>SHREE RENUKA SUGARS (PRIME BROKING)

KUCH MEETHA HO JAAYE.....

Sugar prices in India are on a structural rise due to positive macro fundamentals and we expect them to firm up even further over the next 12-18 months. The primary reasons for this are:

1) A 45% YoY fall in sugar production in India in 2008-09 sugar season

2) Contracted area under sugarcane cultivation for next year due to diversion of cane into other remunerative crops

3) Expectation of further weakness in 2009-10 sugar season due to poor monsoon in large sugarcane producing states in India

4) Tightening of the global demand supply situation due to steady growth in consumption and lower production in India, the EU, Australia, Thailand and Pakistan

5) Expected low levels of closing sugar stocks for current as well as next year

India witnessed a significant drop in sugar production in sugar season 2008-09 due to diversion of cane into other remunerative crops, adverse climatic condition, fall in yield of sugarcane and lower sugar recovery. At 14.5 mn tonnes, sugar production for the year came down 45% YoY against about 22.5 mn tonnes of domestic sugar consumption. The prospects of an expected rebound in sugar production to around 20 mn tonnes for sugar season 2009-10 seem unlikely now due to poor monsoon in some of the large sugarcane producing states of India. With sugar consumption expected to grow at 2-3% annually, India is staring at two consecutive deficit years. The low closing sugar stock for the current year means India would have to import between 4-5 mn tonnes of additional raw sugar for next year to meet the deficit. The expected purchases
by India from international market have caused international raw sugar prices to spiral upwards. Brazil has allocated over 42% of sugarcane to sugar production compared to 39.5% last year due to the relative price spread in favour of sugar than ethanol; this allocation is expected to go up further by the end of the year.

We believe Shree Renuka Sugars is well positioned to take advantage of this situation. The fact that they are among the few sugar companies in India that have focused on building sugar refining capacity will work to their advantage. The company has visibility on its raw material for next year and we expect it to achieve a high throughput next year. We are bullish on the stock with a STRONG BUY rating and price target of Rs. 232.

GLOBAL SUGAR INDUSTRY

The global sugar trade has been dominated by Brazil and EU. Brazil is the largest producer of sugar and has increased its production significantly since deregulation in 1999-2000 when sugar price controls and government mandated sugarcane prices were eliminated and private participation in sugar exports were encouraged. India is the second largest producer followed by
China, USA, Thailand, Australia, Mexico and Pakistan. Global sugar production increased from approximately 134 mn tonnes in 2000-2001 to 167.2 mn tonnes in 2007-2008 and expected to decline to 154.9 mn tonnes in 2008- 2009 (Exhibit I) according to F. O. Licht’s July 2009 estimates.

The world’s largest consumers of sugar are India and China followed by Brazil, USA, Russia, Mexico, Pakistan, Indonesia, Germany and Egypt. The world consumption grew from approximately 131 mn tonnes in 2000-01 to157.6 mn tonnes in 2007-08 and is projected to grow to steadily due to combination of world GDP growth and population growth (See exhibit in report)

To see full report: SHREE RENUKA SUGARS

>ZICOM ELECTRONIC SECURITY SYSTEMS (PRIME BROKING)

Q1FY10 CONSOLIDATED PERFORMANCE

Zicom reported a 26.2% YoY growth in revenues for Q1FY10 at Rs. 1,047 mn versus Rs. 829 mn for Q1FY09. EBITDA grew by 49.6% YoY and EBITDA margin improved to 14.3% from 12.1% for Q1FY09. Depreciation and interest costs increased by 39.9% and 116.7% YoY respectively. At PBT level, profit stood at Rs. 61 mn, up by 15.8% YoY. Net profit adjusted
for minority interest was up by 14.5% YoY at Rs. 44 mn versus Rs. 38 mn for Q1FY09.

VALUATION

We maintain our expectation of a 30% CAGR in revenues over FY10-FY11E. We estimate FY10E and FY11E EPS of Rs. 22.3 and Rs. 32.8 respectively. The company is currently trading at P/E of 3.8x and 2.6x and EV/EBITDA of 3.4x and 3.0x times FY10E and FY11E numbers. Our target price on the stock is Rs. 223 at a P/E multiple of 10.0x its FY10E earnings.

KEY RISKS

The key downside risks are:
1) Delay in response for change in regulatory framework from the government as this impacts priority for security products, decision making and budgetary provisions for security projects in government and public sector companies

2) Increased competition due to low barriers to entry

3) High price sensitivity in the Indian market

4) Obsolescence of technology and products

To see full report: ZICOM

>ABAN OFFSHORE LIMITED (PRIME BROKING)

BACK WITH (A BAN)G!

