ABG Shipyard
Buy/Medium Risk
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
Friday, April 13, 2007
STOCK UPDATE
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
Q4FY2007 FMCG earnings preview & BHEL
SHAREKHAN SPECIAL
Q4FY2007 FMCG earnings preview
Key points
* Backed by a pick-up in rural demand, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power.
* Rising input prices is a concern for the industry. Palm oil prices have increased by around 20% in the last three months but LAB prices continue to remain steady. Price increases as well as cost savings would help the companies to maintain their margins.
* We expect the profit of Hindustan Lever Ltd (HLL), the market leader in the segment, to grow by 18.8% year on year (yoy) backed by a strong growth in the home and personal care (HPC) segment and price increases in key products. We expect the margin to improve from 11.8% in Q1CY2006 to 12.8% in Q1CY2007, which would be primarily due to the price hikes taken in many of its products as well as improved product mix.
* ITC's profits are expected to grow by a strong 24% yoy. We expect the growth to be broad-based with the magnitude of losses in the non-FMCG business coming down. The imposition of the value-added tax (VAT) is having a dampening effect but we believe any decline is a good opportunity to buy.
* The long-term potential of this sector appears favourable with higher disposable incomes and increased spending. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth the sector still looks attractive.
STOCK UPDATE
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
NTPC capex plan augurs well for BHEL
Key points
* The near-term order flow for Bharat Heavy Electricals (BHEL) is expected to be robust in view of the ambitious capacity addition plans of the power utilities, especially National Thermal Power Corporation (NTPC). NTPC has announced its provisional results and plan for the next ten years where it plans to increase its capacity by 22,000 megawatt (MW) during the 11th Five-Year Plan and by 25,000MW in the 12th Five-Year Plan, taking its total capacity to over 75,000MW from 27,404MW at present. NTPC, which had awarded contracts for 3,600MW last year, has already placed orders for projects with aggregate capacity of about 11,300MW.
* More importantly, NTPC's capital expenditure (capex) budget of Rs12,792 crore for this fiscal is 63% higher than last year's Rs7,820 crore. Four straight years of 100% realisation on its billing has clearly improved its cash flows and strengthened its finances considerably. NTPC had free cash of about Rs12,000 crore as on December 31, 2006, hence the capex budget looks quite achievable.
* Furthermore, over the next 18-24 months, we expect the other power utilities to award projects worth around Rs76,000 crore for around 38,000MW of capacity.
* Over half of the total orders to be awarded in the next 18-24 months are in the category of 250/500MW units, where BHEL is extremely competitive. So far BHEL has not lost a single 500MW project in India, despite competition from Russian, Korean and Chinese companies. NTPC as well as the state utilities award many of the 500MW orders to BHEL on a negotiated basis. Thus, it is highly likely that BHEL may bag around 19,500MW, or Rs39,550 crore, worth of new orders.
Q4FY2007 FMCG earnings preview
Key points
* Backed by a pick-up in rural demand, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power.
* Rising input prices is a concern for the industry. Palm oil prices have increased by around 20% in the last three months but LAB prices continue to remain steady. Price increases as well as cost savings would help the companies to maintain their margins.
* We expect the profit of Hindustan Lever Ltd (HLL), the market leader in the segment, to grow by 18.8% year on year (yoy) backed by a strong growth in the home and personal care (HPC) segment and price increases in key products. We expect the margin to improve from 11.8% in Q1CY2006 to 12.8% in Q1CY2007, which would be primarily due to the price hikes taken in many of its products as well as improved product mix.
* ITC's profits are expected to grow by a strong 24% yoy. We expect the growth to be broad-based with the magnitude of losses in the non-FMCG business coming down. The imposition of the value-added tax (VAT) is having a dampening effect but we believe any decline is a good opportunity to buy.
* The long-term potential of this sector appears favourable with higher disposable incomes and increased spending. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth the sector still looks attractive.
STOCK UPDATE
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
NTPC capex plan augurs well for BHEL
Key points
* The near-term order flow for Bharat Heavy Electricals (BHEL) is expected to be robust in view of the ambitious capacity addition plans of the power utilities, especially National Thermal Power Corporation (NTPC). NTPC has announced its provisional results and plan for the next ten years where it plans to increase its capacity by 22,000 megawatt (MW) during the 11th Five-Year Plan and by 25,000MW in the 12th Five-Year Plan, taking its total capacity to over 75,000MW from 27,404MW at present. NTPC, which had awarded contracts for 3,600MW last year, has already placed orders for projects with aggregate capacity of about 11,300MW.
* More importantly, NTPC's capital expenditure (capex) budget of Rs12,792 crore for this fiscal is 63% higher than last year's Rs7,820 crore. Four straight years of 100% realisation on its billing has clearly improved its cash flows and strengthened its finances considerably. NTPC had free cash of about Rs12,000 crore as on December 31, 2006, hence the capex budget looks quite achievable.
