OnMobile Global : Highly under valued stock !!!

Scrip Code: 532944 / ONMOBILE

CMP:  Rs. 100.55; Buy at Rs.98 - 101 levels.
Short term Target: Rs. 115, LT – Rs. 150;

STOP LOSS : Rs. 92.00 ;

Market Cap: Rs. 1180.27 cr;

52 Week High/Low: Rs. 190.70 / Rs. 90.28;

Total Shares: 11,79,09,086 shares; Promoters : 5,70,68,638 shares –48.40 %; Total Public holding : 6,08,40,448 shares – 51.60 %; Book Value: Rs. 69.14; Face Value: Rs. 10; EPS: Rs. 7.77; Div: --- ;P/E: 12.88 times; Ind P/E: 20.33; EV/EBITDA: 12.06.

Total Debt: Rs. 181.87 cr; Enterprise Value: Rs. 1415.14 cr. 

OnMobile Global Limited was formerly known as OnMobile Asia Pacific Private limited and changed its name to OnMobile Global Limited in August 2007. OnMobile Global Limited was founded in 2000, headquartered in Bangalore, India. It provides telecommunications value added software products and services in India and internationally. It offers m-commerce, entertainment, media portals, interactive television programming, mobile marketing, user-generated content, social networking, mobile utility data, 3G, network products through mobile access channels, such as voice, SMS, WAP, USSD, video, on-device portal, and Web. The company’s product lines include speech products, speech ports, voice based search; network products comprises of ring back tones, missed call alert, and OnMobile developer network; pollenStudio 2.0; messaging and m-commerce products consisting of mobile adversting, cell broadcast. It also offers various applications, including music, entertainment, sports, live streaming, infotainment, and user generated content; data products comprising phone backup, network/social address book, mobile paparazzi, ODP applications. Company's subsidiaries include OnMobile Singapore Pte. Ltd., PT. OnMobile Indonesia, Vox mobili S.A., Vox mobili Inc., Phonetize Solutions Private Limited, Telisma SA, OnMobile Europe B.V., OnMobile USA, LLC, Servicios de Telefonia Onmobile, S.A. de C.V. and OnMobile Australia Pty. Ltd.

Investment Rationale

OnMobile witnessed strong traction in the international revenues, during 3QFY11, despite lower domestic revenues, as expected, further with the launch of 3G services by operators and access to 3G video technology of Dilithium it is believed that this will drive data revenues for OnMobile as 3G and Value Added Services (VAS) revenues are expected to be critical for growth of telecom in aspect of revenues. The company is expected to complete the deployment in the Latin American regions by March 2011, after which it is expected that the adoption rates will go up which in turn will help growth in international revenues. OGL dominates VAS market with 33% share & has firmly secured itself in the leadership position as the dominant VAS provider to majority of domestic telecom companies. OGL is expected to register revenues to a tune of 25% CAGR during FY10-12 and net profits to a tune of 67% CAGR during the same period. OGL will continue with its aggressive deployment of Telefonica projects in these regions. The company is now live in six countries of Latin America with the launch of services in Brazil, Argentina and Venezuela. The company has indicated that the deployments are on track. They expect all the deployment to complete by March 2011. OGL has won an embedded deal with one of the major handset OEMs for its video stacks in China. OGL’s dynamic churn management solution helped to add 2% to their top line revenue for a leading telecom operator in Asia, resulting in an astounding 88% increase in subscriber recharging.

Outlook & Valuation:

