Jet Airways (CMP: Rs628)
Mkt Cap: Rs54.2bn; US$1.2bn
After calling off merger talks in June 2006, Jet Airways and Air Sahara have inked their deal today. In 2006, we had a negative bias on Jet Airways bid to buy Sahara Airlines, given the valuations (Rs22bn). However, we see merit in the deal being struck this time round at NPV of Rs12.5bn on following counts:
· The agreed EV of Rs14.5bn (NPV of Rs12.5bn given the staggered payment terms) is at significant discount to the earlier price. Sahara Airlines is valued at less than 1x revenues vis-à-vis Jet Airways valuations of 2x
· We always believed that Jet Airways was on a poor footing in the arbitration process and would have to do away with atleast Rs7bn. Rather, we believe that Jet Airways has effectively got an incremental market share of 8% at a value of Rs5.5bn.
· With capacity addition slowing down in the domestic market and yields improving, we see market dynamics also turning favourable then what they were in 2006.
· It also strengthens Jet Airways' international operations, as Sahara Airlines has permit to operate in Gulf market and operations are expected to commence in early 2008.
After three years of bearish call on Jet Airways, we had turned positive in January 2007, as we believe that the worst is over in the domestic operations and profitability in the business will be driven by rapidly surging international operations. Acquisition of Sahara, we believe, strengthens the case for Jet Airways in the domestic market. Reiterate Outperformer.Download here
Ballarpur Industries
(CMP: Rs109)
Mkt Cap: Rs17.7bn; US$399m
BILT's Q3FY07 results are in line with our estimates. Revenues grew by 16.6% yoy in the quarter owing to paper price hike effected in January and February 2007, and improvement in paper volumes post consolidation of APR Packaging. Paper prices continue to rise on account of strong demand as also due to passing on of cost pressure arising from higher coal prices. We retain our fully diluted FY07 and FY08 earnings estimates for at Rs12.4and Rs12.5 as the price environment is robust and the company is expected to witness moderate volume growth in the medium term. Reiterate Outperformer with a price target of Rs150.
ONGC has long been treated as a poor cousin of domestic and global E&P players. The stock trades at a steep discount to global/ domestic earnings as well as reserve valuations, which reflects highly pessimistic estimates on loss sharing, APM deregulation and growth. However, with a 21-32% increase expected in ultimate (recoverable) reserves over the next 18-24 months, low earnings sensitivity to international crude prices and falling proportion of APM gas, we see the valuation gap narrowing significantly. Recommend Outperformer with a DCF-based SOTP target price of Rs1130.
Significant reserve accretion on the anvil: Significant reserve accretion over the next 2-3 years would likely drive ONGC's performance on the bourses. We expect at least a 21-32% increase in ultimate (recoverable) reserves over the next 18-24 months from domestic new gas finds, redevelopment gains and overseas discovered assets currently under appraisal.
Concerns recede: APM gas pricing and subsidy sharing have been the key issues impacting ONGC's valuations. ONGC's APM gas volumes are set to fall by 60% over the next 4-5 years. We expect gas prices to be fully deregulated by FY11-12. Also, crude price discount on account of loss sharing narrows to just 11.6% at a crude price of US $50/bbl (FY09E) and 15.8% at $55/bbl (FY08E) from as high as 33.3% at $75/bbl.
We expect discount to global valuations to narrow: Despite a superior return profile and more conservative (1P vs 2P) reserve base, ONGC trades at a discount to domestic benchmarks. At 9.5x FY08E earnings and an EV/boe of US $5.6, ONGC also trades at a steep 22% and 38-60% discount respectively to global valuations. We believe valuations build in highly pessimistic estimates on loss sharing, APM deregulation and growth. However, given the reserve accretion, production growth and falling proportion of APM gas, we expect the discount to narrow significantly. Recommend Outperformer with a DCF-based SOTP target price of Rs1130, an upside of 32% from here.
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