* Furthermore, over the next 18-24 months, we expect the other power utilities to award projects worth around Rs76,000 crore for around 38,000MW of capacity.
* Over half of the total orders to be awarded in the next 18-24 months are in the category of 250/500MW units, where BHEL is extremely competitive. So far BHEL has not lost a single 500MW project in India, despite competition from Russian, Korean and Chinese companies. NTPC as well as the state utilities award many of the 500MW orders to BHEL on a negotiated basis. Thus, it is highly likely that BHEL may bag around 19,500MW, or Rs39,550 crore, worth of new orders.
Thursday, April 12, 2007
Idea Cellular
Initiate at Buy: Free from Shackles, Poised for Growth
> Initiate coverage at Buy/Low Risk — Our DCF-based target price of Rs112 implies a target valuation of 11.6x FY09E EV/EBITDA – in line with that of Bharti. We believe Idea’s relatively undiluted exposure to India’s wireless growth, its higher growth rates (FY07-09E EPS CAGR of 47.7%) and long-term M&A possibilities make it a better proxy for Bharti than is RCOM.
> Leverage to wireless growth restored — Post its restructuring and IPO, Idea is placed to expand and deepen its network in what is essentially a supply-driven market (FY10E penetration of 32.8%). Roll-outs in three new circles have done well; two more rollouts are due based on spectrum. Margins will soften with new rollouts, but recover gradually to generate FY07-09E EBITDA CAGR of 42.6%.
> Strong regional player — Idea Cellular has a national market share of 8.7% (Feb-07). More importantly, its strong presence in the eight old circles with 18.2% share and top-three ranking in six of them indicate inherent strengths. Besides, respectable key performance indicators (KPIs), which imply rational competitive behaviour, provide a boost to our confidence in Idea’s ability to achieve NAV accretion from new rollouts.
> Key risks — Delays in procuring spectrum impacting the rollout timetable and project cost overruns remain the key risks. From an industry perspective, we believe low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.
Buy/Low Risk 1L
Price (10 Apr 07) Rs94.90
Target price Rs112.00
Expected share price return 18.0%
> Initiate coverage at Buy/Low Risk — Our DCF-based target price of Rs112 implies a target valuation of 11.6x FY09E EV/EBITDA – in line with that of Bharti. We believe Idea’s relatively undiluted exposure to India’s wireless growth, its higher growth rates (FY07-09E EPS CAGR of 47.7%) and long-term M&A possibilities make it a better proxy for Bharti than is RCOM.
> Leverage to wireless growth restored — Post its restructuring and IPO, Idea is placed to expand and deepen its network in what is essentially a supply-driven market (FY10E penetration of 32.8%). Roll-outs in three new circles have done well; two more rollouts are due based on spectrum. Margins will soften with new rollouts, but recover gradually to generate FY07-09E EBITDA CAGR of 42.6%.
> Strong regional player — Idea Cellular has a national market share of 8.7% (Feb-07). More importantly, its strong presence in the eight old circles with 18.2% share and top-three ranking in six of them indicate inherent strengths. Besides, respectable key performance indicators (KPIs), which imply rational competitive behaviour, provide a boost to our confidence in Idea’s ability to achieve NAV accretion from new rollouts.
> Key risks — Delays in procuring spectrum impacting the rollout timetable and project cost overruns remain the key risks. From an industry perspective, we believe low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.
Buy/Low Risk 1L
Price (10 Apr 07) Rs94.90
Target price Rs112.00
Expected share price return 18.0%
ABG Shipyard - CitiGroup
Buy: Raising Estimates on Improved Earnings Visibility
> What's new — ABG Shipyard recently announced that it has secured an order worth US$139m from Essar Shipping for the construction of 4 bulk carriers. This follows the US$13m repeat order that the company recently won for the construction of one APS tug vessel for Lamnalco, Cyprus.
> Order visibility improves — ABG's total unexecuted order book now stands at c.Rs33bn (5x FY07E sales) vs. Rs25bn earlier. With order backlog extending well into FY10 and orders for the company's upcoming Dahej facility yet to be completely tied up (5 slots are still available even after the recent order wins), earnings visibility for the company over the next 3 years has improved significantly – we expect ABG to deliver an EPS CAGR of 46% over FY07-09E.
> Revising FY09E earnings by 21% — We are raising our FY09E earnings by 21% factoring in improved earnings visibility following the order wins; FY08E earnings, which would not be affected by the Dahej expansion, remain relatively unchanged. Our earnings forecasts do not currently factor in any upside from yet-to-be announced rig orders. However, these are unlikely to have any significant impact on FY09 performance.
