STOCK UPDATE
Shiv-Vani Oil & Gas Exploration Services
Recommendation: Buy
Price target: Rs433
Current market price: Rs339
A strong performance in Q2
Result highlights
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Shiv-Vani Oil & Gas Exploration Services (Shiv-Vani)? Q2FY2010 results were well above our expectations on account of a stronger than expected top line and a lower than anticipated effective income tax rate.
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The net sales grew by a strong 70.8% year on year (yoy) to Rs319.8 crore supported by the deployment of new rigs and depreciation of the Indian Rupee against the US Dollar (on a year-on-year [y-o-y] basis). Improved revenues from the seismic surveys further aided the top line growth.
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The operating profit margin (OPM) improved by 273 basis points yoy to 42.1% (in line with our estimate of a 42% for the quarter) due to better asset utilisation by the company. Consequently, the company?s operating profit increased by 82.7% yoy to Rs134.5 crore in Q2FY2010.
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Despite a strong 82.7% y-o-y growth in the operating profit and a decline in the effective tax rate (19.5% in Q2FY2010 versus 24.1% in Q2FY2009), the company?s adjusted profit after tax (PAT) increased at a lower rate of 58% yoy to Rs54.9 crore during the quarter. This was mainly due to an increase of 133% and 153% yoy in the interest and depreciation costs respectively on account of increased debt and high capital expenditure (capex) by the company. Adjusting for a foreign exchange (forex) loss of Rs2.2 crore and a currency fluctuation of Rs3.7 crore, the company reported a PAT of Rs56.4 crore for the quarter.
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Currently, the company?s portfolio of rigs stands at 40, out of which 35 rigs are operational including six rigs for the Rs1,610-crore Oil and Natural Gas Corporation (ONGC) contract for the supply of eight rigs. The deployment of the rigs for the ONGC contract is a big positive as the company expects to pay nil or minimal penalty to ONGC for the delay in the supply of rigs caused by several external factors. The company expects that the remaining two rigs for the ONGC contact would also get deployed by the end of October 2009 and all its rigs would become operational in H2FY2010. Further, the company is also planning to raise money up to Rs600 crore through a qualified institutional placement (QIP) or private placement to fund its capex requirements (to add new rigs) and to reduce its leverage position.
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On the new order fronts, the company is in talks with several block owners and is optimistic of winning new orders with the launch of eighth round of the New Exploration Licencing Policy (NELP) bids and the fourth round of the coal bed methane (CBM) bids. Further, the company?s management has highlighted that the day rates for the new contracts it is bidding for are higher by around 10% as compared with the day rates for its previous contracts. We expect a healthy order inflow from the CBM contacts, as we believe that the development of the CBM blocks would be at faster pace, given the extension of the seven-year tax holiday under section 80 IB to the CBM blocks also in the Union Budget for FY2010.
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We have fine-tuned our earnings estimate to factor the slightly higher revenues from the CBM blocks and the lower effective tax, which is offset by higher depreciation, interest and direct expenses. With incremental revenues kicking in from the deployment of the new assets and stable margins, we expect the strong earnings momentum to continue for the company. Moreover, the company?s strong order book of around Rs3,700 crore increases the visibility of its earnings and raises our confidence in the stock. At the current market price, the stock is available at 6.2x its FY2011E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6x. We maintain our Buy recommendation and price target of Rs433 for the stock.
Q2FY2010 Auto earnings preview
Key points
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Pre-festive inventory build-up propels volumes: Continuing the robust demand seen in the previous two quarters, Q2FY2010 saw automobile industry delivering excellent volume growth. Apart from conducive macro scenario in terms of better credit availability, lower interest rates and improved consumer sentiments, Q2FY2010 witnessed pre-festive inventory build-up leading to robust volumes for auto companies. Newly launched products in recent months also gave a boost to the growth on a y-o-y basis. Furthermore, the implementation of Euro IV emission norms in 11 cities across the country by April 2010 brought in significant boost to the volumes on account of pre-buying.
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Passenger cars and two wheelers play the lead: The passenger car segment did well during the quarter both at domestic as well as exports front with Maruti Suzuki leading the herd and other players following on. The festive season falling early this year and that to spread over a period of two months led to significant inventory build-up by automobile makers. New launches in past months also spiced up the growth on a y-o-y basis. Same was the case with two-wheeler segment.
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CV sales suggest demand pick up: Demand for commercial vehicles (CV) has picked up significantly and was clearly reflected in recovery in CV volumes during Q2FY2010. The domestic medium and heavy commercial vehicle (M&HCV) segment, which saw heavy decline in sales volume in the second half of FY2009, posted positive growth for the quarter. This growth can be attributed to increase in profitability of truck operators and pre-buying on account of implementation of Euro IV emission norms in 11 major cities of India. We believe the growth in CV segment also drew strength from increasing governmental infrastructure spending.
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Strong volume growth all around: Among heavyweights, Maruti Suzuki?s sales volume grew by 29.9% yoy, with the domestic volumes growing by 21.8% and the exports continuing their growth, this quarter by whopping 109.1%, on account of robust demand for small cars in European countries due to incentives offered by government in those countries. Mahindra & Mahindra?s automotive sales volume grew by 23.5% and those of farm equipment spiraled up by 40.5%. However the outlook in tractor segment remains subdued on account of lag effect of deficient rainfall in the country, which can impact agriculture productivity. However, the impact of deficient rains could be offset to an extent by the increase in the minimum support prices by the government. Bajaj Auto also did well during the quarter with the overall volumes increasing by significant 7.3% after reeling in negative territory for couple of quarters. The newly launched Discover 100 cc marked the re-entry of the company into the less than 125cc segment. The motorbike has been well received in the market and the company has sold 129,000 units since its launch on July 17, 2009.
Q2FY2010 Capital Goods earnings preview
Key points
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Interest rates continue to pressurise margins: The operating profit margin (OPM) of most of the companies are expected to improve on a year-on-year (y-o-y) basis as the benefit of a lower material/input cost continued to flow in during the quarter while the operating efficiencies also improved in most of the cases. However, higher interest rates would continue to affect the profitability at the net level on account of higher debt. We expect the bottom line of our universe of capital goods companies to grow by 18.3%.
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Better order inflow outlook: The capital goods sector outperformed the broader markets in the last quarter with the improved revenue visibility boosted by the strong order inflow reported by the giant players like Larsen and Toubro (L&T) and BHEL. The easing of liquidity pressure and increasing expectation of improvement in private capital expenditure (capex) led to significant re-rating of the sector.
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Outlook: The capital goods companies, particularly those under our coverage, would continue to gain from the infrastructure spending by the government in areas like power, roads and water. Furthermore, we believe with the business environment getting more conducive, the companies under our coverage should start to claw back to the earlier levels of their working capital cycles, which subsequently would ease the financial cost pressure and boost profitability. However, in spite of a strong business outlook, valuations of some of the companies under our coverage (BHEL, L&T, Thermax) appear stretched. From the results perspective we expect BHEL and Crompton Greaves Ltd (CGL) to outperform the others in the second quarter.
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