Summary
of Contents
SHAREKHAN SPECIAL
Monetary policy preview
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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.
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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.
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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.
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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%.
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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.
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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.
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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.
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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).
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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).
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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 on the
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