With crude oil prices galloping over $ 135/bbl and reserve accretion rate slipping below 100 per cent mark, increased investments in exploration and production space globally has become inevitable.
However, lack of availability of rigs will continue to keep the day rates firm. Shipyards are now booked for more than three years.
Aban Offshore (Aban), with its 22 rigs (post acquisition of Sinvest) is well poised to leverage on the industry dynamics. Historically, Aban has clocked the highest operating margins in the industry at a global level.
Aban has 13 of its assets (including Sinvest) in its Singapore subsidiary, Aban Singapore (ASL). Aban plans to list ASL by divesting some stake and thereby reduce the debt it raised to acquire Sinvest. Listing of ASL could unlock value for the company.
Contract renewals for six of Aban's assets (including Sinvest) are due over the next 10 months. With the current tightness in the rig market, the re-pricing of these contracts is expected to happen at significantly higher rates compared to their existing rates.
At Rs 4,047, the stock is trading at a P/E multiple of 8.1x FY09E earnings compared to international average of 12.6x on CY08E earnings. Recommend Buy with a target price of Rs 5,247.
Texmaco
Reco price: Rs 1,561
Current market price: Rs 1,563.9
Target price: NA
Brokerage: Edelweiss Securities
The recent opening up of the container freight business to private operators and the dedicated freight corridor project is expected to generate Rs 10,000 crore of additional demand for wagons in the next five-six years. Texmaco, with 25 per cent share of the market, will be one of the biggest beneficiaries of this spend.
The Indian government is looking at an addition of nearly 20,000 MW of hydro power in the next five years.
This also augurs well for Texmaco's hydro mechanical division. The company has envisaged a modernisation-cum expansion plan for its steel foundry division, expected to be completed by FY09, and the capacity is expected to increase from 15,000 tpa to 40,000 tpa.
The company recorded revenues of Rs 690 crore for FY08, registering a robust growth of 85 per cent y-o-y driven by sharp volume growth in the rolling stock division from 2,843 to 4,113 wagons. Net profit, at Rs 69.1 crore, increased 143 per cent y-o-y due to improvement in operating performance as well as higher other income.
Texmaco's revenues are expected to grow 37.7 per cent to Rs 850 crore, while earnings are expected to increase by 25.8 per cent to Rs 86.9 crore in FY09. The stock trades at 17x and 12.1x FY09E and FY10E earnings respectively. Maintain buy.
Varun Shipping
Reco price: Rs 82
Current market price: Rs 85
Target price: Rs 118
Upside: 38.8%
Brokerage: ICICI Securities
Varun Shipping reported a 24 per cent y-o-y increase in revenues to Rs 850.8 crore for FY08 on the back of the acquisition of new vessels.
EBIDTA margin (excluding forex provision) increased from 55.9 per cent to 57.8 per cent due to enhanced contribution from the offshore segment. The company reported a robust 55.9 per cent growth in net profit to Rs 225.9 crore, mainly on account of a whopping 192.8 per cent increase in other income to Rs 151.1 crore.
In Jan 2008, Varun announced a capex of $400 million. The company has already acquired one AHTS vessel, Suvarna, and is planning to complete the capex implementation by CY08.
The company is looking to acquire vessels in the high margin offshore segment, as it wants to develop a critical mass and have a meaningful presence in this segment. Revenue contribution from the offshore segment increased from 3.6 per cent in FY07 to 19.4 per cent in FY08, while from the LPG segment it has come down from 72.8 per cent in FY07 to 62.7 per cent in FY08. At Rs 82, the stock trades at 4.2x FY09E earnings, making it the cheapest stock in the shipping sector.
K S Oils
Reco price: Rs 75
Current market price: Rs 78.25
Target price: Rs 111
Upside: 41.85%
Brokerage: Religare Securities
K S Oils (KSO) has posted robust revenue growth of 107 per cent y-o-y to Rs 670 crore for Q4FY08, which is attributed to a 28 per cent y-o-y increase in average oil prices (crude mustard and refined oils, which contribute 66 per cent to the total revenue pie) and 31 per cent rise in volume sales.
The growth in net profit during the quarter was impressive at 91 per cent y-o-y to Rs 40.2 crore. The company has successfully scaled up the revenue share of high-margin retail packs to branded as well as overall sales. For FY08, revenues increased 90 per cent to Rs 2,041 crore while the net profit doubled to Rs 122.7 crore.
KSO currently imports palm oil, refines the same and markets it along with mustard oil in northern and eastern India. Up to 35 per cent of the company's turnover comes from refined products.
In order to secure raw material supplies and insulate itself against global price volatility, the company has recently acquired a 50,000-acre palm plantation in Indonesia, which is expected to yield 80,000 MT of palm oil each year from FY12. At Rs 75, the stock is quoting at a P/E of 12.8x FY09E earnings. Maintain buy with a DCF-based price target of Rs 111.
Everest Kanto Cylinders
Reco price: Rs 347
Current market price: Rs 332.7
Target price: Rs 400
Upside: 20.23%
Brokerage: Kotak Securities
The demand for CNG cylinders in China is expected to go up significantly due to the government mandating conversion of buses in certain cities to CNG.
Also, there has been an aggressive ramp up of gas stations in China from current levels of 400 to about 2,000 CNG stations in two to three years. This augurs well for Everest Kanto Cylinders (EKC), which has recently commissioned a cylinder plant in China with a capacity of 2,00,000 cylinders p.a.
The company has acquired US-based Reunion Industries, for a cash consideration of $66.3 million. This acquisition will enable EKC to capitalise on the robust global demand for specialty and CNG gas storage systems across various countries. The second plant in Dubai, which was commissioned in Q2FY08, is operating at peak capacities.
This unit is likely to improve the company's profitability as the Dubai operations enjoy higher realisations and margins. EKC's aggressive capacity expansion is expected to lead to a CAGR of 44.5 per cent in revenues and 45.6 per cent in net profits over FY07-FY10E.
The brokerage has downgraded the stock from buy to hold due to rich valuations and limited upside potential. At Rs 347, the stock trades at 3.9x book value and 16.5x FY10E earnings.
Current market prices as on May 22.
