ZEE Entertainment Enterprises Ltd : Offering growth opportunities !!

Umeed Se Saaje Jindagi

Scrip Code: 505537 / ZEEL
CMP:  Rs. 134.00; Buy at Rs. 120 - 126.00 levels; Short term Target: Rs. 150, 6 Month target – Rs. 200 ; STOP LOSS - Rs.110; Market Cap: Rs. 13,107.11 cr. 

52 Week High/Low: Rs. 164.33 / Rs. 105.80
Total Shares: 97,81,42,930 shares; Promoters : 41,84,72,440 shares –42.79 %; Total Public holding : 55,96,03,690 shares –57.21 %; Book Value: Rs. 29.69; Face Value: Rs. 1.00; EPS: Rs. 5.92; Div: 200 % ; P/E: 27.11 times; Ind P/E: 21.27; EV/EBITDA: 20.48

Total Debt: Rs. 268.01 cr; Enterprise Value: Rs. 29,409.98 cr

ZEE Entertainment Ltd was founded in the year 1982, based in Mumbai. Company was formerly known as Zee Teleflims Limited and changed its name to Zee Entertainment Enterprises Limited in January 2007. ZEEL, together with its subsidiaries, operates as a vertically integrated media and entertainment company in India. It operates in three segments: Broadcasting and Content, Education, and Film Production. The Broadcasting and Content segment develops, produces, and procures television programming and film content, and delivers through satellites, cable, and Internet. It broadcasts channels, such as Hindi general entertainment channels and regional language general entertainment channels, Bollywood channels, sports channels, English entertainment channels, alternate lifestyle channels. Company earns revenues by the way of advertisement and subscription revenues and syndication The Education segment engages in distribution of software learning products; and provides education and training in information technology. The Film Production segment produces and distributes films. The company has a library housing approximately 80,000 hours of television content; and rights to approximately 3,000 movie titles. Effective March 29, 2010, Zee News Ltd. demerged its Regional General Entertainment Channel Business Undertaking and transferred its operation to Zee Entertainment Enterprises Limited It has operations in India, the United States, Canada, Europe, Africa, the Middle East, Southeast Asia, Australia, and New Zealand.

Investment Rationale:

Zee - Turner signed a distribution JV with Star-Den which will be a game-changer, as it will significantly increase the bargaining power with local cable operators. Company’s subscriptions will be strong after this JV with Star Den which will also set up a Media Pro Enterprise India which will be 50:50 partnerships between Zee Turner and Star Den Media Services, for combined distribution of TV channels. ZEE and Star networks together controls 40 % - 45 % of viewer ship share.  The JV will be effective from July 2011 and the subscription revenue would be visible from FY13. It is expected that a 17 % Y-o-Y growth will be seen in analog subscription revenue for ZEE in FY13 as against an estimated 5 % growth in FY12. Recently on 19th June 2011, Zee unveiled its new brand identity by a new logo & a new slogan with the objective of taking forward of progressive outlook for the channel. Zee Entertainment Enterprises (ZEEL) announced a share buyback programme that will have a cash outflow of up to Rs. 700 cr. The buyback would be of its fully paid-up equity shares of face value Re.1.00 each, at a price not exceeding Rs. 126.00 per equity share. ZEEL proposes to buyback a minimum of 1.26 crore shares. The Maximum Buyback Size is within the company law limit of 25% of the aggregate of the Company’s paid-up equity capital and free reserves as on March 31, 2010. The aggregate paid up equity share capital and free reserves of the Company as at March 31, 2010 was Rs. 2,818.33 Cr. The date of opening of Buyback offer is July 27, 2011 and will end at March 23, 2012.

Concerns regarding margin pressure:

Margins are likely to be under pressure, it is believed that there could be a pressure on core business margins, as volumes will slowdown coinciding with the ramp-up in original programming hours. Original Programming Hours for the flagship channel like Zee TV has increased from 24 hours per week to 29.5 hours per week and the management targets to increase original programming hour further to 33-35 hours per week by March 2012.  On the contrary, Star Plus is currently running at original programming hours of 40 hours per week while Colors is at 30-31 hours per week.

Outlook & Valuation:

Though there are visible signs of slowdown in ad growth likely due to macro slowdown and a pause in ad spends after the spending of Rs.1,500 cr on cricket season (ICC Cricket World Cup + Indian Premier League). While there is no indication of a cut in ad-budgets as yet, advertisers have turned more cautious, thus impacting advertising volumes. A buy back & 11 % ad revenue growth in FY12 and 12 % growth in FY13 makes a buy in ZEEL with a target price of Rs. 150 The stock trades at 20x FY12E EPS of Rs. 6.70 and 16.5x FY13E EPS of Rs. 8.2 with a price target of Rs. 150 (18x FY13E EPS). I believe that buy back will be EPS accretive by 1.288 %. 

