Thursday, August 27, 2009


Upgrade to Buy: Concerns Abating, Outlook Improving
 Upgrade to Buy — Despite the stock’s 27-29% outperformance in the last 2-3
months, we upgrade Aban to Buy (1M) from Sell (3S) with a Rs1,550 TP (was
Rs520), driven by a better outlook and yesterday’s positive announcements.
 Three key concerns abating — Our Sell rating was premised on 3 key concerns
— (i) idle assets, (ii) high leverage, and (iii) E&P capex cuts — which did play
out and have materially abated since then. The announcement yesterday of LT
contracts for 4 idle rigs at healthy day rates provides us the necessary evidence
to substantiate our earlier claim of improving times (see our note titled '1Q
Ahead of Estimates – Signs of Improving Times' dated 31 Jul’09) and drives
our TP, rating and risk rating upgrade. Debt restructuring (through moratorium
on principal) also appears likely, largely precluding bankruptcy. The jack-up
market appears to be showing signs of turning around, with crude at US$60+.
 Duration and pricing of new contracts +ve — Aban yesterday announced
deployment of 3 Deep Driller rigs in Middle East at day rates of cUS$165K for 3
years and 1 Deep Driller rig in Latam for US$120K/day for ~2 yrs. The day
rates, esp. on the Middle East contract, are a +ve surprise. While political risks
may have discouraged competition permitting Aban to command higher rates,
Aban's presence in the region (through Aban VIII and Aban VI) reduces risk.
 New TP of Rs1,550 — Key changes to our DCF assumptions: (i) improvement
in industry outlook driving higher medium-term cash flows and slight
improvement in mid-cycle earnings, (ii) terminal growth rate of 2% (vs. 0%),
(iii) roll forward to Mar-10E, and (iv) earnings changes: -50% in FY10E, +19%
in FY11E. Given the high debt, our equity value nearly trebles though our EV is
up a more modest 46%. Our new TP imputes a 5.3x P/E and 6.7x EV/Ebitda.

Read full report ABAN OFFSHORE(CITI)


􀂄 We believe the worst is over for the Indian steel industry
We believe the worst is over for the steel industry as: 1) steel prices should remain
firm globally (the global steel industry is operating at 55-60% capacity utilisation);
and 2) Chinese HRC prices increased in Q1 FY10 on robust demand, providing
support for domestic prices (import duty is 5%). We believe the Indian economy is
over the worst, based on the upturn in the UBS Lead Economic Indicator, Index of
Industrial Production, and strong cement and auto sales.
􀂄 Indian prices to remain firm; no significant overcapacity in next 2-3 years
We estimate Indian HRC prices at US$600/US$630 in FY10/FY11 (UBS China
steel analyst, Hubert Tang, estimates Chinese HRC prices at US$458/US$505 (ex-
17% VAT)) for FY10/11. The Indian steel industry is operating at 89% capacity
and we do not expect significant overcapacity between FY10-12. We estimate steel
demand will grow 7%/12% in FY10/11 (+5% YoY in Q1 FY10 versus -10% YoY
in Q4 FY09).
􀂄 Raw material costs have declined significantly from peak levels
Raw material prices have declined significantly. Coking coal has been renegotiated
to US$129 versus US$300/tonne previously (US$129/145/155 per tonne estimated
for FY10/11/12). In the current deflationary cost environment, JSW Steel (JSW)
and Tata Steel should benefit more than Steel Authority of India (SAIL) due to
their lower integration.
􀂄 Positive on JSW and Tata Steel
Our preferred picks are JSW (upgrade from Neutral to Buy) and Tata Steel. We
believe JSW is an attractive play on the domestic growth story. Tata Steel is
unlikely to have cash flow issues and the stock has priced in some pessimism, in
our view. We downgrade SAIL from Buy to Sell.

To read full report :- INDIAN STEEL(UBS)