Surya Pharma, Marico, SEAMAC, Banking

Surya Pharma, Marico, SEAMAC, Banking

ICICI Bank, Aban Offshore, SEAMAC, Cement

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs223

High charter rates improves earnings

Result highlights

• South East Asia Marine Engineering & Construction (SEAMEC) has reported a growth of 26.5% in its revenues to Rs46.7 crore in Q2CY2007. The growth in revenues was largely driven by an increase in day rates for two of its vessels (Seamec-II and Seamec-III) that were renegotiated in the second half of CY2006.
• The operating margin, however, declined by 290 basis points to 49.4% largely due to a jump of 96% in the staff cost to Rs14.4 crore. The staff cost as a percentage of net sales increased by 1,090 basis points to 30.7% in Q2CY2007, as compared with 19.8% in Q2CY2006. Consequently, the operating profit increased by around 20% to Rs23.1 crore as compared with Rs19.3 crore in Q2CY2006.
• The increase in the interest outgo and higher depreciation charges resulted in a relatively lower growth of 15% in its earnings to Rs19.6 crore.
• On a half-yearly basis, the revenues grew at a healthy rate of 60.9% to Rs102.8 crore whereas the earnings rose at a relatively lower rate of 36.5% to Rs44 crore due to the steep increase in the staff cost (up by 175.8% to Rs34.5 crore).
• In terms of operational highlights, one of the company's vessels Seamec-I went for the periodic maintenance from mid June 2007 and is expected to get operational by the third week of July 2007. The dry docking expenses for the same will be accounted in Q3CY2007. Another vessel Seamec-II is scheduled to go for the statutory periodic maintenance by the end of Q3CY2007. Further, the delivery of its fourth vessel Seamec Princess has been delayed to the mid of the current quarter.
• To factor in the change in the exchange rate assumption (Rs41 in CY2007 and CY2008 as compared with Rs44 earlier), delay in the delivery of Seamec Princess and higher than expected dry-docking period for Seamec-I, we have revised downwards CY2007 and CY2008 earnings estimates by 24.7% and 2.4% respectively.
• At the current market price the stock trades at 12.7x CY2007 and 6.5x CY2008 earnings. We maintain our Buy rating on the stock with a price target of Rs300.

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,173
Current market price: Rs872

FIPB hurdle cleared, positive for valuations

Key points

• ICICI Bank has obtained the Foreign Investment Promotion Board (FIPB) approval (subject to RBI clearance) to sell upto 24% stake in its financial services company to foreign investors. This proposal had earlier been rejected by FIPB on the grounds that it did not comply with the 26% foreign direct investment (FDI) cap in insurance ventures and also that the promoter of an insurance venture cannot be the subsidiary of the same company, ICICI Financial Services (IFS) in this case.
• The above view of FIPB was in contradiction to the view expressed by the finance ministry's insurance division and the Insurance Regulatory and Development Authority that the FDI in ICICI Bank's proposed holding company would not violate the norms. The change in the stance of FIPB is a welcome move for ICICI Bank and other banks like state Bank of India who are looking to adopt the holding company route to raise the capital for their insurance business.
• Our back of the envelope calculation suggests that with the formation of the holding company and its future listing, the overall valuations of the stock can further improve by Rs78 per share as the core banking business can improve by 4% or Rs30 per share, and if the market valuations for its subsidiaries are taken as a benchmark then there is a further upside to our valuations of Rs48 per share. The details on the valuation upside are explained later.
• At the current market price of Rs872, the stock is quoting at 19.1x its FY2009E earnings per share, 9.3x its pre-provisioning profits and 1.9x book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs1,173.