With the domestic revenues accounted for 33% of the addressable Value Added Services (VAS) market (ex-P2P SMS & non-aggregator share of revenues) worth Rs. 1000 cr – Rs. 1100 cr. Telefonica deal will ramp up revenues beyond FY11. In June 2009, OnMobile signed an agreement with Telefonica which is the world’s largest mobile operators, for an exclusive period of 5-7 years and non-exclusive market rights to deploy several of its VAS products. These include Ring Back Tones (RBTs), Music Radio, and Soccer Portal etc in 13 Telefonica operating Latin American countries. OnMobile is likely to complete roll out by Mar’-Apr 2011. As of Q2, company has gone live in 3 countries including Mexico, the first large-scale deployment. The real impact of the deal would be felt from FY12 as rapid revenue ramp up will occur from next fiscal. OnMobile is set to report increased traction in revenues driven by leadership in domestic business and upsides from Telefonica and Vodafone deals. It would incur a cap ex of Rs. 70 cr – Rs. 80 cr and to pay Rs. 170 cr in deferred liability to Telefonica in the current fiscal, comfortably supported by Rs. 150 cr in operating cash flows. Recovery in operating margins should be seen on stable content cost except for one-offs in Q4 FY10. As revenues kick in from international deals, benefits of operating leverage could help expanding operating profit margins by 2.80 % over FY10-12. Robust EPS CAGR makes a BUY on OnMobile Global with price target of Rs. 115 for the short term and Rs. 150 for the long term.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E
SALES (Rs. crs)	406.4	454.4	571.8	695.6
NET PROFIT (Rs. crs)	85.2	42.8	84.14	95.4
EPS (Rs.)	14.7	7.3	14.3	16.3
PE (x)	19.0	38.1	26.9	17.1
P/BV (x)	2.3	2.2	2.7	1.8
EV/EBITDA (x)	10.4	17.5	13.0	10.0
ROCE (%)	13.0	6.0	10.8	11.1
RONW (%)	16.9	7.5	10.2	12.8

I would buy onMobile Global with a price target of Rs. 115 for the short term and Rs. 150 for the long term. As I always say do respect the markets and keep a strict stop loss of 8 % or Rs. 92.00 on your purchase.

Pipavav Shipyard Limited : A major Defence sector player !!!!

Scrip Code: 533107 / PIPAVAVYD

CMP:  Rs. 80.70; Buy at Rs. 78 - Rs. 80 levels.
Short term Target: Rs. 85, LT – Rs. 100 ; Market Cap: Rs. 5,372.99 cr ; 52 Week High/Low: Rs. 119.70 / Rs. 62.00

Total Shares: 66,57,98,388 shares; Promoters : 29,95,76,180 shares –45.00 %; Total Public holding : 36,62,22,208 shares – 55.00 %; Book Value: Rs. 24.81; Face Value: Rs. 10; EPS: Rs. 0.60; Div: --- ;P/E: 134.5 times; Ind P/E: 13.17; EV/EBITDA: 110.08.

Total Debt: Rs. 1,329.59 cr; Enterprise Value: Rs. 6,702.59 cr. 

Pipavav Shipyard Limited promoted by SKIL Infrastructure was formerly known as Pipavav Ship Dismantling and Engineering Limited and changed its name to Pipavav Shipyard Limited in April 2005. Pipavav Shipyard Limited was incorporated in 1997 and is based in Mumbai, India, company engages in the defense shipbuilding, and construction of offshore oil and gas assets, as well as provision of commercial shipbuilding and repairs, and heavy engineering services in India. Pipavav is the only private shipyard in India to have license to produce frontline warships from the Govt. of India giving it significant opportunities in the defence space. The company also offers very large crude carriers, suezmax tankers, aframax tankers, capesize bulk carriers, panamax bulk carriers and tankers, handymax and handysize bulk carriers and tankers, and product and chemical tankers; and specialized vessels, such as LNG carriers, LPG carriers, reefers, containerships, offshore support vessels, ferries, and dredgers. It also provides offshore platforms, which include rigs, jackets, and single buoy mooring systems; naval vessels; and ship repair services, such as refit/dry docking, a-float repair, and conversions. Pipavav Shipyard (PSL) is the largest shipyard in India and the 5th largest in the world in terms of its size (400000 dwt). Pipavav’s dry dock capacity is larger than top 5 yards in India put together.

Investment Rationale:

Pipavav recently signed a contract with the Ministry of Defence for construction of 5 naval gunboats worth Rs. 3000 cr. The company has also been active in signing MoU’s with international defence majors such as SAAB Dynamics, Northrop Grumman, and Babcock Group UK which will make the Company’s position as leader in the defence segment. The company is also planning to rename itself Pipavav Defence and Engineering Company Ltd. to highlight its objective to become a major defence player. Company has a strong and diversified order book of Rs. 6300 crore which is expected to result in CAGR of 48.8% over FY10-FY13.

