>BEML: Will supply intermediate metro coaches to Delhi Metro Rail Corporation

■  Metro orders
BEML has recently bagged orders worth Rs 318 crs for supplying 40 metro cars (10 trains of 4 cars each) to Jaipur Metro Project. The Company expects to receive some more orders totaling Rs 60 crs from this project in future. It is also designing and developing metro cars for upcoming metro projects in Tier II cities.


BEML will supply intermediate metro coaches to Delhi Metro Rail Corporation. It is also targeting orders from Bangalore, Hyderabad and Kolkata rail projects, besides participating in international projects in Dubai, Abu Dhabi, Qatar, Colombo, Malaysia and Dhaka.


■  Railway business hive-off
BEML is planning to hive off its railway business into a separate Company to tap the growing demand for rolling stock over the next decade. It has emerged as the only Indian Company to manufacture metro rail cars, which has helped in bagging orders from Delhi, Bangalore and Jaipur metro projects. The company is also exploring opportunities in aluminium rail wagons manufacturing and has taken trial project for Nalco. Demand for mining equipments from Indonesia continue to soar which made BEML to rework its growth strategy. It plans to open an after - sales service centre cum depot at the coal mining belt of Kalimantan in
Indonesia this fiscal. A new assembling unit or an acquisition of existing unit in Indonesia by next fiscal is also on the anvil.


■  Flurry of earthmoving equipment orders
BEML expects order intake of earthmoving equipments to improve this year, led by new product introductions, recovery in domestic mining sector and strong overseas demand. It launched mining equipments in Thailand and other neighbouring countries like Myanmar, Laos,
Cambodia etc through marketing tie up with Paragon Company Ltd, a Thailand based entity. Similarly, it unveiled high - end products such as dozers, dumpers, motor grader etc in China this year.


We estimate the earthmoving equipment division to grow by 12% this year, thus reversing the declines of last two years. The next year is projected to be tad better as plans to enter new markets in South East Asia, Africa and South America for supplying earthmoving equipments for mining sector fructifies. Margin which saw an erosion of 450 bps in FY11 is estimated to rise by 180 bps to 14.5% in current year.


To read full report: BEML
RISH TRADER

>HEXAWARE TECHNOLOGIES LIMITED: Improvement in utilization level, moderation in attrition and higher contribution of offshore revenue

We initiate coverage of Hexaware Technologies with a LONG rating and March’13 price target of Rs 143, based on 12x March’13e TTM earnings which implies an upside of 20% from current level. In 2008-09 Hexaware’s revenue was hit severely given the disproportionate exposure to discretionary spend segment. Since then the company undertook realignment of its business segment resulting in industry leading growth (CQGR of 8.1%) for the last 8 quarters and also significant improvement in operating performance (wherein operating margin improved by ~1600 bps) during the same time frame. Given the recent deal wins, we expect that the company to sustain its revenue growth momentum going ahead and believe that the company has enough levers to at-least maintain its Q4CY11’s operating margin if not improve
the same.


■ Recent large deal wins provide better visibility over revenue – expect $ revenue CAGR of 20% from CY11-14E: Recent deal wins amounting to TCV of ~$600 mn by Hexaware which are long term in nature (as compared to short-term earlier), spanning across various service lines provides better visibility and much-needed stability to the future revenues. As most of the deals are with existing clients, it will help Hexaware improve its offshore mix and employee pyramid metrics. We expect Hexaware to clock a $ revenue CAGR of 20% from CY11-14E.


■ Still enough levers left to aid margin improvement – company’s target of EBITDAM of 25% a realistic target: Aided by sharp rupee depreciation (~11% in Q4CY11), Hexaware clocked an EBITDA margin of 23% (lifetime high) in the Q4CY11. The company intends to achieve 25% EBITDA margin in next couple of years. We think that an EBITDA margin of 25% is definitely a realistic target and the company still has enough levers to achieve the same. Some of the potential levers are (a) Change in employee mix – Hiring more of freshers (b) Reduction in SG&A expense (c) Improvement in utilization level, moderation in attrition and higher contribution of offshore revenue.


