South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs177
Annual report review
Key points
- The robust financial performance of South East Asia Marine Engineering & Construction (SEAMEC) was driven largely by higher deployment days and an increase in charter rates. The strong growth momentum in earnings and tight working capital management resulted in a significant improvement in the return ratios during CY2006.
- The outlook on charter rates continues to be bullish for the next two years. Moreover, the deployment of SEAMEC's recently acquired fourth vessel from mid-CY2007 would drive growth. It would also enable the company to more than nullify the impact of the revenue loss and expenses resulting from the planned periodic dry-docking of two vessels in the second half of CY2007.
- A sharp appreciation of the rupee and an unexpected delay in the deployment of its fourth vessel are two key risks to our earnings estimates.
- At the current market price the stock trades attractively at 7.2x CY2007 and 5x CY2008 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs300.
SECTOR UPDATE
Banking
CRR hike—negative for banks
The Reserve Bank of India (RBI) has surprised the market with another 50-basis-point hike in the cash reserve ratio (CRR) to 6.5% from 6.0% at present and a 25-basis-point hike in the repo rate to 7.75%. The CRR is a percentage of the net demand and time liabilities, read deposits, which the banks need to maintain in the form of cash balances with the RBI. The CRR hike would be in two stages of 25 basis points each (effective from April 14 and April 28 of this year). The hike is expected to absorb Rs15,500 crore of liquidity from the banking system. The RBI has also reduced the interest on CRR balances from 1% to 0.5%.
Automobiles
High interest rates affect two-wheeler sales
Hardening interest rates seem to be having a dampening impact on automobile sales, as the sales during March were lower than expectations despite the month containing a number of auspicious days like Gudi Padwa and Navratri. The impact seems to be more severe in the two-wheeler segment, particularly motorcycles, while four-wheelers continued to record decent growth.
Our checks also reveal that the auto finance companies have been extra careful while disbursing loans, hence the rejection rates have gone up in the past few months. To counter the effect of rising interest rates, auto-manufacturers are partnering with auto finance firms to offer loans at a lower rate to consumers. The cost of the same is being borne by the manufacturers, financers and the dealers. However, the same shall have a negative impact on the earnings of the companies.
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