Monday, November 2, 2009

>Strong Equity Issuance Hindering Asian Fund Inflows (CITI)

Asian fund inflows still lagging — As per EPFR, US$781m of new money to offshore Asian funds last week was less than one-third of the inflows to GEM funds, 37% below Global funds and even 10% smaller than the amount taken in by Latin American funds whose AUM are just one-fourth of Asian funds. August-to-date, net inflows to Asian funds have been US$2.1b, much lower than the US$8.6b to GEM funds and US$13b to Global equity funds.

Strong issuance in Asia ex holding back inflows to equity funds — Asian fund inflows have been lagging those to other emerging market funds since August but equity issuance in this region is the strongest of all. Over last three months total cash calls (both IPOs and secondaries) reached US$54b in Asia ex, which was 3.6x the fund raised in Latin America, Emerging Europe, Middle East and South Africa altogether.

Asian fund inflows likely to pick up given inflows to GEM funds are close to a peak — Although Asian equity issuance in the pipeline remains big and should continue to absorb excess liquidity in the markets, we see possible money flows coming from GEM to Asian funds. As per figure 3, inflows to GEM funds are close to their previous peak in Oct 2007 and if it starts weakening, Asian funds may benefit.

To read the full report: FUN WITH FLOWS


Revenues down 15% Y-o-Y on back of ~10 idle assets during Q2FY10
Aban Offshore’s (Aban) Q2FY10 consolidated revenues declined 14.7% Y-o-Y and11.4% Q-o-Q to INR 7,029 mn on account of ~ 10 idle assets in the quarter (as compared to 6-7 assets in Q1FY10). Most assets in the Singapore subsidiary were idle, except Deep Driller 3, Aban VIII, Deep Driller 5 for 10-15 days, Deep Driller 8, and Deep Venture. In the parent company, FPU Tahara was idle. Currently, most of the new contracts have started, taking the current idle rigs to ~three (Aban VII, Deep Driller 1, and Deep Driller 6). Hence, we expect revenues to improve in the next few quarters. The company is also marketing the three idle assets.

Weak performance, but outlook positive

Higher interest costs offset dip in expenses, revenues from Deep Venture
Overall, the company’s total expenses declined 31.3% Y-o-Y and 23.0% Q-o-Q to INR 2,500 mn in Q2FY10. The decline is due to absence of marketing by Premium Drilling effective from July 2009 end which helped curtail operating costs. Consequently, the company’s EBITDA margin increased to 64.4% in Q2FY10 from 55.9% in Q2FY09. However the company’s interest expenses increased to INR 2,611 mn in the quarter, on account of high debt levels (~INR 3.27 bn) and higher interest costs (~Libor + 400 basis points from Libor + 300 basis points on foreign currency loans), due to debt rescheduling. Aban has partly benefited from start of higher rate contract of Deep Venture in Q2FY10. All these factors resulted in a Q2FY10 PAT of INR 715 mn, down 73.3% Y-o-Y and 35.5% Q-o-Q, significantly ahead of our estimates due to higher Deep Venture revenues, mobilisation fee, and EBITDA margins.

Outlook and valuations: Fair value at INR 1,551/share; maintain ‘BUY’
Q2FY10 results were weak due to ~10 idle assets and high interest expenses. Hereon, we expect improvement in fleet utilisation, turnover and potential new contracts. Any equity capital raising is likely to help ease balance sheet leverage. We have revised our FY10 estimates down by ~22% to reflect delay in start of Aban Abraham and Aban Pearl contracts and higher Libor spread on foreign currency loans. Yet, we have increased our FY11 EPS estimate. We estimate Aban’s fair value at 6.0x FY11E EPS (40% discount to global peers) at INR 1,551/share (fair value EV/EBITDA = 7.9x; Mid-cycle EV/EBITDA = 8.0-9.0x). Upsides to our fair value are likely on new contract announcements and higher-than-expected day rates. At INR 1,381, Aban is trading at 5.3x FY11E EPS, a 48% discount to 2-year median P/E of 10.2x for global offshore drilling firms. On the other hand, Aban’s FY11E EV/EBITDA of 7.9x is trading at 7% premium to global median valuations (2-year EV/EVITDA = 7.4x). We maintain our ‘BUY’ recommendation. On relative return basis, the stock is rated ‘Sector Outperformer’

To read the full report: ABAN OFFSHORE


Numbers in line with estimates; strong EBITDA growth
Opto Circuits (Opto) reported Q2FY10 consolidated sales of INR 2.56 bn, up 18% Y-o-Y. The non-invasive segment, at INR 2.08 bn (81% of overall sales), grew 24% Y-o-Y, while the invasive segment, at INR 474 mn (19% of overall sales), declined 3% Y-o-Y. Lower raw material costs and fall in other expenditure on account lower selling expenses saw EBITDA margins increase 367bps Y-o-Y, with EBITDA growing 32% Y-o-Y, to INR 908 mn. Higher tax rate has eroded gains made at the EBITDA level, resulting in lower net profit growth of 18% Y-o-Y.