WHAT’S NEW & WHAT’S CHANGED?
We are bullish on the offshore drilling industry in general and Aban Offshore in particular because of the following positive developments and changes:

1) There has been a dramatic resurgence in the demand for rigs in the Middle East and Latin American markets. We expect offshore drillers to be able to deploy their idle rigs for two-three year fixed term contracts over the next few months.

2) The contract day rates, which were expected to drop to Rs. 90K-100K have settled between Rs. 115K-125K for two-three year contracts; the day rates in the Middle East markets would be higher at Rs. 130K-140K.

3) We believe banks would reschedule debt tenors for offshore drillers to between 8 and 10 years from their current five year tenors. This is based on a similar approach by banks to companies needing debt rescheduling in other sectors. This is more so in case of Aban as it already has operational rigs and substantial cash flows from their operation.

We expect Aban to be able to deploy at least six of its currently seven idle assets by the beginning of and during the third quarter of FY10. Further, its deepwater assets – Aban Pearl and Aban Abraham – that are on long-term contracts are expected to start generating revenues beginning August 2009. We expect Aban to have deployed all its assets for FY11. Given the improvement in macro environment for offshore drilling industry and our expectation of Aban’s ability to restructure its debt, we are bullish on the stock with a STRONG BUY rating and price target of Rs. 2,091.

OUTLOOK
The global offshore drilling industry is hugely dependent on the crude oil prices. The industry suffered heavily during the second half of 2008 as crude oil prices plunged from highs of about $147 to lows of about $32. The recent strong rally in crude oil prices and the expectation of a sustained rising demand should benefit the offshore drilling industry as higher crude oil prices
make several oil & gas projects commercially viable.

It is a simplification to base the fortunes of the offshore drilling industry on the oil and natural gas prices, however, they are a key determinant of the number, length and value of the offshore drilling contracts. The demand-supply mismatches of the offshore drilling rigs being the obvious other key determinant. The graph of number of new offshore rig contracts awarded each month from
January 2008 to May 2009 – a period when oil prices have been extremely volatile – clearly establishes the importance of oil prices for the offshore drilling industry.

To see full report: ABAN OFFSHORE

>ZICOM ELECTRONIC SECURITY SYSTEMS (PRIME BROKING)

Sense of security

RESULTS HIGHLIGHT
Zicom reported a 29.5% increase in topline to Rs. 3,757.6 mn. EBITDA jumped substantially by 224.3% to Rs. 505.2 mn versus Rs. 155.8 mn for FY08 with EBITDA margin improving to 13.4% versus 5.4% for FY08. This was primarily because the company had taken the advertising expense of Rs. 231.6 mn for their retail arm as one-time expense in FY08. Depreciation and interest cost increased by 78.4% and 72.3% respectively.

At PBT level, profit was up significantly by 2,572% at Rs. 240.2 mn. The company’s net profit increased by 447.3% to Rs. 222.9 mn versus Rs. 40.7 mn for FY08. The net profit figure after adjusting for minority interest was Rs. 195.9 mn versus Rs. 14.5 mn for FY08.

Zicom reported consolidated Q4FY09 revenues at Rs. 1,038.4 mn with EBITDA of Rs. 152.1 mn. Net profit figure for the quarter stood at Rs. 67.6 mn. EBITDA margin and net profit margin for the quarter were at 14.7% and 6.5% respectively.

INVESTMENT RATIONALE
The electronic security solutions market in India is at a nascent stage compared to developed countries of the world. While the U.S. and Europe may account for more than 60% of the global electronic security industry, the rate of growth of the industry in India is expected to be much higher at 30% compared with the single digit growth rates expected in these developed markets. We believe that there is a huge potential for security business in India for the following reasons:

1) The security perception of the government has changed drastically due to continued threats from terrorist activities in India. With the government giving increased importance to safety and security measures, we expect significant demand from the government for integrated security solutions to protect public infrastructure.

2) The industrial segment’s rising demand for new generation network-based integrated products and solutions to support remote access and monitoring across their physically scattered plant locations.

3) The consumers’ growing awareness and change in attitude about safety, security and preference for integrated electronic security systems.

4) The need for security systems at the increasing number of public places such as malls, multiplexes, retail chains, etc that have come up over the past few years. Further, need for security equipments such as burglar alarm system, video phone doors, etc for large number of residential townships across metros, tier 1 and tier II cities in India as these are increasing considered as basic facilities or lifestyle products by the consumers.

To see full report: ZICOM