■ Revenue growth momentum and operational stability is here to sustain; Strong dividend policy to support our TP: Post 2008-09 business restructuring, the company has reported industry leading growth and significant improvement in operating performance. We believe this change is sustainable owing to recent deal wins, and operational stability. Hexaware has a high dividend payout ratio of ~50% along with dividend yield of 3.5% which limits the downside risk to our price target (as evident from the DDM fair value of Rs 116). The stock has kept pace with business performance (has doubled over the last 12 months) but we still see upside from current level because of continued revenue growth momentum, healthy dividend pay-out policy and improving operating performance.


To read full report: HEXAWARE TECHNOLOGIES
RISH TRADER

>KSK ENERGY VENTURES LIMITED: High Project Visibility coupled with Attractive Valuations (EQUIRUS)

We expect KSK Energy Ventures Limited (KSKEVL) to commission a total of 4644 MW by FY16 comprising operational capacity of 601 MW, capacity of 313 MW which is expected to be commissioned by FY11 and further capacity under construction of 3730 MW. KSKEVL has pioneered the group captive business model along with a focus on long term off take agreements and fuel security which lead to lower volatility in the tariffs and fuel costs. This provides higher visibility and scalability to its power generation capacity. We see 35% upside in KSKEVL by 30th Sep, 2011 and initiate coverage recommending LONG position and suggest an overweight within the power sector. Our FCFE based DCF Target Price (TP) of ` 242 is based on projections till FY17 and 20 years of growth.

■ Existing Capacity of 601 MW to be ramped up to 914 MW by FY11 and 4644 MW by
FY15 leading to 75% Revenue CAGR and 51% EPS CAGR from FY10 to FY15: KSKEVL has commissioned 601 MW across multiple locations in India including the first two units of
135 MW at the 540 (4*135) MW Warora plant. The further expansion of 313 MW includes 2
remaining units of the Warora Plant and a 43 MW expansion of Arasmeta Phase II. KSKEVL
has also achieved substantial progress on the 3600 MW KSK Mahanadi Project at
Chhatisgarh in terms of placement of BTG orders, commencement of construction works
at the site and recent financial closure for the entire debt requirement. It has incurred a
Project Cost of ` 33 bn and has already infused equity of ` 21 bn. It has also received
equity commitment of ` 2500 mn by IFCI and expects to commission the first unit of 600
MW in Q1FY12 vis-à-vis our conservative assumption of Q2FY12.

■ Predictability of business model and innovative capital structuring enabling higher
financial leverage: KSKEVL has focused on fuel security in the form of long term fuel
supply agreements and has tied up most of its off-take on a long term basis which provide
higher predictability to its business model. It has also set up power plants on captive
basis where in it receives partial equity contributions from its equity partners. These
factors have enabled KSKEVL to finance its projects at higher leverage than its peers.

■ Overcoming the Lehman Hangover with High Investor Interest due to Improved
Visibility of Projects, Scalability of Business and Attractive Valuations: KSKEVL has
entered into a lock up agreement with Lehman Brothers Subsidiaries (LB Entities) to not
sell 12.2% of the shareholding till Oct 30, 2011 and has a right of first refusal over sale of
6.5% of the shareholding. This reduces the uncertainty on the sale LB entities and we
expect that several long term investors will be interested in KSKEVL due to improved
visibility of its projects, scalability of business model and its attractive valuations. This is
evident in the recent commitments of ` 3.5 bn by IFCI and L&T Infra.

■ Attractive Valuations and High Sensitivity to Project Cost Overruns: KSKEVL is
attractively priced on FY10 and FY11 Price/Book to Forward RoE. The advanced stages of
its projects provide assurance regarding the implementation of the projected capacity of
4644 MW within the estimated project costs.

To read the full report: KSKEVL