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India Equity Research Reports, IPO and Stock News
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Awaiting order-book boost
Delay in orders increases concerns about future growth
Recent fund raising eases balance-sheet concerns
Sell-off unwarranted; new order bookings key to re-rating, in our view
Reiterate BUY with a reduced TP of INR402, P/E of 7x FY12E
Stock re-rating awaits orders
The share price of SVOG has fallen 34%YTD (against the BSE Sensex down 10%)
due to reports of an income tax raid (management has said the raid has been
completed and there have been no material findings) and delays in potential
order announcements. SVOG attributed the delay in order bookings to slow tender
activity at ONGC (ONGC IN), which it believes will pick up over the next couple
of months. The company recently issued some USD55m in optional convertible
debentures to ICICI bank, with a coupon of 6% convertible in 18 months at a share
price of INR575. Combined with the earlier USD80m FCCB issue, we
believe SVOG is well placed to meet its debt obligations and pursue new
orders aggressively.
Current and new order-book details
SVOG’s current order book is at INR28bn (see Exhibit 1 for segmentwise
order-book breakdown), which is executable on an average of 2 to
2.5 years. The company’s new order bid book is at INR25bn and
management reiterated its expectation of winning about 40% of the
orders, in line with SVOG’s historical success rate. The capex required in
order to begin executing the new order wins is marked at about
USD100m for FY12, for which we believe the recent fund raising and the
operating cash flows of the company should be sufficient (Exhibit 4).
Earnings decline on account of order delays
We cut our earnings estimates for FY11-13 by 5-15%, reflecting the delay
in new orders and increase in interest cost. We continue to factor in
steady operating margins of about 45% over FY11-13, and we derive
confidence from the company’s 9MFY11 operating performance, where
EBITDA margins averaged some 46%. The company has guided that the
recent volatility in interest charges will not be seen in upcoming quarters,
and we factor in around 12% average cost of debt.
Looks cheap, but we look for seismic order pick-up
We reduce our TP to INR402 (from INR513), mainly on cuts in our
earnings estimates, and we assume a lower 2012E P/E multiple of 7x
(7.5x previously) to account for the volatility seen below the EBITDA line,
in terms of interest costs. After the correction, the shares look attractive
at about 5x 2012E P/E, and we believe that downside risks of order
delays and high-interest costs are already built into the current market
price. Within the new order bookings, we look for seismic order wins to
improve cash flows. Key risk to our TP: further delays in new orders.
The Risk Experts
• Our starting point for this page is a recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Awaiting order-book boost
Delay in orders increases concerns about future growth
Recent fund raising eases balance-sheet concerns
Sell-off unwarranted; new order bookings key to re-rating, in our view
Reiterate BUY with a reduced TP of INR402, P/E of 7x FY12E
Stock re-rating awaits orders
The share price of SVOG has fallen 34%YTD (against the BSE Sensex down 10%)
due to reports of an income tax raid (management has said the raid has been
completed and there have been no material findings) and delays in potential
order announcements. SVOG attributed the delay in order bookings to slow tender
activity at ONGC (ONGC IN), which it believes will pick up over the next couple
of months. The company recently issued some USD55m in optional convertible
debentures to ICICI bank, with a coupon of 6% convertible in 18 months at a share
price of INR575. Combined with the earlier USD80m FCCB issue, we
believe SVOG is well placed to meet its debt obligations and pursue new
orders aggressively.
Current and new order-book details
SVOG’s current order book is at INR28bn (see Exhibit 1 for segmentwise
order-book breakdown), which is executable on an average of 2 to
2.5 years. The company’s new order bid book is at INR25bn and
management reiterated its expectation of winning about 40% of the
orders, in line with SVOG’s historical success rate. The capex required in
order to begin executing the new order wins is marked at about
USD100m for FY12, for which we believe the recent fund raising and the
operating cash flows of the company should be sufficient (Exhibit 4).
Earnings decline on account of order delays
We cut our earnings estimates for FY11-13 by 5-15%, reflecting the delay
in new orders and increase in interest cost. We continue to factor in
steady operating margins of about 45% over FY11-13, and we derive
confidence from the company’s 9MFY11 operating performance, where
EBITDA margins averaged some 46%. The company has guided that the
recent volatility in interest charges will not be seen in upcoming quarters,
and we factor in around 12% average cost of debt.
Looks cheap, but we look for seismic order pick-up
We reduce our TP to INR402 (from INR513), mainly on cuts in our
earnings estimates, and we assume a lower 2012E P/E multiple of 7x
(7.5x previously) to account for the volatility seen below the EBITDA line,
in terms of interest costs. After the correction, the shares look attractive
at about 5x 2012E P/E, and we believe that downside risks of order
delays and high-interest costs are already built into the current market
price. Within the new order bookings, we look for seismic order wins to
improve cash flows. Key risk to our TP: further delays in new orders.
The Risk Experts
• Our starting point for this page is a recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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