The parent company of Pipavav Shipyard Ltd, SKIL Infrastructure promoted by Nikhil Gandhi, primarily is an infrastructure development company, with interests in shipyard, special economic zones, free zones, logistics, port, education and defence sectors, filed its drafted documents on 7th June 2011, to raise Rs. 1,125 Cr through IPO. SKIL Infra controls 43.14 % (a 28,72,26,686 shares) in Pipavav Shipyard and 21.02 % (a 40,00,000 shares) stake in Everon Education. Proceeds from the IPO will used to retire its debts of Rs. 800 Cr & will set aside Rs. 150 cr to acquire companies in education, infrastructure & defence sectors.  As of March 31, SKIL Infra had total debt of Rs. 1351 cr, excluding vehicle loans.

Investment concerns:

There was a delay of 15 months in the construction of the shipyard and the facility became fully operational only in December 2010 with the installation of Goliath cranes. The delay in construction of the shipyard has, in turn, led to significant delay in the delivery schedule of vessels. Although Pipavav has a strong and diversified order book valued at Rs. 6300 crore, the first deliveries of panamax and offshore vessels is likely only from Q2FY12 onwards i.e. delay of 18 and 3 months respectively. Pipavav is in a growth phase so a significant premium over global shipyards would not be justified until execution improves.

Outlook & Valuation:

Company posted 18 % YoY revenue growth in Q4FY11, after excluding subsidy of Rs. 75 cr and trade sales of Rs. 257 cr. The Company received a new order of Rs.3000 cr taking the total order book to Rs. 6300 cr. EBIDTA for the year turned green to Rs. 170 cr with margins at 20%. PAT at Rs. 44 cr. The order inflows and recent initiatives of the company give confidence that the company is on track to become a major defence player. At the CMP of Rs.80.70, Pipavav is trading at 19.6 x FY13E EPS and 2.55 x FY13E P/BV. In my view it can be a Bought with a price target of Rs. 100.50/share valuing the company at 11.3x FY13E EV/EBIDTA comparing it to defence player.

KEY FINANCIALS	FY10	FY11E	FY12E	FY13E
SALES (Rs. crs)	629.4	882.7	1,598.5	2,073.7
NET PROFIT (Rs. crs)	- 48.2	- 1.7	126.1	269.6
EPS (Rs.)	--	--	1.9	4.1
PE (x)	--	--	41.7	19.5
P/BV (x)	3.2	3.1	2.9	2.5
EV/EBITDA (x)	--	80.3	20.6	11.3
ROCE (%)	--	2.5	10.2	17.8
RONW (%)	--	--	6.9	12.8

I would buy PIPAVAV SHIPYARD LTD with the price target of Rs. 85 in short term. For long term I would be looking at a target price of Rs. 100. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.

QE2 coming to an end and QE3 could follow!!!

As told on blog on QE earlier, by JUNE 30^th 2011, the Fed will be winding down its second round of quantitative easing. I.e.QE2. By announcing quantitative easing Fed made an impression to the world that they’re willing to do whatever is necessary to maintain growth, which promoted higher stock prices, made people and companies feel a little more financially stable and wealthy, which will then translate into consumer spending & subsequently unemployment will go down. The employment situation do showed some increase in hiring & a drop in the unemployment rate below 9.0 %, all due to QE program. Now when the unemployment rate ticked back up again above that high benchmark of 9.0%, and weekly initial jobless claims have been firmly above 4,00,000 for several weeks, people have started talking about QE3 i.e. third round of quantitative easing !!!

Well, the perception of “easy money” was enough to encourage speculators and traders to make a leveraged bets on both stocks & commodities. As said, stocks and commodities went higher. And the jobs data improved a little bit all due to blessing of QE2.

Now, when the QE2 is coming to an end, the perception of 2011 recovery has evaporated as the economic data from mid-summer signaled another round of recession coming back. At the opening of the year, many economists were projecting U.S. to grow as high as 5 %; the Fed was thinking 3.4 % to 3.9 % of growth which was above average year of economic expansion.

