Friday, March 12, 2010


Accounting for two-thirds of global IT-spending, enterprises are the real engine of technology into 2010-11. After a 14-28% collapse in 2009, a phoenix-like revival is at hand, driven by improving corporate cashflows and ageing installed hardware. We consider server virtualisation a likely success, but security and control issues are troubling cloud computing, delaying its mainstream adoption (and thus reducing the likelihood that it will disrupt a spending revival). More than 40 stocks stand to benefit.

Enterprise is the engine
Enterprises account for 65% of IT-hardware spending, 71% of telecom equipment, 85% of software and almost all of IT services.

Our analysis of global IT-spending data shows an unprecedented collapse in recent years, with enterprise-hardware expenditure down 21% YoY last year.

Unlike consumer tech, where China and Asia-Pacific are surging, North America and Western Europe account for 66% of enterprise spending. For a revival, look West.

The case for a revival
For more than five decades, corporate cashflows and profits have been useful lead indicators for IT spending - and these are now reviving.

By 2011, 84% of the installed base of enterprise-desktops will be five years old.

Delaying “PC refresh” converts capital-cost savings into higher operating expenses.

A rise in notebook replacements is encouraging (51m units in 2009; 29m in 2008).

Offshore outsourcing of IT services, such as to India, is saving US$8bn-10bn each year; this can finance 4ppts hardware-value growth, even if budgets stay flat.

The case against
Upgrading to a new operating system such as Windows 7 without a “PC refresh” carries substantially higher migration costs.

Although server virtualisation is likely to be successful, the utopian dream of cloud computing is troubled by security, compliance, control and regulatory issues.

Long list of beneficiaries
The debate over enterprise spending is the No.1 tech catalyst in 2010-11.

Enterprise-spending stocks have underperformed over recent years.

More than 40 stocks stand to benefit from an enterprise-spending revival.

To read the full report: GLOBAL TECHNOLOGY

>RELIANCE INDUSTRIES: 4QFY10 shall be an inflection point

During April – Dec 09, RIL has doubled refining capacity and added one of the world’s largest gas facilities, and yet earnings have stagnated due to more than halving in GRMs. We believe a recent tripling in GRMs, further gas rampup and shift to cheap in-house gas shall herald 4QFY10 as an inflection point.

We forecast a 39% QoQ rise in RIL’s 4QFY10 PAT. Our scenario analysis (Fig 1) suggests a Rs 15–25bn QoQ PAT growth due to the above factors.

Sustained and significant rise in GRMs: Singapore GRMs have tripled QTD to US$ 6.0/bbl from near 10-year low of US$ 1.7/bbl during Oct-Dec 09. Our sensitivity analysis shows a US$ 2.5-4.0/bbl QoQ rise in GRM adds Rs 13-21 bn to PBT. We believe RIL enjoys a double leverage to rising GRMs: (1) Our regional refining team believes that the rise in margins is sustainable and forecasts a rise in refining margins from US$ 3.5/bbl in 2009 to US$6/bbl in 2010. Nearly 1m bpd of refining capacity has closed globally, and during CY10 capacity closures is forecast to exceed additions (Figs 2 and 3)

(2) A potential widening in light-heavy crude price differential shall further significantly benefit Reliance as it has amongst the world’s most complex refineries. High refined product inventory levels (Fig 5) has constrained widening of light-heavy spreads. A strong growth in US economy (5.9% in 4Q09 actual) has recently spurred demand and hence could cut inventory.

Ramping up of KG-D6 gas production: We believe RIL’s KG-D6 production has increased to ~60 mmscmd from an average of 45mmcmd during 3QFY10, a 33% QoQ jump. Production plateau of 80-89mmscmd is unlikely until end CY-10 though, once GAIL India (GAIL IN, Rs400.10, Outperform, TP: Rs506.00) expanded HBJ pipeline is fully commissioned.

Reduction in operating costs: RIL has switched over from imported LNG, which costs ~US$9/mmBTU for in-house use to KGD6 gas saving it US$ 2- 4/mmBTU. We estimate a PBT increase of Rs 2-5bn QoQ.

Petchem margins also higher: We estimate that polymer integrated margins are up 13.3% QoQ and polyester margins have risen 2.8% (Figs 6, 7 & 8)

Earnings and target price revision
No change

Price catalyst
12-month price target: Rs1,207.00 based on a Sum of Parts methodology.
Catalyst: New oil & gas finds, and potential acquisitions.

Action and recommendation
RIL is one of our top picks. We believe the company is not only poised to witness strong and highly visible earnings growth over the next two years, but sharply enhanced upstream exploration activities and likely corresponding finds shall sustain growth in the longer term.

To read the full report: RIL


Management reiterated creditors backing for debt rescheduling.
Company to de-risk geographical concentration in Middle East.
Management not averse to further equity dilution to reduce debt.
Reiterate BUY with TP of INR1561 (7.7x FY11E EBITDA).

Strong creditors backing

There have been concerns about Aban’s ability to service its bullet payments for March 2010 and March 2012, even after debt re-scheduling. Management allayed such fears and said that Indian banks are ready to refinance loans coming up as bullet payments. Also, Indian banks are more willing to extend tenure, rather than take possession of rigs and sell them at a discount to NAV, as Aban has a predictable cash-flow-backed business.