Criticare to be growth driver; invasive growth to slow down
We note from Opto’s FY09 annual report that there has been a significant increase in intangibles of INR 750 mn (ex reclassification of miscellaneous expenditure and addition to intangibles due to Criticare acquisition). We also understand from the company that most of this expenditure is towards R&D, for new product launches and obtaining regulatory approvals in the non-invasive segment. We believe that lack of clarity on the FDA approval process, coupled with - (1) de-growing global stents market; (2) dominance by larger players; and (3) change in current product portfolio (on expected new product launches for attaining competitive edge) - could lead to lower–than-anticipated growth in the invasive segment. We believe the non-invasive segment, particularly Criticare, could be the growth driver for the company’s topline over the next two years.

Steady performance

QIP funds deployed against debt; impact on EPS neutral
Opto has raised INR 4 bn via a QIP in September 2009. We understand from the company that the entire amount raised has been used to reduce its debt burden, including cash credit. We expect interest cost to be minimal in the next two quarters. However, impact of lower interest cost remains EPS-neutral due to a similar increase in share capital for the company.

Outlook and valuations: Attractive; maintain ‘BUY’
At the CMP of INR 196, Opto is trading at 12.8x our FY10E consolidated EPS of INR 15.3 and 10x our FY11E consolidated EPS of INR 19.5. Given healthy growth rates in sales and profits over the next two years (at 26% and 32% respectively), attractive valuations and healthy return ratios, we maintain ‘BUY’ on the stock.

To read the full report: OPTO CIRCUITS


Highest-ever throughput; expansion-related shutdown from Q3FY10-end
Chennai Petroleum Corporation (CPC) posted its highest-ever throughput of 2.76 MMT (up 2.8% Q-o-Q and 20% Y-o-Y) in Q2FY10. Its Chennai refinery will undergo an expansion of 1.0 MMT in the near future. A shutdown of CDU-III (3.0 MMT) for the expansion is planned from December end for about two months, which will reduce throughput by ~0.5 MMT in H2FY10.

Inventory gains protect earnings; future expectations bleak
While operational GRMs have been nil-to-marginally-negative for low-complexity refiners like CPC, crude inventory gains due to rising crude prices have been shielding reported GRMs in the past two quarters (see Chart 2). Also, increase in auto fuel prices at the beginning of the quarter has resulted in product inventory gains (~INR 1.47 bn), which has further supported earnings in Q2FY10. With crude prices not expected to rise sustainably in the next quarter (a mild correction post the recent run up is anticipated), poor operational GRMs (bereft of inventory gains) could flow down to the bottom line in Q3FY10.

Bleak outlook for second half

Maintaining earnings estimates broadly; cash costs revised up
We have broadly maintained our earnings estimates for CPC. A marginal decline in bottom line due to increased cash costs (employee expenses primarily) has resulted in a 1-2% downwards revision in our earnings for FY10E and FY11E.

Outlook and valuations: Weak H2FY10 expected; maintain ‘REDUCE’
At CMP of INR 222/share, CPC is currently trading at 8.9x our FY10E EPS, 1.0x FY10E P/BV, and 6.4x FY10E EV/EBITDA. Hence, the stock appears priced in on all the various valuation parameters on comparison with global peers. We expect operating GRMs to sustainably resurrect earliest by FY12 (especially for relatively low complexity refiners like CPC) and the full impact of CPC’s Euro IV/SPM projects to improve reported GRMs only post FY12. Hence, we maintain our ‘REDUCE’ recommendation and rate the stock ‘Sector Underperformer’.

To read the full report: CHENNAI PETROLEUM


Consolidated Q2FY10 results largely in line with estimates
JSW Steel (JSW) reported Q2FY10 consolidated net revenues of INR 47.5 bn, up 2% Y-o-Y (up 19% Q-o-Q) due to 74% Y-o-Y increase in sales volumes in the standalone business. EBITDA, at INR 10.8 bn, was broadly in line with our estimate of INR 10.5 bn. PAT, at INR 3.2 bn, was slightly higher than our estimate, as tax rate was lower at 30% against our assumed 35%. EBITDA/tonne increased 39% Q-o-Q from USD 118 in Q1FY10 to USD 160 in Q2FY10 (standalone).

On target to meet volume guidance
In H1FY10, JSW has met 45% of its FY10 volume target (crude steel volume: 6.4 mt). Since H2 is seasonally stronger than H1, JSW expects to meet its crude steel volume guidance for FY10. Further, the company reiterated its crude steel volume guidance for FY11 of 7.0 mt.

Commencement of captive iron ore, coking coal mines likely in FY11
The 3.5 mt HSM project and 3.2 mtpa steel expansions, at Vijaynagar, are on schedule for completion by March 2010 and March 2011, respectively, as per the company’s guidance. JSW also indicated commencement of its iron ore and coking coal mines in India in FY11. However, we haven’t considered the same in our estimates and valuation.

Outlook and valuations: Strong volume growth; upgrade to ‘HOLD’
With continued volume growth, we have raised our FY10 and FY11 volume estimates by 16% and 8%, respectively. Also, we have cut down our FY10 earnings estimates for the US business based on actual inventory write-down and upgraded FY11 estimates, as utilisation is likely to improve. Overall, we have raised our FY10 and FY11 EPS estimates by 30% and 16% to INR 72.6 and INR 92.3, respectively. We estimate our fair value for JSW at INR 885 per share, based on increased FY11 earnings and FY11E EV/EBITDA of 5.5x. We, thus, upgrade the stock from ‘REDUCE’ to ‘HOLD’, and rate it ‘Sector Underperformer’ on relative return basis.

To read the full report: JSW STEEL