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs3,540
Current market price: Rs2,760

Price target revised to Rs3,540

Key points

• AOL's consolidated financial performance in FY2007 is below our expectations as the line-by-line consolidation of Sinvest was done only with effect from January 9, 2007 (after it become the wholly owned subsidiary of Aban Singapore Pte [ASPL]). In terms of its consolidated balance sheet, the company had total debt of Rs10,852 crore (debt-equity ratio of 20.4). The gross block of Rs8,099 crore included a goodwill of Rs4,800 crore which would not be amortised, and only the impairment cost (if any) would be charged to the profit & loss account.
• To support its decision to acquire Sinvest, the company believes that the step was taken keeping in view the robust industry outlook (i.e. the record day rates and consequently the compelling payback). Moreover, the strong visibility in cash flow more than negate the financial risk in terms of higher debt-equity of over 20 times. The outlook for the day rates continues to be robust with the support from favourable supply-demand scenario and the increasing pricing power of operators due to the consolidation among leading global players. Further, AOL is taking steps to enter into long-term contracts for its older assets that are more venerable to a possible softening of day rates going forward.
• The proposed listing of its Singapore-subsidiary ASPL (which holds 100% stake of Sinvest and controls three other assets) at the indicated equity value of $2.5-3 billion (much higher than market expectations) is an important re-rating trigger for the stock. Another likely positive development is the unexpected gain of $90 million due to the acquisition of Petrojack where AOL holds indirect stake of 18%.
• The earning estimates have been revised downwards by 25% for FY2008 (primarily due to delay in the schedule for some assets and change in the exchange rate assumption) and upgraded by 8.6% for FY2009 estimates. At the current market price the stock trades at 25x FY2008 and 7.4x FY2009 earning estimates. We maintain the Buy call on the stock with a revised price target of Rs3,540 (8.5x FY2010 estimates discounted backward by one year).

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SECTOR UPDATE

Cement

Dispatches up 14.5% yoy in July
In July, industry dispatches grew by 9.5% year on year (yoy) whereas the dispatches for the Sharekhan universe rose by a robust 14.5% yoy to 7.63 million metric tonne (MMT) underlining the buoyancy in the appetite for cement consumption. As mentioned in our earlier update, among the majors, Ambuja Cements witnessed the highest growth of 19% due to a lower base last year. Similarly ACC and AV Birla Group recorded a strong growth of 15% yoy and 13% yoy respectively.

SEAMAC

SEAMAC

Emkay - L&T, SEAMAC

Emkay - L&T, SEAMAC

Anand Rathi - Daily Fundamental Snippets - Apr 20, Geojit - SEAMAC

Anand Rathi - Daily Fundamental Snippets - Apr 20

Geojit - SEAMAC

Sharekhan Investor's Eye dated April 19, 2007

Monetary policy preview

• The market is currently not expecting another 50-basis-point cash reserve ratio (CRR) hike and we also don't expect the same. The reason why we don't expect any further tightening is because we feel the RBI has already taken action on March 30, 2007, which was completely unexpected, by increasing the repo rate by 25 basis points and the CRR by 50 basis points.
• Further the inflation is expected to moderate going forward and the non-food credit and money supply growth have also shown some moderation, which favour a status quo. If the RBI goes ahead and hikes the CRR again it could be a setback for the markets.
• Liquidity management will remain high on the agenda for 2007-08, with the policy rates such as the repo rate, the reverse repo rate and the bank rate likely to remain unchanged.
• The gross domestic product (GDP) growth estimates for FY2008 could be in the range of 8-8.5% while the target zone for inflation may remain unchanged at 5-5.5%.
• A curb on foreign flows through the lowering of the NRI deposit rates to make them less attractive and lowering the external commercial borrowing limits may be undertaken to control capital inflows at least in the short term as long as the inflation is above the RBI's comfort zone.
• Some mention on the credit and fund flow to sensitive sectors like the commercial real estate may find its place in the policy, as the RBI is very concerned about the escalating real estate prices, which could lead to an asset price bubble.
• We feel the RBI should avoid excessive tightening so that concern over the economic growth potential in the next fiscal doesn't come under serious scrutiny.