Result Update:

Zee Entertainment Enterprises Ltd (ZEEL) posted 13.28 % decline in its consolidated net profit at Rs. 130.16 Cr for the first quarter ended June 30, 2011. In the same quarter of the previous fiscal, the company’s net profit was Rs. 150.10 Cr. For the three months ended June 30, 2011, the company’s consolidated sales increased 3.14 per cent to Rs 698.30 crore compared with Rs. 676.99 crore in the same quarter of 2010—11. The company’s advertising revenues increased 0.5 % during the quarter to Rs. 378.74 crore (Rs 376.91 crore). As said earlier, with the onset of festival season, the company is expecting to see normalcy in advertising spends. ZEEL’s subscription revenues increased 16.7 % during the first quarter of the current financial year to Rs. 305.09 Cr v/s Rs. 261.42 Cr in the same quarter last fiscal. Zee final Dividend of 200 % i.e Rs. 2.00 on 28th July 2011, AGM on 10th Aug 2011. Book Closure from 30th July 2011 to 5th Aug 2011  

KEY FINANCIALS	FY10	FY11E	FY12E	FY13E
SALES (Rs. crs)	2,196.60	2,941.40	3,238.20	3,674.30
NET PROFIT (Rs. crs)	468.60	570.00	660.20	803.10
EPS (Rs.)	5.20	5.80	6.70	8.20
PE (x)	25.80	23.20	20.00	16.50
P/BV (x)	3.50	3.10	2.80	2.60
EV/EBITDA (x)	21.00	17.10	14.30	12.00
RONW (%)	13.00	13.80	14.40	16.20
ROCE (%)	17.80	19.50	21.2	23.80

I maintain my buy status on ZEE Entertainment Enterprises Ltd with the price target of Rs. 150 in short term. For long term my target is of Rs. 200. As I always say do respect the market and keep a strict stop loss of 8 % or Rs. 110 on your every purchases.

BERGER PAINTS : Paint your Imagination !!!

Scrip Code: 509480 / BERGEPAINT

CMP:  Rs. 101.45; Buy at Rs. 95 - 100 levels.
Short term Target: Rs. 105, 6 month Target – Rs. 115; STOP LOSS – Rs. 87.40; Market Cap: Rs. 3,510.90 cr; 52 Week High/Low: Rs. 123 / Rs. 73.50.

Total Shares: 34,60,72,464 shares; Promoters : 26,15,89,683 shares –75.59 %; Total Public holding : 8,44,82,781 shares –24.41. %; Book Value: Rs. 22.35; Face Value: Rs. 2.00; EPS: Rs. 4.29; Div: 55 % ; P/E: 23.55 times; Ind P/E: 33.04; EV/EBITDA: 17.90.

Total Debt: Rs. 24.57 cr; Enterprise Value: Rs. 3,590.50 cr.

BERGER PAINTS INDIA LTD was founded in 1760 but started its business in Kolkata, India in the year 1923. The company has undergone many change of hands - In 1947, it was acquired by British Paints (Holdings) UK, which renamed the company as British Paints (India). The UK Company was then acquired by Celanese Corporation, which later sold the Indian company to Berger, Jenson Nicholson Ltd in 1969. In 1983, the company was renamed as Berger Paints India and it started using the trade name of Berger. Berger Paints engages in the manufacture and sale of various decorative and industrial paints in India and internationally. The company’s products include synthetic enamels, acrylic emulsions, metal and wood paints, interior wall coatings, and exterior wall coatings. It has a wide variety of product portfolio including interior and exterior wall coatings as well as metal and wood paints. It has strong and well established brands like Berger Silk, Berger Rangoli, Berger Illusions, Berger Weather Coat, Jadoo Enamel, etc. It also provides color consultancy services. The company offers its products primarily for home owners, professionals, and industrial users. Berger Paints has six subsidiaries and two JVs located across geographies including Cyprus, Russia, Poland and Nepal.

Investment Rationale:

The Indian Paints Industry is estimated at US$ 380 Cr and is growing at 1.8-2x GDP growth since the last few years. This industry is dominated by top 4 players commanding more than 90 % share of the organized market. The per capita consumption of paints in India remains very low at 1.5 kgs, against 15-20 kgs in developed countries. This industry is categorized in two segments – decorative paints, which contributes 70 % and industrial paints that contributes 30 % to the total industry size. Berger Paints is the second largest player in the decorative paints market with a 17 % market share. Decorative paints constitute 80 % of its sales and enjoy strong brand equity in the eastern regions. It has a pan India distribution network of 14,000 dealers and 7,700 tinting machines. Further, the company also has a strong foothold in the protective coatings market, which contributes nearly 10 % to its total sales. Also the company has adopted aggressive expansion plan to increase its production capacity by 52 %, through the addition of 160,000 MT at a cost of Rs. 140.00 Cr scalable to 320,000 MT in Andhra Pradesh over the next 2 years. Berger Paints is focusing on raising the share of water-based paints in its total product portfolio and has also filled the product gap that existed with Asian Paints, through the introduction of premium products in the water-based paints. This segment will drive higher revenue growth and will also expand operating margins in the future. The shift towards water-based paint will bring high growth & also it’s a higher margin product segment compared to solvent-based paints. In FY10, it had issued 2 Cr shares on warrant conversion to a promoter group company, Jenson and Nicholson and issued additional 72 Lakhs shares to Nalanda Fund at Rs. 50.5/share to fund its growth prospects, leading to a total dilution of 8% on the expanded equity capital. It is expected that Berger Paints will not dilute equity further, as it has sufficient internal accruals to fund its growth plans over the next two years.

