| Turnaround bets |
| Jitendra Kumar Gupta & Ram Prasad Sahu / Mumbai March 22, 2010, 0:16 IST |
A few stocks, which have been lagging behind due to various concerns, could see a revival in fortunes going ahead.
“Be fearful when others are greedy and greedy
when others are fearful” – Warren Buffett
Even though Indian markets have recovered from their March 2009 lows, there are still many companies and sectors where investor interest hasn’t caught up in the same breadth. As a result, the share prices of some companies are still at depressed levels as compared to their peaks in 2008.
There could be genuine concerns which in turn justify the valuations of these companies. Reasons could be weak demand, subdued margins, excess debt, heightened competition, lower capacity utilisations and so on. To put in simple words, in some of these cases due to absence of clarity over the future prospects and the financial position of the companies, the share prices continue to trade at lower levels.
The positive side is that, ever since the global economic downturn and its impact on the Indian industries and companies, lot of things have changed for the better, which is also reflecting in the key indicators. These indicators suggest a recovery in industrial production, higher GDP growth, turnaround in the exports market and pick up in credit growth among others. Also, on the corporate front, companies have been able to report better sales and profit margins; in many cases there has been a clear turnaround viz., from losses to profits.
Change is the only constant
Meanwhile, many of these concerns pertaining to these companies could still hold true. However, as it typically happens during any economic recovery, there is a tendency that certain sectors and companies lag others and recover only in the later part of overall recovery or when demand improves visibly leading to enhanced confidence levels. This is also a reason that despite the economic recovery some companies are yet to show improvement in growth.
Nevertheless, it could be a good time to look at companies, whose stocks are quoting at lower levels, which appear to have the potential to rebound once the economic momentum picks up further. Here are six companies, which are operating in growing industries with some of them enjoying leadership in their respective segments. While there are some medium-term concerns, a turnaround (whenever it happens) could lead to strong gains for investors.
Aban Offshore
Aban Offshore, a leading offshore rig provider, suffered due to the two critical events. Due to the correction in crude oil prices, the day rates at which the company deployed its rigs came down. Simultaneously, some its rigs were rendered ideal, leading to lower revenues and profits. But, crude oil prices have now stabilised and are showing an upward bias. Analysts, thus, believe that the day rates for the rigs should also improve from $125,000 currently (still lower by 50 per cent compared to its highs in 2008).
For Aban, the bigger issue pertains to capacity utilisation. Currently, of Aban’s fleet of 20 rigs/jacks, 16 are deployed and remaining ideal. If all of these are deployed, the company will be able to generate good cash flows. However, analysts expect the utilisations to only improve in the medium term. Aban’s management is expecting to deploy three rigs by mid 2010-11. More importantly, it is working towards reducing its dependence on a single market.
On this front, it has already deployed six rigs in India and is looking to deploy the remaining one rig in the country.
| ABAN OFFSHORE | |||||
| in Rs crore | FY08 | FY09 | FY10E | FY11E | FY12E |
| Revenue | 2,021 | 3,185 | 3,452 | 4,590 | 4,487 |
| EBITDA margin (%) | 61.7 | 55.4 | 61.1 | 59.4 | 57.2 |
| PAT | 93 | 556 | 456 | 1,010 | 1,022 |
| EPS (Rs) | 24.3 | 146.5 | 104.4 | 231.4 | 234.2 |
| Interest cover (x) | 1.2 | 2.6 | 1.6 | 2.6 | 2.7 |
| ROE (%) | 14.7 | 43.5 | 19.7 | 29.9 | 23.3 |
| Free cash flow to equity | -2,973 | -3,605 | 812 | 1,464 | 1,511 |
| Net debt-equity ratio (x) | 15.3 | 9.2 | 5.0 | 3.4 | 2.4 |
| Source: BNP Paribas | |||||
The other major concern is the high debt in its books. Notably, Aban’s debt-equity ratio has improved to 9 times in 2008-09 and is further expected to fall to about 5 times in 2009-10. While these levels are still high, the company is looking at ways to reduce it further. While the Rs 700 crore it raised through a QIP in December 2009 quarter helped pay some debt (should result in a lower debt-equity ratio in 2009-10), analysts expect Aban to generate cash flow of about Rs 3,500 crore from operations during the next two years. This should help bring down its debt further. Also, the company might dilute its equity further to reduce its debt. Any improvement in the business such as higher day rates will only be icing on the cake.
Mahindra Satyam
Post the scandal at Satyam Computer Services not many analysts cover the stock now; even investors have stayed shy of the stock. While the problems were for real, the market is awaiting clarity about the company’s financials. Positively, post the Mahindra group company, Tech Mahindra, acquiring ownership things seem to be improving as the management is trying to turnaround the company. Also, in the recent past, the outlook for the IT sector has improved as a result of the ongoing global economic recovery. This has also resulted in improved pricing power for IT players.
| MAHINDRA SATYAM | |||
| in Rs crore | FY10E | FY11E | FY12E |
| Revenues | 5,420 | 6,072 | 7,137 |
| Net profit | 662 | 1,213 | 1,429 |
| EBITDA margin (%) | 17.0 | 25.6 | 24.1 |
| RoE (%) | 17.1 | 19.2 | 18.6 |
| EPS (Rs) | 5.6 | 10.3 | 12.2 |
| PE (x) | 17.1 | 9.4 | 7.9 |
| Source: BNP Paribas; E: estimates | |||
For now, the company’s biggest challenge of retaining employees seems to be cooling off after the recent hike in salaries. Besides, the big worry relating to Upaid’s $1 billion claim, which is being settled out-of-the-court by paying $70 million or Rs 325 crore, has not only eased worries but now, will also help the company get worldwide royalty-free license for the related products.
The confidence is also increasing as the company is able to retain its existing clients. It recently bagged a four-year offshore contract work with KMD valued at Rs 218 crore. This is in addition to the GE’s extension of multi-million dollar contracts for the next three years. In last one year, the company has signed about 90 new deals, including over 35 new accounts. As a result of higher confidence, the company is also planning to hire around 5,000 people by March 2010. However, analysts believe that the stock captures most of these positives, and at a one-year forward PE is fairly valued. Also, given that the financials are awaited, it is better to adopt a wait-and-watch approach.
Punj Lloyd
Punj Lloyd’s stock has also been impacted on account of concerns over its prospects. For instance, in the case of Simon Curve’s (its subsidiary) ethanol project, analysts expect Punj to book additional liquidated damages in the March 2010 quarter. While Punj has already booked Rs 300 crore so far in 2009-10, its client raised a claim of Rs 160 crore in early March 2010. Punj’s large project in Libya, which is delayed and accounts for about 43 per cent of its order book, could mean more earnings downgrades by analysts in the near term. Also, concerns over its ONGC project exists, even as the company has booked most of the likely cost overrun. In terms of revenue visibility, too, Punj’s order book has been shrinking in the last few quarters on account of lower order inflows due to the lower capex in the global oil and gas industry.
| PUNJ LLOYD | ||||
| in Rs crore | FY09 | FY10E | FY11E | FY12E |
| Net sales | 11,910 | 11,910 | 13,700 | 15,630 |