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STOCK UPDATE

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs205

ONGC contract boosts Q1 performance

Result highlights

• South East Asia Marine Engineering & Construction (SEAMEC) has reported a 107.9% growth in its revenues to Rs56.1 crore for the first quarter ended March 2007. The growth was higher than expectation due to the two-month extension of the contract from Oil & Natural Gas Corporation (ONGC; with relatively high day rates) for one of its vessels.
• The operating profit margin (OPM) slipped from 61.3% to 48.2% primarily due to the incremental cost related to SEAMEC Princess (the fourth vessel that is undergoing modification and that didn't contribute to revenues in Q1). This coupled with the general wage inflation resulted in a four-fold jump in the staff cost to Rs20.2 crore as compared with Rs5.2 crore in Q1CY2006. Consequently, the earnings grew at a relatively lower rate of 61.2% to Rs24.4 crore.
• In terms of the outlook on charter rates, the company expects the day rates to remain firm on the back of the favourable demand environment. Even after the anticipated addition of multi-support vessels (MSVs) by some of the Indian companies (like Great Offshore) there would be a shortage of MSVs in the coming years due to the huge requirement to set up the required infrastructure to transport hydrocarbons produced from the large offshore fields discovered in India over the past few years.
• To factor in the robust performance of Q1 and the higher than expected dry docking expenses indicated by the management, we are revising downwards the CY2007 earnings estimates by 4.9% but maintaining the CY2008 earnings estimates.
• At the current market price the stock trades at 8.8x CY2007 and 5.8x CY2008 estimated earnings. We maintain our Buy call on the stock with a price target of Rs300.

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,528
Current market price: Rs2,280

Price target revised to Rs2,528

Result highlights

Aban Offshore (AOL) reported a marginal decline in its stand-alone revenues to Rs118.7 crore during Q4FY2007. This is in line with expectations as there was no re-pricing of any asset in the parent company. In fact, one of its assets Aban II was not operational for part of the quarter.

The operating profit margin (OPM) slipped sharply to 40.2% (down from 57.1% in Q4FY2006) due to lower revenues from Aban II, increase in the staff cost (380 basis points) and insurance charges (430 basis points) as a percentage of sales, and extraordinary expenses of Rs7.5 crore (incurred towards the issue of foreign currency convertible bonds [FCCB] and preferential shares).

However, the jump in the other income component to Rs34.9 crore (up from Rs3.7 crore) enabled the company to report a 34.5% growth in its earnings to Rs29.6 crore. The other income was boosted by the foreign exchange (forex) gains (on the forward hedges and FCCB proceeds) of around Rs17 crore. Moreover, the company would also have benefited from the interest on loans given to its Singapore subsidiary, Aban Singapore Pte (ASPL).

On the full year basis also, the stand-alone revenue growth was largely flat at Rs497.5 crore as compared to Rs490.2 crore in FY2006. The OPM declined by 740 basis points to 49.8%. However, the huge jump in the other income to Rs59.2 crore (up from Rs15.3 crore) enabled the company to post a 9.2% growth in the stand-alone earnings to Rs91.5 crore. It should be noted that the stand-alone results do not reflect the complete picture, as the company has been valued at its FY2009 estimated earnings on a consolidated basis.

Along with the results the company has announced the conversion of the $100 million FCCB at a price of Rs2,789 per share. Thus, the dilution in equity would be around 1.5 million equity shares (as against our base case estimate of the conversion at Rs1,400 per share.) Consequently, even though the estimates for FY2008 and FY2009 remain unchanged, the target price is revised upwards to Rs2,528 to factor in the lower than anticipated dilution in equity. We maintain our Buy call

Sharekhan Investor's Eye dated April 19, 2007

Hidden Gems - Ashish Chugh - SEAMAC

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Sharekhan Investor's Eye dated April 02, 2007

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.

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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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Sharekhan Investor's Eye dated February 14, 2007

PULSE TRACK

• Inflation trend

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STOCK UPDATE

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs206

Price target revised to Rs300

Result highlights

• South East Asia Marine Engineering & Construction (SEAMEC) has reported a robust growth of 124.6% in its revenues to Rs61.6 crore for the fourth quarter of CY2006. The revenue growth was largely contributed by the firming up of the charter (day) rates and the incremental revenue from an additional vessel (SEAMEC Princess) acquired recently.
• The operating profit margin (OPM) at 49.3% was lower than 65.1% reported in Q4CY2005 as the fourth vessel (SEAMEC Princess) was operational only for a 25-day contract during the quarter.
• The earnings grew by 64.8% to Rs25.9 crore in Q4CY2006, ahead of our expectations of around Rs19.2 crore.
• On a full year basis, the revenue and earnings have grown at a healthy rate of 93.6% and 202.4% to Rs159.3 crore and Rs58.7 crore respectively. The OPM improved significantly to 44.5% (up from 33.2% in CY2005) in spite of the one-time expense of Rs8 incurred on mobilisation and repairs of its recently acquired vessel in Q3CY2006.
• We have revised the estimates for CY2007 to factor in the appreciation of the rupee, better than expected charter (day) rates and delay in the conversion of the newly acquired vessel into a multi service vessel (MSV). The new vessel, SEAMEC Princess, is expected to be operational for around 200 days in CY2007 (as compared with around 300 days anticipated by us earlier). Consequently, the revenue and earnings estimates for CY2007 are being revised downward by 5% and 16.3% respectively. The estimates for CY2008 have also been introduced in this note.
• At the current market price the stock is trading at 8.4x CY2007 and 5.8x CY2008 estimated earnings. We continue to maintain our Buy call on the stock with a revised price target of Rs300 (8.5x rolling four quarter earnings).