Outlook & Valuation:

Berger Paints (I) Ltd is the second largest player in the decorative paints market with a 17 % market share and is expected to benefit from the long-term steady demand in paints industry. Revenue and earnings CAGR of 19 % - 20 % over FY11-13E can be expected from Berger Paints, leading to a comfortable cash flow position; Additional fund raising is ruled out. Focus towards water-based paints to augur well will be added advantage for operating margins. Company witnessed 18 % CAGR over FY06-11, while concerns on the short-term demand scenario remains; It is believed that over a longer term, the company is on the way for a healthy growth. The company has already undertaken a 7 % price hike in 1QFY12, which will further help overall sales growth in coming quarters. Company’s subsidiaries  are expected to contribute 7 % to the consolidated sales by FY13E. At the current market price, the stock is trading at 20 x FY12E EPS of Rs 5.00 per share and 16.0x FY13E EPS of Rs 6.20 per share. At 16.36 x FY13E EPS, it is trading at 38% discount to the market leader, Asian Paints. Historically, the company has traded at an average discount of 40% to Asian Paints’ one-year forward mean Price Earning Ratio. It is believed that going forward this discount should narrow due to reasons like Gaining considerable size with a revenue CAGR of 19% over FY11-13E; Product mix focus shifting towards higher growth and better margin business of water-based emulsion paints; Increasing presence across India with rising penetration in the south. Initiate buy with ACCUMULATE on the BERGER PAINTS with the target price of Rs 105/share for the short term valuing it at 17.5x FY13E (30% discount to Asian Paints) EPS of Rs 6.20/share

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. crs)	1,891.30	2,328.10	2,896.70	3,317.40
NET PROFIT (Rs. crs)	120.40	150.10	173.30	215.30
EPS (Rs.)	3.50	4.30	5.00	6.20
PE (x)	28.60	22.90	19.90	16.00
P/BV (x)	7.40	5.60	4.70	3.90
EV/EBITDA (x)	16.60	13.40	11.60	9.60
ROCE (%)	24.70	23.30	23.10	24.30
RONW (%)	22.60	25.10	25.90	28.00

I would buy BERGER PAINTS (I) LTD with a price target of Rs. 105 for the short term and Rs. 115 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 87.40 on purchase.

As the author of this blog I disclose that I do hold BERGER PAINTS in my investment portfolio.

JSW STEEL : A Growth potential Stock !!!

Scrip Code: 500228 / JSWSTEEL

CMP:  Rs. 882.55; Buy at Rs. 865 - 875 levels ; Short term Target: Rs. 915, 6 month Target – Rs. 1150; STOP LOSS – Rs. 812.00; Market Cap: Rs. 19,674.47 cr; 52 Week High/Low: Rs. 1400.00 / Rs. 750.85 ; Total Shares: 22,31,17,200 shares; Promoters : 8,41,43,661 shares –37.71 %; Total Public holding : 13,89,73,539 shares –62. %; Book Value: Rs. 421.41; Face Value: Rs. 10; EPS: Rs. 90.12; Div: 95 % ; P/E: 9.78 times; Ind P/E: 10.67; EV/EBITDA: 6.46.

Total Debt: Rs. 14,160 Cr; Enterprise Value: Rs. 33,834.47 cr.

FAIR VALUE – Rs.1,516.00 .  

JSW Steel Limited (JSW) is an India-based company engaged in the business of production & distribution of iron and steel products. The company has two primary business segments, Steel and Power (used mainly for captive consumption). The Company's products include hot-rolled coils/steel plates/sheets, rolled products (long), cold-rolled coils/sheets, galvanized plain/corrugated/color coated coils/sheet, steel billet, and bars and rods. The Company has an installed crude steel making capacity of 7.8 metric tons per annum (MTPA) in India, consisting 23% of value-added flat products (capacity of 1.8 MTPA), spread across four locations, which are Vijayanagar Works in Karnataka, Salem Works in Tamil Nadu, and Vasind and Tarapur Works in Maharashtra. In January 2011, it bought assets of Bellary Steel.

