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.
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