The U.S. has grown at a historical average of 3 % per year. Even with unprecedented stimulus it’s been growing below the trend since 2006. Recent data suggests that another round of recession is coming …A recent study showed that since 1948 whenever the US GDP fell below 2 %, it normally predicted recession for the U.S. economy.

In April 2011, the Bureau of Economic Analysis (BEA) gave their advanced estimate for Q1 2011 which said that growth will be at 1.8 %, Unemployment will hover around 5 % higher than pre-crisis levels.

Even after the two rounds of quantitative easing by the Fed and two rounds of fiscal stimulus by the U.S. government, employment will still sits about 5 % over the long run “natural rate” of unemployment, housing prices will remain anywhere from 20 % to 50 % below its peak levels. The government has recapitalized the banks, the Fed has kept mortgage rates historically low, and various failed mortgage revival programs have been floated, housing is still at 32 % down from 2006 highs.

As all can see that consumer credit peaked in 2008 when Lehman Brothers failed, it likely means that the world is in for another seven years of economic uneasiness.

In Asia, traders have been anticipating QE3, sending the Indian rupee, Singapore dollar, Malaysian ringgit, Indonesian rupiah & even Thai bhat went higher, QE3 could turn into massive capital inflows in Emerging markets like India boosting growth, creating an illusion of false recovery, but in reality they would be just bubbles. If QE3 is not announced then in that case US markets can collapse by 10 % or so making treasury yields to rise, USD would strengthen and commodities like Gold, Silver & Oil would see a minor dip in their prices.  And if QE3 happens it will make US $ to crash. US $ will loose its value among all major currencies across the world , crude oil prices will jump up, prices of commodities like Gold will shot up, Equity markets around the world especially Emerging markets will rise and India will be benefited by it if India’s own internal problems are solved by that time.

With all of this in mind, even though the easy money policies of the Fed have been highly scrutinized, in my view Fed may delay the announcement of QE3 which can cause markets to take a down turn for a while and on announcement of QE3 markets will raise again. There are lots of issues around the Indian equity markets such as high inflation, 2G scam, Government facing public agitation on corruption, such issues were keeping investors away form our markets for a while, but on announcement of QE3 our markets will raise again, I believe that stocks specific investments during the down turn would bring good returns, in the mean time I would be going for 45 % in stocks & 25 % in Gold & rest to hold cash, this would be my strategy for the time being.

But one thing of sure QE3 would bring another violent downturn for the global economy!!!!!

CLICK HERE FOR PREVIOUS POSTS ON QE 

SHREE RENUKA SUGAR : Best buy in Sugar Sector .

Scrip Code: 532670 / RENUKA 

CMP:  Rs. 64.35; Buy at current levels for ST;LT buy at Rs.58 - Rs.60 ;  Short term Target: Rs. 75;  LT – Rs. 100 ; Market Cap: Rs. 4,312.98 cr; 52 Week High/Low: Rs. 108.20 / Rs. 55.90; Total Shares: 67,12,80,850 shares; Promoters : 25,55,67,980 shares –38.07 %; Total Public holding : 41,57,12,870 shares – 61.93 %; Book Value: Rs. 26.51; Face Value: Rs. 1; EPS: Rs. 1.19; Div: 100 % ; P/E: 53.99 times; Ind P/E: 13.17; EV/EBITDA: 8.32. 

Total Debt: RS. 6508 cr; Enterprise Value: Rs. 10,820.98 crs.

