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.

ULTRATECH CEMENTS - Buy on every dips

Scrip Code: 532538 / ULTRACEMCO

CMP:  Rs. 1033.90; Buy at current levels.
Short term Target: Rs. 1050, LT – Rs. 1150.
Market Cap: Rs. 28,333.16 cr.
52 Week High/Low: Rs. 1163.10 / Rs. 817.3.

Total Shares: 27,40,41,665 shares; Promoters : 17,36,05,057 shares –63.35 %; Total Public holding : 10,04,36,608 shares –36.65 %;

Book Value: Rs. 224.80; Face Value: Rs. 10; EPS: Rs. 51.24; Div: 60 %.P/E: 20.10 times; Ind P/E: 13.67; EV/EBITDA: 14.23. 

Total Debt: Rs. 3,532.12 cr; Enterprise Value: Rs. 65,583.10 cr

UltraTech Cement Ltd was incorporated in the year 2000, based in Mumbai. The company was formerly known as Ultra Tech CemCo Ltd which was changed to Ultra Tech Cement Ltd in October of 2004. It’s a subsidiary of Grasim Industries Ltd from Aditya Birla Group. The Company has an annual capacity of 23.1 million tons. It manufactures ready mix concrete (RMC). The company has 5 integrated plants, 6 grinding units and 3 terminals: 2 in India and 1 in Sri Lanka. It is an exporter of cement clinker to the countries around the Indian Ocean, Africa, Europe and the Middle East. The Company's subsidiaries include Dakshin Cement Limited, UltraTech Cement Lanka (Pvt.) Ltd. and UltraTech Cement Middle East Investments Limited.

Investment Rationale

Expansion on track: As per the company’s long term strategy it is setting up additional clinkerisation capacity by 4.8 MT at Raipur, Chhattisgarh and by 4.4 MT at Malkhed, Karnataka, the combined additional capacity would amount to 9.2MTPA. The capital expenditure on the new clinkerisation plants, grinding units & bulk packaging terminals across various states is estimated at Rs. 5,600 crore. The capital expenditure (capex) will be funded through a mix of internal accruals and borrowings. As per the schedule, the project is expected to come on stream from FY2014. Since the project is expected post FY13 it is not incorporated in the volume growth estimates.

Concerns regarding margin pressure: The cement industry is expected to grow at 8-9% from FY2012 on account of initiatives taken by the government to boost infrastructure, housing activity and also rural development. However, the upcoming capacity will be creating surplus capacity and cement prices are likely to come under pressure. Further, the cost inflation in terms of higher coal prices will also continue to pressure margins in the coming quarters.

Outlook & Valuation: I like Ultratech for its diversified model & its all India presence along with its strong balance sheet. On the acquisition of Star Cement by Ultratech provided an access in growing markets like Bangladesh, Dubai, Sudan, and Bahrain. However, on account of the anticipated pressure on cement prices in the coming one year and in terms of rising coal prices, I see limited upside in the stock price from the current levels, I give Buy recommendation on the stock with a price target of Rs.1, 150. At the current market price, the stock trades at a PE of 20.2x FY2012E. On an EV/EBITDA basis, the stock trades at 9.9x FY2012E.

Result Update: Ultratech Cement’s financials for Q4 & FY11 are not comparable due to merger of Samruddhi Cements with itself. Dispatches stood at 10.68MT for Q4FY11, for full year 2011, it stood at 32.76 MT. Adjusted with white cement, wall care putty and RMC revenues, grey cement realizations stood at Rs. 3,577/ tonne during Q4FY11 v/s Rs. 3,279 in Q3FY11. Blended realizations during Q4FY11 were Rs. 4,204/ ton is much higher than pure grey cement realizations. Margins stood at 22.7% & 19.2% for Q4FY11 and FY11 respectively.  BITDA/Tonne for Q4FY11 stood at Rs. 956. Overall costs continued to remain high due to increase in raw material, coal and freight expenses, so EBITDA/tonne of Rs. 886 is expected for FY12.

KEY FINANCIALS	FY10	FY11E	FY12E
SALES (Rs. crs)	7,049.7	13,209.9	17,114.5
NET PROFIT (Rs. crs)	1,093.2	1,404.2	2,023.7
EPS (Rs.)	87.8	51.2	73.9
PE (x)	11.7	20.7	14.30
P/BV (x)	2.8	2.8	2.3
EV/EBITDA (x)	6.4	11.9	7.7
ROE (%)	26.6	14.3	17.7
ROCE (%)	28.5	14.5	20.1

I maintain my buy status on Ultra tech Cement with the price target of Rs. 1050 in short term. For long term my target is of Rs. 1150. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.

INDRAPRASTHA GAS: Accumulate on every dip.Better positioned,Good stock.

Scrip Code: 532514 / IGL

CMP:  Rs. 337.45; Buy at Rs. 310-325.
Short term Target: Rs. 350, LT – Rs. 450. 