Investment Rationale

Ispat will be a positive surprise in December 21st, 2010, JSW STEEL acquired 41.29 % of ISPAT IND for Rs. 2157 Cr; Ispat will be renamed as JSW Ispat Steel. JSW to get 108.66 crore equity shares of Ispat on a preferential basis at Rs. 19.85/sh totaling to Rs. 2,157 Cr. JSW has made an open offer for an additional 20% to the minority shareholders of Ispat at a marginal premium of Rs. 20.54, which would be an additional spending of around Rs. 1,200 Cr. This deal will not only make Jindal the largest private sector steelmaker by capacity in India, but it will also bring Ispat back to the profit path after its debt of Rs. 7,500 Cr is refinanced and Rs. 3,100 Cr injected into the company as capital expenditure. With the start of Chile shipments, Ispat industries have posted a net profit of Rs. 70 Cr for Q4FY11, with EBITDA/ tonne of Rs. 5700. This has been a positive surprise and could be achieved because of better realizations of Rs. 40,700/ tonne and one time tax benefit to the tune of Rs. 35 Cr. Japan’s 2nd largest steelmaker JFE has acquired 14.99% stake in JSW (on a fully diluted basis) at Rs. 5,410 cr @Rs1,500/share. The current stake of 16.17% will come down to 14.99% after the conversion of 1.75 Cr warrants by JSW’s promoters. This has helped JSW in bringing down its financial leverage to a manageable level & to meet its funding requirements for the many growth projects in the pipeline. It is believed that technological collaboration with JFE would help JSW to improve product mix & to achieve further operational efficiencies, leading to EBITDA/tonne expansion. JSW has received all permits for coking coal sales in US and expects 0.5mnt shipment in FY12. Company also plans to increase Vijayanagar capacity by 2.0mntpa through debottlenecking at an attractive capital cost of US$ 300/tonne. JSW Steel and Essar Steel have hiked prices of flat products by up to Rs. 600–1,000/tonne with effect from June 1, 2011, on account of higher raw-material costs. 1QFY2012 benchmark coking coal contracts have been settled at US$330/tonne due to floods in Australia, and 2QFY2012 contracts have been settled at higher levels of US$315/tonne. In case of iron ore, 1QFY2012 contracts were settled higher by 20%, while 2QFY2012 contracts are expected to remain flat vs. 1QFY2012. On the other hand, steel companies may not hike long product prices as the monsoon season is approaching, when construction activity slows down

Outlook & Valuation:

The company has a net debt of Rs. 14,160 Cr and a cash balance of Rs. 2300 Cr as on 31st March 2011. The consolidated D/E remains at 0.84. The company has repaid Rs. 450 Cr and drawn Rs. 760 Cr new debt during FY11. Raw material as percentage to sales has been lower during the quarter, as the company has been using its comparatively low priced coking coal inventory. The scenario however is not likely to remain same in the short to medium term, as the macro economic situation in the country has been getting more challenging with rise in inflation and interest rates.  This would put pressure on margins. Steps by Karnataka government and other concerned authorities to stop illegal mining in the state may also proved to be negative for the company, as that might restrict availability of low grade fines at a cheaper price. On the positive side, contribution form Chile iron ore mines are likely to visible during FY12. The sales volume of 0.8 mt and 1 mt for FY12 and FY13 respectively from Chile are considered. Company is expecting 0.5 mt coking coal from US during FY12. Despite some pain in the short to medium term it can be expected that the stock has a potential to outperform on a longer term basis backed by strong volume growth and higher integration. The company has indicated its seriousness in having stronger backward integration even by acquisition of mines if available at a right price. At the CMP of Rs. 882.55, the stock is trading at 7.18 x FY13E EPS and 5.1 x FY13E EV/EBITDA. Looking at the positives and concerns, the value of the company comes at Rs. 1,500/ share which I believe is a fair value of the stock.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E
SALES (Rs. crs)	19,073.80	24,116.10	37,073.20	37,713.30
NET PROFIT (Rs. crs)	1,597.60	1,754.00	2,583.00	2,953.30
EPS (Rs.)	71.60	78.60	107.40	122.80
PE (x)	12.90	11.70	7.80	7.50
P/BV (x)	1.90	1.40	1.00	1.20
EV/EBITDA (x)	7.50	7.30	4.10	5.20
ROCE (%)	17.80	11.70	14.70	15.50
RONW (%)	7.20	6.90	8.60	8.20

I would buy JSW STEEL LTD with a price target of Rs. 915 for the short term and Rs. 1150 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 812.00 on purchases. JSW STEEL to hold its EGM on July 25, 2011 for the purpose of Rs.12.25 per share (122.5%) Dividend, the book closure for the same has been fixed from July 13, 2011 to July 15, 2011.

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.