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SECTOR UPDATE

Banking

CRR hike—negative for banks
The Reserve Bank of India (RBI) has surprised the market by hiking the cash reserve ratio (CRR) by another 50 basis points to 6% from 5.5% at present. The CRR is a percentage of the net demand and time liabilities (NDTL; read deposits) that the banks need to maintain in the form of cash balance with the apex bank. The hike would be implemented in two stages. The CRR would be first hiked by 25 basis points to 5.75% on February 17, 2007. One more hike of 25 basis points would be effected on March 3, 2007 which will take the CRR to 6%. The latest round of hikes is expected to absorb Rs14,000 crore of liquidity from the banking system. This would be in addition to the Rs13,500 crore already sucked in by the 50-basis-point increase announced in December 2006.

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MUTUAL FUNDS: WHAT’S IN—WHAT’S OUT

Fund Analysis: February 2007

An analysis has been undertaken on equity and mid-cap funds’ portfolios, indicating the favourite picks of fund managers for the month of January 2007. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 18 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc.

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Sharekhan Investor's Eye - Oct 12

PULSE TRACK

• Strong growth in August 2006 IIP despite floods

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STOCK IDEA

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs190

At a high tide

Key points

• Boom in offshore service industry: With the surge in crude prices and drop in global spare production capacity for oil, exploration activity has picked up globally. The IEA estimates that USD3.6 trillion would be spent on oil and gas exploration over 2003-30. The day rates for offshore oil and gas drilling, and support assets including MSVs are sky-rocketting as a result of this rise in the E&P spend.
• SEAMEC to benefit from rising E&P spend: With its fleet of three MSVs, SEAMEC is a direct beneficiary of this boom and the higher charter rates for the MSVs. It has recently entered into a long-term charter for its MSVs and that too at high charter rates of USD40,000-47,000 compared with USD20,000 per day for the earlier contracts.
• New vessel to further boost revenues: SEAMEC has recently acquired a vessel named Oceanic Princess, which is being converted into a diving support vessel (DSV). This DSV (expected to commence operation by Q1CY2007) and the three MSVs should help its revenues to grow at a CAGR of 70% over CY2005-07E.
• Profit to grow at a CAGR 126%: With a strong revenue growth, a debt-free status and the tonnage tax scheme, the earnings per share are expected to grow at a CAGR of 126% to Rs17.4 in CY2006 and to Rs29.2 in CY2007.
• Buy with a price target of Rs270: At the current market price of Rs190, the stock is trading at 6.5x CY2007E earnings and 4.1x CY2007E EV/EBIDTA. Compared with its global peers, SEAMEC is trading at a discount of 30%. It has the highest EBIDTA margin and RoE compared with them. We believe the discount is not justified. We recommend Buy on SEAMEC with a price target of Rs270.

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SECTOR UPDATE

Automobile

Performing against all odds
Despite the impact of floods, heavy monsoons and the inauspicious Shraadh Paksha, the automobile industry reported a strong performance for September. The car segment delivered a good performance with a 22.4% domestic growth and the two-wheeler sales too grew by 18.9% despite an average performance by the market leader, Hero Honda. The overall automobile sales volume rose by 20% with the domestic and export sales rising by 19.7% and 24.2% respectively.

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INDUSTRY UPDATE

Equity AUMs rise in line with market movement

The AUM for equity funds increased by 6.2% to Rs121,332 crore in September 2006. The rise was in line with the general upward movement seen in the equity markets.

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