Keen to reduce geographical concentration
Out of the 16 rigs deployed, 6 are in India and 5 in the Middle East (Iran). Management plans to diversify geographically and is reluctant to charter more than one rig in the Middle East from the four idle rigs – DD1, 6, 8 and Aban VII. Management aims to deploy three out of the four rigs by mid-FY11. Utilization rates in Latin America and South East are stabilizing with no visible pressure in spite of incremental supply earmarked for 2010/11. Management believes that rig market fundamentals are improving with E&P companies restarting long-gestation projects estimated to be viable at the current USD70-80/bbl crude price.

Further equity dilution – a risk
With operating cash flows sufficing debt repayment obligations at best, Aban has no growth plans for FY11. While no capex is guided for FY11, if rig environment continues to improve in terms of utilization and day rates, Aban plans to invest in a deepwater vessel backed by a long-term contract by FY12/13. However, until then Aban’s priority is to reduce debt levels to a comfortable 2-3x, giving comfort to creditors, mainly Indian
banks and, for the same purpose, might not shy away from raising equity.

Still steam left to play for new rig orders/de-leveraging
At CP, risk-reward looks favorable; we are comfortable owning the shares for the potential rig contracts and to play the de-leveraging story (we expect D/E to decline from 5x in YTD FY10 to 2.3x by FY12). We do not anticipate significant downside from current levels as more than 75% of the revenue is contracted until FY12. We reiterate our BUY rating and INR1,561 TP. We value ABAN at 7.7x target 2011E EV/EBITDA, in line with the global peer average on Bloomberg consensus estimates. We believe the market will cheer the potential rig contracts from current levels; we look for rig rates of ~USD125,000 for the DD series of jack-ups in line with current world average for jack-ups. Risk: Contract delays.

To read the full report: ABAN OFFSHORE


Promoted by Pradipkumar Karia, Chetan Karia and Vishal Karia, Pradip Overseas is one of the few niche textile companies in India focused on home linen products in wider and narrow width. Currently, the company has
facilities at Changodar near Ahmedabad in Gujarat.

Objects of the Issue: The company intends to utilise the issue proceeds to part finance the setting up the proposed Manufacturing facility within the Proposed Textile SEZ, to part finance the incremental margin money requirement for working capital.

Key Points
The company has a unique business model where it begins its manufacturing process from post weaving stage. It sources grey fabric and then processes the same before the finished fabric is ready for stiching. The ready fabric is stitched and then converted into bed sheets and pillow covers and other material as required.

The company has drawn up plans to expand its current capacity from 136.5 million meters to 169.50 million meters p.a by setting up manufacturing facility in a proposed textile SEZ in Ahemadabad, Gujarat. Expanded capacity is to be commissioned by January 2011.

The company caters to both domestic and export markets. The order book as on February 15, 2010 was Rs 333.78 crores, comprising export orders worth Rs 101.51 crores and domestic orders worth Rs 232.27 crores. Exports constitute around 45-50% of the net sales in the past three years.

Majority of the company exports are indirect exports and primarily shipped to American and European markets.

The company has also makes small quantity of garments, dress materials and bottom wear fabrics, primarily for international markets and has drawn up plans to scale it up. Apart from these value added products, it is also looking at industrial textiles as potential opportunity. The company is also focusing on value added products such as quilts and organic cotton home Lenin products.

In a move to strengthen the business presence, the company has also received permission from International Development LLC, Tampa, FL, USA (IDL) for using and marketing the brand, Lucy B Linens, for home linen products in India and other pertinent countries. The company distributes its home linen products through C A Patel Textiles, which has a retail network of more than 2,000 retailers across the country.

Its capacity utilization is continuously improving, from 86.32% in FY07 to 97.92% in FY09.

Investment Concerns
The Company does not have presence in direct retail.

It operates in a highly competitive market and faces stiff competition from other organized players in this segment and also from the unorganized sector.

The home textile sector is export oriented and so is more vulnerable to global economic and liquidity factors.

Volatility in forex market

Valuations & Advise: The company is in the highest value addition segment of textile value chain which is fabric processing and has an asset-light model. It is predominantly single product company i.e home linen. It cannot be fully compared with Alok Industries or Welspun Indian as they are integrated players and have diversified products. The full benefit of expansion will be felt in FY12 wherein the profits are expected to double from current levels. At the price band of Rs 100-110, the PE works out to 5.9-6.5x. Alok Industries and Welspun India are trading at P/E of 6.4x and 5.5x. The asking price is in line with its peers. SUBSCRIBE.

To read the full report: PRADEEP OVERSEAS


The company is available at cheap valuations as compared to its future growth prospects. The company derives approximately 60-65% of its revenues from the Power sector which is expected to grow significantly going forward. With significant increase in new power capacities expected in future, demand for turbines used in power generation is set to increase. .In our Budget top picks 2010-2011 we Recommended Investors to BUY Mazda Ltd between Rs 81 and Rs 89 for price target of Rs.111.We Recommend Investors to HOLD at for initial Price target of Rs.111.

• Mazda ltd operates in Engineering and Food division manufacturing engineering equipments like vacuum systems and pumps, evaporators and valves. It caters mainly to power generation, petrochemicals, edible oil extraction and steel manufacturing sector. The company currently has an order book of Rs.600 mn which is to be executed in near term.

• The Company is into technical collaboration with Croll- Reynolds Inc of USA for manufacturing equipments used in turbines that are used by power sector.

• Croll-Reynolds holds 13% stake in Mazda Ltd. Croll-Reynolds clients in India are being served by Mazda ltd.

• The company expects to achieve sales of Rs.1,150 mn by FY 2012 from the current sales of approximately Rs.800 mn. It expects its operating margin to improve to 20% from the average 16%.It also expects to achieve net margin of 12.5% by FY 2012 from the average 10%.

To read the full report: MAZDA LIMITED