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| Analysts' corner |
| SI Team / Mumbai Aug 10, 2009, 00:31 IST |
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Aban Offshore Reco price: Rs 1,038.85 Current market price: Rs 1,128.95 Target price: Rs 605 Downside: 46.7% Brokerage: Macquarie Research
Aban Offshore reported a decline in the June quarter consolidated net profit decline of 10 per cent y-o-y to Rs 1,100 crore (above estimates). The key reason for the outperformance was higher than expected EBIT margin expansion. Consolidated net sales increased 2.5 per cent q-o-q. Aban cut down its operating costs by 7 per cent y-o-y resulting in EBIT margin expansion of 977 bps. Aban has cut down on costs in light of its challenging business environment; however, these gains may not be sustainable. Interest expense increased 49 per cent y-o-y and 5 per cent q-o-q, which offset the gains from EBIT margin expansions. Aban announced plans to raise equity capital totalling Rs 4,500 crore. This is positive for Aban as it will bring its gearing to around 2x from 5x. Nine of Aban’s twenty rigs are currently idle. The global jack-up market is continuing to see lower rates and increased idle time in the geographies that Aban primarily operates in. Besides, lower crude oil prices would lead to further deflation of the E&P costs. The brokerage cut FY10E PAT by 10 per cent as rig utilisation drops. The brokerage is concerned about worsening jack-up market fundamentals that will make it difficult for Aban to contract its idle rigs. The brokerage revised target price from Rs 315 to Rs 605. Maintain underperform.
Axis Bank Reco price: Rs 894.05 Current market price: Rs 845.2 Target price: Rs 970 Upside: 14.7% Brokerage: Goldman Sachs
Axis Bank (Axis) notified the stock exchanges that its board of directors had approved issuance of new equity shares by way of GDR/QIP and preferential issue to the promoters of the bank. The brokerage says that capital raising plan may not surprise the market, given that its loan growth rate was strong in recent years and statements in the past that it may consider raising capital. However, the timing of such an announcement is likely to surprise expectations negatively. Given a Tier I capital ratio of 9.4 per cent at the end of June 2009, the market could have factored capital raising in 2010. The reasons for making capital raising proposal could indicate Axis’ preparedness to leverage any resumption in growth momentum, intention to diversify into other areas of financial services, the need to strengthen its capital position given its large exposure to corporate banking segment which will help absorb potential shocks from any adverse loan concentration risks. The market would be concerned about the potential dilution impact on EPS in the near term. However, potential for accretion is not ruled out, depending on how the proceeds will be used. Maintain buy.
Grasim Industries Reco price: Rs 2,790 Current market price: Rs 2,729.05 Target price: NA Brokerage: Motilal Oswal Securities
Grasim Industries’ (Grasim) June quarter standalone results were ahead of estimates, driven by strong performance by core businesses of cement and VSF. The net sales were up 18 per cent to Rs 3,040 crore. EBITDA margin expanded 50 bps y-o-y to 29.1 per cent, driven by higher realisations in cement and VSF businesses. But higher depreciation, interest costs, lower other income and higher tax provisioning restricted net profit growth to 3.2 per cent y-o-y to Rs 530 crore. VSF’s volumes continued their recovery with growth of 18.8 per cent y-o-y and realisations rose 12.5 per cent q-o-q. This coupled with a decline in costs led to an expansion of EBITDA margins in fibers to 27.7 per cent. Cement volumes benefited from commissioning of new capacity with volume growth of 23 per cent to 4.88 MT with an improvement in realisations. The brokerage has upgraded EPS estimates by 18 per cent each for 2009-10 (to Rs 315) and FY11 (to Rs 289); to factor-in higher than estimated realisations in cement and VSF, and rebasing of cement-pricing assumptions. The stock is quoting at 8.9x its estimated FY10 consolidated EPS and 4.7x EV/EBTIDA. Maintain buy.
GMR Infrastructure Reco price: Rs 142 Current market price: Rs 135.85 Target price: Rs 110 Downside: 19% Brokerage: Ambit Capital
GMR Infrastructure revenues were up 33 per cent y-o-y to Rs 1,180 crore (above estimates), led by a growth in roadways/other segments. Growth in revenues got a push from the Istanbul airport construction JV. Revenues in the power segment were higher with increased gas supplies at the Vemagiri power plant and merchant sales. The increase in revenues in the roadways segment is on account of new assets that were added. A combination of a 3 per cent fall in fuel expenses and a 200 per cent plus rise in other O&M expenses have kept the EBITDA in check. EBITDA for the June quarter grew 35 per cent y-o-y, and EBITDA margin stood at 27.3 per cent in the same period. An increase in depreciation costs, interest expenses and a jump in effective tax rate caused profitability to reduce substantially. Adjusted net profit was down 74 per cent y-o-y in Q1 FY10 to Rs 24 crore (below expectations). The management has clarified that it has no equity funding requirement during the current fiscal, expect minimal capitalisation requirement for the newly awarded roadway projects. Maintain sell.
Hindalco Industries Reco price: Rs 108 Current market price: Rs 103.65 Target price: Rs 135 Upside: 30.2% Brokerage: Kotak Securities
Adjusting for one-off items such as unrealised gains on fair value of derivative instruments, restructuring charges and tax litigation settlement in Brazil, Hindalco’s reported net income for the June quarter stood at a net loss before tax for the quarter at $29 million. Similarly, the reported net income for Q4 FY09 was also impacted by several one-off items. Total shipments for the quarter were 691,000, a decline of 16 per cent y-o-y. Shipments improved in Asian and North American geographies in June quarter compared to sequential quarter, however, Europe and South American geographies reported modest declines. Nevertheless, better economic conditions in the next two-three quarters would likely result in an uptick in volumes. Traction on account of better price and volume mix and lower costs lifted earnings by $75 million and $40 million, respectively. Other major items that negatively impacted earnings were metal price lags and metal long positions, which impacted earnings by $68 million and $50 million, respectively. Novelis results highlight an improving pricing scenario despite weak volumes. Volumes could take a few more quarters to recover based on an economic recovery in general and would positively impact earnings. Maintain buy.
Market prices as on August 6.
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