SHREE RENUKA SUGARS LTD was founded in 1995 and is headquartered in Mumbai, India with an additional office in Belgaum, India. SRSL focuses on three businesses - Sugar, Bio-fuels & Renewable energy. The company produces power from Bio-gases - a by-product of sugar; and offers ethanol, which is extracted form molasses. In addition, it provides bio-fertilizers - a residue product from distillery operations blended with chemicals. It has cane crushing operations in Karnataka (Munoli, Athani, Havalgah and Gokak) and Maharashtra (Pathri). It also operates two leased facilities at Maharashtra (Arag) and Karnataka (Raibag). The Company has three integrated refineries in Karnataka each at Munoli and Havalgah and a port-based refinery in West Bengal. Some of its subsidiaries include Renuka Commodities DMCC, Shree Renuka Agri Ventures Limited, Gokak Sugars Limited, SRSL Ethanol Limited and KBK Chem Engineering Private Limited. On September 30, 2009, the Company acquired VALE DO IVAI S/A ACUCAR E ALCOOL (VDI), a Brazilian sugar and ethanol producer. In July 2010, Shree Renuka Sugars Limited acquired a controlling stake of 50.34% in Equipav S.A. Acucar e Alcool. Equipav will give Shree Renuka 10.5 million tons of annual crushing capacity in Brazil, the top producer, and help it meet half its raw-sugar requirement of 1.7 million tons.

Investment Rationale

SRS is the only sugar/ethanol producer in the world with almost a year-long cane crushing operations as it has operations in Brazil and India, which have complimentary cane crushing seasons. Cash flows from the Brazilian operations would be self sufficient to meet obligations and yield a surplus. SRS's integrated, diversified and flexible business model makes it more resilient to cyclical downsides. Over last couple of months there has been a strong price correction of 40% from peak due to supply pressure from change in production mix with larger players swinging towards sugar production, and additional 3 mt production surprise from Thailand (where higher sugar price makes the sugar production more profitable than tapioca). In my view domestic sugar prices would move upwards and would trade above Rs. 30/kg due to lower than expected sugar production in the country. Sugarcane prices paid to farmers in FY11 was Rs. 210/Quintal compared to Rs. 240/Quintal paid in FY10. This would result in lower sugar production in FY12. However, sugar prices in Brazil have corrected from its peak of 36 cents/lb in Feb, 2011 to 21 cents/lb currently.

Investment concerns: With the current domestic sugar prices per kilo at Rs. 27 – Rs. 28, the company is making losses on the bottom-line. It is expected that domestic sugar prices to firm up to Rs. 30/kg led by the lower than expected sugar production in India. At the same time, profitability from the Brazilian operations would improve due to the increasing ethanol prices and higher sugar realisations at 23cents/lb (the company having hedged 80% of its annual sugar production at 23c/lb via future contracts). However Rs. 6500 crore of long term debt on the book would remain an concern and a hurdle for the valuations.

Outlook & Valuation: Shree Renuka Sugars (SRS) is one of the top 10 sugar producers in the world. It is the only sugar company to have significant operations in the two most relevant locations in the world - the largest sugar exporter, Brazil, and the largest sugar consumer, India. Over FY06 - FY10, SRS grew from a very small domestic sugar player to a global giant, with an average RoE of 32.4% and EPS of 20% CAGR in a cyclical industry, which speaks a lot about its vision and capabilities.

In my view, Shree Renuka Sugars is the best company to play the global sugar industry recovery and is a direct play on rising sugar/ethanol prices. Strong cash flow visibility would allow it to de-leverage itself and will meet all the concerns regarding its high leverage. The stock trades at 8.5x FY11E EPS of Rs. 7.7, 1.3x FY11E BV of Rs. 48.4, and EV/EBITDA of 6.1x FY11E. I value SRS at Rs. 85, based on EV/EBITDA of 6x FY12E EBITDA an upside of 31%. So it comes a Buy on SRS for Rs.75 in Short term & Rs. 100 in Long term.

KEY FINANCIALS	FY10	FY11E	FY12E
SALES (Rs. crs)	7,669.6	9,494.2	11,741.5
NET PROFIT (Rs. crs)	692.2	514.2	733.9
EPS (Rs.)	10.3	7.7	11.0
PE (x)	6.3	8.5	5.9
P/BV (x)	1.9	1.3	0.9
EV/EBITDA (x)	8.4	6.1	4.5
ROE (%)	37.1	20.7	22.6
ROCE (%)	16.4	12.2	14.3

I maintain my buy status on SHREE RENKA SUGARS with the price target of Rs. 75 in short term. For long term my target is of Rs. 100. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.