Market Cap: Rs. 4,724.30 cr. 52 Week High/Low: Rs. 374.00 / Rs. 256.70. Total Shares: 14,00,00,160 shares; Promoters : 6,30,00,080 shares –45.00 %; Total Public holding : 77,00,00,080 shares –55.00 %; Book Value: Rs. 58.96; Face Value: Rs. 10; EPS: Rs. 17.29; Div: 45 %. P/E: 19.49 times; Ind P/E: 20.88; EV/EBITDA: 11.59.

Total Debt: Rs. 55.16 cr; Enterprise Value: Rs. 4,694.06 cr

Indraprastha Gas Ltd was incorporated in 1998, provides natural gas for automobile, domestic & commercial use in Delhi, India. The company is a joint venture of GAIL (India) Limited, Bharat Petroleum Corporation Limited & the Government of the National Capital Territory of Delhi. The company is the supplier of Compressed Natural Gas (CNG) to the automotive sector in the National Capital Territory of Delhi (NCT of Delhi). As on March 31, 2010, the company operated 241 CNG stations, provided PNG to 1,82,000 domestic & 355 commercial customers.  The company also markets and distributes Piped natural Gas (PNG) for domestic and commercial users in NCT of Delhi. As on March 31, 2010, the Company is supplying Re-LNG to 21 industrial consumers in Delhi. PNG was supplied to the domestic and commercial sectors in the areas of Kaka Nagar, Bapa Nagar, Pandara Road, Pandara Park, Sunder Nagar and Sujan Singh Park. BPCL holds 3,15,00,080 shares (22.5 %) & GAIL holds 3,15,00,000 shares (22.5 %) in Indraprastha Gas Limited.

Investment Rationale

Demand still robust in NCT of Delhi and NCR for CNG: Compressed Natural Gas (CNG) volumes (90% of total volumes) grew at a CAGR of 15% between FY07-10 led by private car conversions due to favorable pricing of CNG. Considering the beneficial pricing scenario (CNG being 67% cheaper than petrol and 36% than diesel) as well as robust CNG demand in the operational areas, it is expected that CNG volumes to grow at 18% Y-o-Y from FY10 to FY13. With a view to cater to the increasing demand, IGL plans to add 40 CNG stations by FY11 (241 stations in FY10) and 30 CNG stations in FY12 and FY13 each.

PNG segment set to become the next growth driver: The Piped Natural Gas (PNG) segment which includes the relatively under penetrated domestic households and industrial/commercial customers is expected to be the key catalyst for growth going forward. On the back of strong volume growth from the relatively high margin industrial segment, it is expected that PNG volumes to grow from 87 MMSCM in FY10 to 398 MMSCM by FY13 (CAGR of 66%).

End of Marketing Exclusivity should not pose a hurdle in Delhi: The biggest entry barrier for any new player in CGD business in Delhi is the non-availability of cheap gas (APM gas or KG-D6) gas. The government has allotted 2 MMSCMD of gas to IGL for their Delhi operation which is currently utilized fully. In the event of the government increasing the allocation of APM or KG-D6 gas in Delhi, IGL would get first preference over any new player with its already established network in Delhi.

Ability to pass on high input costs: Historically, IGL has consistently been able to pass on cost increases by way of price hikes of CNG which helped in sustaining its margins. With blended cost of gas expected to be Rs 13.16 per SCM in FY13 as compared to Rs 5.96 per SCM in FY10, gradual price increases (recently hiked prices by Rs. 1.25 per SCM with effect from Jan 1, 2011) would be a key to sustain its margins. With petrol and diesel prices expected to increase going forward, it is believed that IGL should not find it difficult to pass on cost increases by way of price hikes.

Outlook & Valuation: The correct measure to evaluate operating performance for the Consumer Gas Distribution business is at EBITDA level. Drived by robust demand in the CNG segment and increasing revenues from PNG segment led by industrial volumes, IGL’s revenues to grow at an AGR of 45% over FY10-13E. The aggressive expansion plans for establishing the CNG and PNG infrastructure in the operational areas of IGL will reap rich dividends going forward. At current market price of Rs. 300 the stock trades at a P/E of 14.3x and 11.6x for FY12E and FY13E respectively. It will be a good BUY on IGL with a price target of Rs. 350/share.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E	FY13E
SALES (Rs. crs)	852.80	1,078.10	1,723.00	2,414.70	3,304.20
NET PROFIT (Rs. crs)	172.50	215.50	254.30	293.40	363.50
EPS (Rs.)	12.30	15.40	18.20	21.00	26.00
PE (x)	24.40	19.50	16.50	14.30	11.60
P/BV (x)	6.10	5.10	4.20	3.40	2.80
EV/EBITDA (x)	13.60	10.90	8.90	7.40	6.00
ROE (%)	25.20	26.10	25.30	23.90	24.00
ROCE (%)	40.30	43.30	34.80	33.00	35.10

I maintain my accumulation status on IGL with the price target of Rs. 350 in short term. For long term my target is of Rs. 450. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.