> Maintain Buy/Medium Risk — We believe fundamentals for Indian shipbuilders remain strong, driven by: (1) the robust E&P cycle ensuring strong demand in the OSV segment and (2) the continued tightness in the global shipbuilding sector. ABG's expansion plans remain on target and are well-timed to capture the continued upswing in the shipbuilding cycle. Maintain Buy / Medium Risk with a target price of Rs430.
Buy/Medium Risk 1M
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
> What's new — ABG Shipyard recently announced that it has secured an order worth US$139m from Essar Shipping for the construction of 4 bulk carriers. This follows the US$13m repeat order that the company recently won for the construction of one APS tug vessel for Lamnalco, Cyprus.
> Order visibility improves — ABG's total unexecuted order book now stands at c.Rs33bn (5x FY07E sales) vs. Rs25bn earlier. With order backlog extending well into FY10 and orders for the company's upcoming Dahej facility yet to be completely tied up (5 slots are still available even after the recent order wins), earnings visibility for the company over the next 3 years has improved significantly – we expect ABG to deliver an EPS CAGR of 46% over FY07-09E.
> Revising FY09E earnings by 21% — We are raising our FY09E earnings by 21% factoring in improved earnings visibility following the order wins; FY08E earnings, which would not be affected by the Dahej expansion, remain relatively unchanged. Our earnings forecasts do not currently factor in any upside from yet-to-be announced rig orders. However, these are unlikely to have any significant impact on FY09 performance.
> Maintain Buy/Medium Risk — We believe fundamentals for Indian shipbuilders remain strong, driven by: (1) the robust E&P cycle ensuring strong demand in the OSV segment and (2) the continued tightness in the global shipbuilding sector. ABG's expansion plans remain on target and are well-timed to capture the continued upswing in the shipbuilding cycle. Maintain Buy / Medium Risk with a target price of Rs430.
Buy/Medium Risk 1M
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
India Economics
Feb Industrial Production – Growth remains strong up 11%; it could result in one last policy hike
➤ Feb Industrial production – in line with expectations: Industrial production rose 11% in Feb with growth led by manufacturing, up 12%; mining up 6.3%; and electricity came in surprisingly lower at 3.3% as compared with an average of 7%+ in the past few months. Other highlights include strong growth in capital goods (18.2%), basic (10.4%) and intermediate goods (13.7%). Consumer non-durables remained buoyant at 9.7%, but growth in durables came in at 1.6% - partially attributed to the base effect. Overall industrial growth during Apr-Feb was 11% and bodes well for the government's 9.2% GDP estimate for FY07.
➤ So will the RBI hike in or around its April 24 Policy? Although we expect inflation to trend below 6% from the week ending Mar 30 (data due tomorrow), we think there is a 50:50 chance that the RBI will hike its policy rates once more given that inflation is likely to remain over its target range of 5%-5.5% till the week ending May 5. Further, the RBI remains concerned on trends in money supply (22%) and bank credit (29%). While we expect policy rates to peak shortly, we maintain that the RBI will continue to use the CRR to keep liquidity tight, but could lower SLR in 2H07 to ensure credit availability for the real sector.
➤ Maintaining our macro forecasts: The near-term outlook is a bit clouded given the RBI’s recent tightening measures coupled with the government’s semi-regressive measures to dampen inflationary expectations (price controls and export bans on commodities such as cement, steel, iron-ore, etc). However, given the continuation of the key economic growth drivers coupled with the uptrend in both savings and investment both touching new highs of 32.4% and 33.8% of GDP, respectively, we expect GDP growth to sustain around the 9%
level for FY08. Key risks would be politics and much further tightening.
➤ Feb Industrial production – in line with expectations: Industrial production rose 11% in Feb with growth led by manufacturing, up 12%; mining up 6.3%; and electricity came in surprisingly lower at 3.3% as compared with an average of 7%+ in the past few months. Other highlights include strong growth in capital goods (18.2%), basic (10.4%) and intermediate goods (13.7%). Consumer non-durables remained buoyant at 9.7%, but growth in durables came in at 1.6% - partially attributed to the base effect. Overall industrial growth during Apr-Feb was 11% and bodes well for the government's 9.2% GDP estimate for FY07.
➤ So will the RBI hike in or around its April 24 Policy? Although we expect inflation to trend below 6% from the week ending Mar 30 (data due tomorrow), we think there is a 50:50 chance that the RBI will hike its policy rates once more given that inflation is likely to remain over its target range of 5%-5.5% till the week ending May 5. Further, the RBI remains concerned on trends in money supply (22%) and bank credit (29%). While we expect policy rates to peak shortly, we maintain that the RBI will continue to use the CRR to keep liquidity tight, but could lower SLR in 2H07 to ensure credit availability for the real sector.
