Ranbaxy, ACC, Welspun Gujarat, Aban Offshore

SSKI on Welspun Gujarat

Welspun Gujarat (WGSR) reported a spectacular 163.5% yoy rise in net profit for Q1FY08—while revenues were in-line with our estimates, a sharp expansion in margins led to profits significantly better than our estimates. Operating margins for the quarter expanded to 16.6% (US$237/tonne) representing a 370bps expansion in operating margins on a sequential basis. The jump in operating margins was primarily due to profitable orders from the likes of Kinder Morgan and Exxon Mobil and appears to be sustainable atleast over the next 2 quarters. WGSR has added orders worth US$634m during the quarter, taking the total outstanding order book position to US$1.1bn (1.6x FY07 revenues). Management confirmed that the plate mill project is on track with likely commissioning in Dec’07. We have upgraded our EPS estimates for FY08 and FY09 by 18% and 37% respectively, to factor in higher margins. Maintain Outperformer.

SSKI on Aban Offshore

Aban Offshore (Aban) has reported standalone numbers of Q1FY08 results – net profit up 48.5%yoy to Rs284m, which is lower compared to our expectation of Rs 321m. Operating profits were lower as the new contract for Aban II got delayed by a month to May end. However, net profit growth was driven by higher other income (up 375%yoy) and lower tax rates (32.8% in Q1FY08 vis-à-vis 46.5% in Q1FY07). Aban’s remaining assets in the standalone account will get re negotiated during the course of the year. Continued strength in rig rates that are expected to remain strong over the next 2 years and timely addition of new rigs provide earnings visibility over FY07-09 (consolidated earnings growth estimated at 129% CAGR). While Aban trades close to the higher end of peer group range, we believe, with a relatively young fleet Aban is in a better position to leverage the strong rig rates. Maintain Outperformer with a target price of Rs3393/share (P/E of 9xFY09E).

SSKI on ACC

ACC's pre-exceptional PAT at Rs3.47bn was marginally ahead of our estimates, mainly due to lower interest costs and higher other income. Q2CY07 revenues were at Rs18.7bn (up 27.8% yoy), driven by a 13.2% yoy increase in cement realizations and a 15.3% yoy growth in volumes. However, operating margin declined by 200bps yoy due to high raw material and other costs. Interest costs declined by 75% yoy and other income jumped 38% yoy as strong operating cash flows were used in repaying debt and making short term investments. Consequently, pre-exceptional PAT grew by 16.7% yoy to Rs3.47bn. We are upgrading our CY07 and CY08 earnings estimates by 4.9% and 2% to Rs63.1/share and Rs49.9/share respectively, considering the higher than expected other income and lower interest costs, as also a ~3% increase in our volume estimates. We continue to remain negative on the cement sector on oversupply concerns by FY09. ACC currently trades at 23.1x CY08E earnings, 13.1x on CY08E EV/EBITDA and US$240 on EV/ton basis, which we believe, are expensive considering the negative outlook on cement prices and profitability over the next two years. We maintain our Underperformer rating on the stock.

SSKI on Ranbaxy

Ranbaxy’s Q2CY07 profits have been ahead of expectations driven by significantly higher forex gains on dollar denominated loans. While the rupee appreciation has sharply impacted operating margins and clouded the “actual operating performance”, we believe that there multiple positives which indicate that Ranbaxy’s business model has finally starting to deliver. The key positive is 24% yoy and 11% qoq growth in revenues on the back of strong growth across all geographies including US, EU and emerging markets despite the absence of any exclusivity opportunities. Further operating margins have slipped by only 100 bps qoq despite 7% appreciation in rupee over the quarter. This indicates considerably improved underlying profitability. There has been a steady improvement in Ranbaxy’s business health over the last few quarters and we believe this quarter will may well prove to be the inflexion point for Ranbaxy’s prospects. To account for the lower $/Re exchange rate for CY07 and CY08 and higher forex gains in CY07, we have adjusted our CY07 and CY08 earnings by 3% and (6%) respectively. Management has guided to a much stronger 2HCY07 performance as well as indicated possibility of significant FTF opportunities in US markets for CY08 and CY09 along with the imminent Lipitor exclusivity in CY10. We believe a combination of continued revenue growth momentum and improving margins will drive sustained profitability growth from hereon. We are upgrading the stock to Outperformer with a SOTP price target of Rs435 (23.1xCY07E and 21xCY08E earnings and Rs35 of Lipitor exclusivity in US). Clarity on Lipitor launch in Canada and the potential FTF opportunity for CY08 will be upsides to our estimates. Key risk to our call remains an escalation in rupee appreciation and any negative development related to the raid on US facilities.