Various Research Calls

ABG Shipyard

Anand Rathi Securities has given a ‘buy’ recommendation on ABG Shipyard with a target price of Rs 320. The company had a healthy order book of Rs 2,360 crore as on November 15, 2006.

This is the highest amongst the private sector shipyards in India. These orders are expected to be executed by the end of FY09. The order book is expected to continue to remain strong in the coming years. ABG Shipyard’s new facility at Dahej is expected to be commissioned in FY09.

The facility will consist of two dry docks capable of accommodating eight bulk carriers up to a maximum weight of 1,20,000 Dead Weight Tonne (DWT). The closure of orders for the facility are expected to begin in FY08.The company is also expected to leverage this facility to build jack up rigs as there is demand in E&P activities worldwide.

The company is expected to operate at sustained operating margins of 28-30 per cent (including subsidy) in the future. This is on account of the company’s raw material policy, state of the art technology and repeat orders.

The government has initiated measures to promote the shipyard industry and make it internationally competitive. The government’s attitude is expected to remain favourable towards the industry.

Going forward ABG is likely to show a robust growth. At the current price of Rs 224, the stock trades at 6.2 times its expected FY08 earnings.

At the target price of Rs 320, the stock would be trading at a P/E of 8.8 times its expected FY08 earnings, thus providing an upside potential of 40 per cent from current levels.

ICICI Bank

Edelweiss Securities has given ‘accumulate’ rating on ICICI Bank on the back of the merger with Sangli Bank.

The merger will be of strategic benefit to ICICI Bank for increasing its presence in semi urban and rural areas and for aggressively embarking on its rural banking strategy as a key growth driver going forward. The deal valuation seems slightly on the higher side considering Sangli Bank’s ailing financial condition.

The swap ratio agreed upon by both the banks is 100 shares of ICICI Bank for every 925 shares held of Sangli Bank, valuing the deal at around Rs 300 crore. Consequently, 34 lakh additional shares will be issued by ICICI Bank, diluting its equity capital by 0.4 per cent.

This implies deal valuation at 3.7 times book value of Sangli Bank with each of its branch being valued, on an average, at Rs 1.53 crore. Sangli Bank’s branch network is primarily concentrated in the interiors of Maharashtra.

ICICI Bank will leverage on this wide rural network to distribute its rural and retail loan products and grow the asset base and productivity at Sangli Bank. The network in metros and urban areas will be tapped to garner retail low-cost deposits.

The proposed merger is not likely to have any material impact on the financials of ICICI Bank in the near term. The effect of merger on ICICI Bank’s earnings, book value, and asset size will be less than 1 per cent.

ICICI Bank, with adequate capital at its disposal, will be able to extract full potential of Sangli Bank’s distribution network to push its rural and retail products and possibly turnaround Sangli Bank.

Everest Kanto Cylinder

HDFC Securities has given a ‘buy’ recommendation on Everest Kanto Cylinder with a price target of Rs 970. The company is the market leader in high-pressure gas cylinders with over 90 per cent market share in CNG cylinders in India. The Supreme Court mandate for 28 cities to shift to CNG will benefit the company to a great extent.

Till date, only 15 cities have shifted to CNG, leaving ample scope for the remaining 13 cities. CNG consumption in Mumbai has risen over 374 per cent over the past three years. The demand for CNG cylinders has been growing exponentially at over 40 per cent per annum for the last three years.

The linking of additional cities through CNG pipeline will enhance the market for ONGC cylinders by over 3 lakh cylinder per annum, from 1.78 lakh sold in FY06. The company’s manufacturing facility at Dubai caters to the demand for CNG cylinders in other countries like Pakistan, Iran, CIS and Egypt. Everest Kanto enjoys economies of scale and hence is cost competitive compared to its peers.

On completion of expansion programs, Everest Kanto will become the second largest in the world next to Faber Industries, Italy. The topline is expected to grow at a CAGR of 43 per cent and the bottomline, at a CAGR of 59 per cent over the next three years.

Deepak Fertilizer

Anand Rathi Securities has recommended a ‘buy’ on Deepak Fertilizers and Petrochemicals Corporation with a price target of Rs 120. The stock’s current price is around Rs 78. The company remains the only domestic producer of isopropylalcohol (IPA), which until recently was fully imported to cater to domestic demand.

IPA is expected to add significantly to contribute around 20 per cent to FY09 revenues. The supply deficit of natural gas has hit the division hard, with capacity utilization lying low at around 24.5 per cent for FY06. This has also forced the company to use higher cost naphtha for reducing steam consequently causing a serious dent on the margins of the company.

However, the completion of the Dahej-Uran gas pipeline by H2FY08 could lead to resurrection of margins enjoyed earlier. The company has been fractionally unlocking large land bank it has at prime locations in Pune and Ishanya, a specialty mall, which is a unique venture by the company are expected to add some stability to its revenue base.

The stock is trading at P/E of 8.5 times and 6.4 times and EV/EBITDA of 3.8 times and 2.8 times for FY07 and FY08 earnings respectively.