➤ Maintaining our macro forecasts: The near-term outlook is a bit clouded given the RBI’s recent tightening measures coupled with the government’s semi-regressive measures to dampen inflationary expectations (price controls and export bans on commodities such as cement, steel, iron-ore, etc). However, given the continuation of the key economic growth drivers coupled with the uptrend in both savings and investment both touching new highs of 32.4% and 33.8% of GDP, respectively, we expect GDP growth to sustain around the 9%
level for FY08. Key risks would be politics and much further tightening.
Post Market April 12th, 07
In line with the weakness in the global indices the domestic market slipped in early trades, as the investors were cautious ahead of the announcement of key results. The Sensex opened with a negative gap of 55 points at 13128. The index tumbled 152 points in early trades on heavy selling in banking and auto stocks. The market managed to pare some losses as buying emerged at lower levels but remained in negative territory. The market steadily lost momentum as the trading session progressed and slipped on selling in heavyweight, metal, banking, fast moving consumer goods and public sector unit stocks. The Sensex finally ended the session with losses of 69 points at 13114, while the Nifty shed 33 points and closed at 3830.
The market breadth was weak. Of the 2,628 stocks traded on the BSE, 1,090 stocks advanced, 1,464 stocks declined and 74 stocks ended unchanged. Most of the sectoral indices ended in the red. The BSE Metal Index led the slump and closed weaker by 2.24% at 9122 followed by the BSE PSU Index (down 1.31% at 6023), the BSE FMCG Index (down 1.28% at 1788) and the BSE Bankex (down 1.26% at 6470).
Among the Sensex stocks nine stocks advanced and 21 stocks declined during the day. ONGC slumped 3.13% at Rs853, Tata Steel shed 3.11% at Rs496, Ranbaxy declined 2.94% at Rs335, HDFC lost 2.92% at Rs1,537, Maruti Udyog shed 2.86% at Rs760, ITC fell 2.74% at Rs156, HDFC Bank slipped 2.26% at Rs958, Hero Honda plunged 1.89% at Rs629 and Tata Motors was down 1.63% at Rs710. Among the select gainers Bajaj Auto added 3.03% at Rs2,349, Infosys advanced 2.57% at Rs2,044 and Grasim gained 1.70% at Rs2,259.
Among the metal stocks Sesa Goa tanked 4.94% at Rs1,663, Jindal Steel slumped 4.01% at Rs2,501, Tata Steel dropped 3.11% at Rs496, Hindustan Zinc shed 2.54% at Rs684 and Nalco was down 2.29% at Rs241.
IFCI was the most actively traded counter with volumes of over two crore shares on the BSE followed by Orbit Corporation (1.44 crore shares), Reliance Natural Resources (53.53 lakh shares), Gremach Infrastructure (39.88 lakh shares) and Idea Cellular (39.57 lakh shares).
Value-wise Orbit Corporation clocked a turnover of Rs185 crore on the BSE followed by India Bulls Real Estate (Rs115 crore), Tata Steel (Rs112 crore), Mind Tree (Rs91 crore) and India Bulls (Rs90 crore).
The market breadth was weak. Of the 2,628 stocks traded on the BSE, 1,090 stocks advanced, 1,464 stocks declined and 74 stocks ended unchanged. Most of the sectoral indices ended in the red. The BSE Metal Index led the slump and closed weaker by 2.24% at 9122 followed by the BSE PSU Index (down 1.31% at 6023), the BSE FMCG Index (down 1.28% at 1788) and the BSE Bankex (down 1.26% at 6470).
Among the Sensex stocks nine stocks advanced and 21 stocks declined during the day. ONGC slumped 3.13% at Rs853, Tata Steel shed 3.11% at Rs496, Ranbaxy declined 2.94% at Rs335, HDFC lost 2.92% at Rs1,537, Maruti Udyog shed 2.86% at Rs760, ITC fell 2.74% at Rs156, HDFC Bank slipped 2.26% at Rs958, Hero Honda plunged 1.89% at Rs629 and Tata Motors was down 1.63% at Rs710. Among the select gainers Bajaj Auto added 3.03% at Rs2,349, Infosys advanced 2.57% at Rs2,044 and Grasim gained 1.70% at Rs2,259.
Among the metal stocks Sesa Goa tanked 4.94% at Rs1,663, Jindal Steel slumped 4.01% at Rs2,501, Tata Steel dropped 3.11% at Rs496, Hindustan Zinc shed 2.54% at Rs684 and Nalco was down 2.29% at Rs241.
IFCI was the most actively traded counter with volumes of over two crore shares on the BSE followed by Orbit Corporation (1.44 crore shares), Reliance Natural Resources (53.53 lakh shares), Gremach Infrastructure (39.88 lakh shares) and Idea Cellular (39.57 lakh shares).
Value-wise Orbit Corporation clocked a turnover of Rs185 crore on the BSE followed by India Bulls Real Estate (Rs115 crore), Tata Steel (Rs112 crore), Mind Tree (Rs91 crore) and India Bulls (Rs90 crore).
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