quality client base, reduced management bandwidth and high
attrition. The new management has done a creditable job in holding the organization
together, but we believe a meaningful turnaround is some time away.
Reinitiating coverage with a REDUCE rating; TP Rs80 and FY2012E EPS of Rs5.4
We reinitiate coverage on Mahindra Satyam (Satyam) with a reduce rating and end-FY2012E DCFbased
target price of Rs80. Our target price implies a 15X P/E multiple on FY2012E financials. Note
that we adjust our target price for any liability that may arise from the class action suit against the
company. We forecast revenues of US$1,098 mn and US$1,344 mn for FY2011E and FY2012E;
we believe that delivering revenue growth in line with the industry will be challenging. Satyam has
done a creditable job in driving cost alignment with revenues; however, the next phase of margin
expansion can only be driven through aggressive revenue growth. We forecast EBITDA margin of
14.2% and 15.4%, translating into EPS of Rs5 and Rs5.4 for FY2011E and FY2012E, respectively.
Satyam discloses audited financial information for FY2009 and FY2010
Key highlights from the audited financials released by MS includes (1) revenues of Rs54.8 bn for
FY2010; (2) EBITDA margin of 8.3%; (3) net loss of Rs1.2 bn after including extraordinary item of
Rs4.2 bn. Extraordinary items pertained to severance compensation for employees (Rs0.9 bn),
forensic investigation expenses (Rs1.1 bn) and write down in value of assets of subsidiaries (Rs2.2
bn), (4) cash and cash equivalent of Rs22 bn at end-March 2010, which would reduce to Rs19 bn
after payout of Upaid dispute (5) accumulated losses of Rs27.5 bn; management has not clarified
whether tax shield will be available on it. However, the company did not share (1) some critical
information on FY2010 revenue and margin exit rate or (2) details on any operational metrics.
Significant challenges ahead—reduced addressable market; non-differentiated positioning etc
We believe Satyam has significant challenges to contend with, including (1) loss of competitiveness
and scale in several verticals and horizontals; (2) loss of high-quality client base—US$800 mn
revenue loss from 150 clients implies revenues of US$5 mn lost per customer. As compared to this,
revenue per client from existing operations stands at US$3.3 mn (3) loss of entire management
team of Satyam and other key employee exits; in fact, we understand that only four members of
the 42 key members of the senior team of Satyam are still with the company; and (4) significantly
reduced addressable market; the company has lost large clients and quality logos in some of its
core areas of competence.
Banking on order book…
ABG Shipyard Ltd (ABG) has performed extremely well in the last one
year with 28.3% revenue growth and 27.4% PAT growth. With the
ramp-up in yard capacities at Dahej and Surat, ABG has increased the
pace of order execution in the last one year. This has helped the
company to book higher revenues in FY10. ABG is expected to maintain
its growth pace over the next two years as incremental capacity gets
added and order execution gains pace.
The order book pending execution is almost 4x FY10 sales. This
provides comfort and would also ensure revenue growth over the next
two years on the back of stable order execution. However, globally
oversupply of vessels has resulted in a drying up of new build orders for
shipyards globally. ABG has also received marginal orders in the last 1.5
years. This reduces the earnings visibility for the company over the
long-term as revenues are expected to peak in FY12. However, post that
a steady decline is expected in both topline and bottomline.
Operating performance expected to be stable
ABG Shipyard has a sizeable order book and its execution would ensure
steady revenue growth over next two years. We expect revenues to rise
from | 1812 crore in FY10 to | 2299 crore in FY11 and further to | 2613
crore in FY12. However, the operating margin is likely to moderate from
26% in FY10 to 21% in FY12 on account of a rise in raw material costs.
The company has almost completed its capex spend at the Dahej and
Surat yards. As debt repayments get under way, we expect the debtequity
ratio to improve from 1.9 to 1.3 over the next two years.
We have valued ABG Shipyard at 0.80x FY12E P/BV to arrive at a price
target of | 241. We maintain our REDUCE rating on the stock.
SCI is trading at a significant premium to its domestic peers. The
premium valuation is justified on account of it being the largest
shipping company in India and a Navratna PSU. In addition, the
company has insignificant debt, which will enable it to leverage its
balance sheet and borrow in the international market at competitive
interest rates. In addition, the follow on public offer (FPO) of SCI has
revived investor interest in the stock.
The average age of SCI’s fleet is 18.1 years, which is twice the age of
Indian shipping companies. In order to replace its ageing fleet, SCI has
committed to incur capex of ~| 8000 crore over the next two years.
Despite the improvement in topline and operating margin, higher
depreciation and interest costs is likely to exert pressure on the
bottomline. A rise in the equity base on fresh issue of shares is further
expected to dilute the earnings.
Capex to fuel topline growth
SCI has reported an improvement in performance over the last two
quarters with the rise in freight rates across vessel categories. The liner
business of the company, which has been posting losses for the last
many quarters also turned around and posted profits in Q1FY11. We
expect the topline to increase at a steady pace over the next two years
combined with expansion of operating margins to 22.1% in FY12. The
main factors leading to the expansion in operating margin would be a rise
in freight rates and drop in repair and maintenance expenses on account
of new fleet addition. However, capex spend would also lead to a rise in
depreciation and interest costs resulting in pressure on net profits.
We have valued SCI at 1.0x book value to arrive at a price target of | 162.
Great Eastern Shipping Ltd (GE Shipping) is one of the largest shipping
companies in India operating a fleet of 62 shipping and offshore vessels.
The company has the best financials in the shipping space. It’s under
leveraged balance sheet would enable it to acquire additional shipping
assets in the second-hand market. Due to the challenging business
environment, the operating performance of the company could remain
volatile in the near term. However, the company would benefit
immensely as the shipping cycle turns around in the next couple of
years. Greatship Ltd, a subsidiary company of GE Shipping, has filed its
DRHP and is expected to get listed in Q3FY11. The offshore business of
GE Shipping is housed under its subsidiary Greatship Ltd. Its listing will
lead to value unlocking for the parent company i.e. GE Shipping.
Consistent performer in volatile industry
The company is ramping up its fleet (especially in the offshore segment),
which will be scaled up to 27 vessels and the total fleet size would rise to
74 vessels in FY12. Scaling up of the fleet along with improvement in
tanker freight rates is likely to result in an improvement in the operating
performance. We expect the topline to report a steady rise over the next
two years on account of new vessel additions accompanied by a
marginal rise in tanker freight rates. GE Shipping is likely to report an
operating margin expansion along with a rise in bottomline.
We have valued GE on multiple valuation parameters and recommend
BUY with a price target of | 356.