Wednesday, August 18, 2010

>INDIAN TOLL ROAD SECTOR: The Roads to Revenue

■ The Indian Toll Roads sector is an excellent proxy to play on India’s vibrant growth story

■ NHDP is entering an important inflection point and NHAI alone would be coming up with orders worth Rs 1.9 trillion over the next four years

■ ITNL and IRB are our top picks in the Toll Road sector: We believe ITNL will leverage its parent’s strong background, superior execution skills, and established track record of executing BOT projects. It is bidding for GoI projects worth Rs.425bn and we conservatively expect it to secure projects worth Rs.85bn. New project wins would be the key catalyst for IRB. It is on the final shortlist for five projects aggregating 576km that will be awarded this quarter. Further, it is pre-qualified for projects worth 1,925km. We believe ITNL and IRB would be an excellent play on India’s vibrant growth.

To read the full report: ROAD SECTOR

>STATE BANK OF INDIA: Result Update 1QFY2011

For 1QFY2011, State Bank of India’s (SBI) standalone net profit grew 25.1% yoy and 56.1% qoq, which exceeded our estimates on account of better-thanestimated NII and lower operating expenses. Robust operating performance with reasonable asset quality was the key highlight of the result. We maintain an Accumulate rating on the stock.

Robust operating performance: The bank’s net advances increased 20.4% yoy
and 3.4% qoq to Rs6,53,220cr, while total deposits grew 6.8% yoy and 1.4% qoq
to Rs8,15,297cr during 1QFY2011. Reported net interest margin (NIM) improved
by 22bp qoq and 88bp yoy to 3.18% during the quarter despite a hit of 12bp due
to change in the method of calculation of SA interest. The margin expansion was
underpinned by improvement in the CASA ratio to 47.5% as of 1QFY2011 from
38.5% as of 1QFY2010 and from 46.7% as of 4QFY2010 coupled with shedding
of high-cost bulk deposits. Gross NPAs were up by 6.6% qoq and net NPAs
increased 1.9% qoq to Rs20,825cr and Rs11,074cr, respectively. NPA provision
coverage ratio including technical write-offs improved to 60.7% compared to
59.2% as of 4QFY2010.

Outlook and Valuation: Due to strong CASA and fee income, SBI’s core RoEs
have improved over the past few years and unlike virtually all other PSBs, actual
FY2010 RoEs are below core levels due to low asset yields, providing scope for
upside as the CD ratio improves and yields normalise to sectoral averages. SBI is
trading at 2.1x FY2012E ABV while excluding value of insurance and capital
market subsidiaries, it is trading at 1.7x FY2012E ABV v/s its 5-year range of
1.3-2.0x and median of 1.7x. We believe this provides reasonable upside,
especially in light of its dominant position and reach, strong growth and superior
earnings quality. We maintain an Accumulate on the stock, with a Target Price of

To read the full report: SBI

>LINC PEN & PLASTICS LIMITED: Good growth prospects

Linc Pen (Linc) has over the years built an aggressive supply chain which comprises the manufacture of writing instruments at very competitive costs. The Kolkata-based manufacturer of writing instruments and stationery also supplies goods to various global retail chains.

Stock trigger: Linc, we believe is a play on the India’s consumption and outsourcing stories. We believe that news of any major orders from any global retail chain will act as a trigger for the stock. On the other hand retail network expansion, in the short-term, may be a lowdown for profitability.

Brands: Linc owns a well-established brand in the domestic
market. The company in all has three manufacturing units of which two are in Goa and one is located in Kolkata. Its brand portfolio also includes names like Uniball from Mitsubishi Pencil & Company and Lamy of Germany.

Vast distribution network: Other than a nationwide distribution network, the company is also a supplier to retail chains in the UK, Northern Europe and the US. Linc also supplies goods to retail chains like Wal-Mart and Tesco.

Retail chains for office stationary: Starting with Kolkata, the company is rolling out retail outlets for office stationary under the brand name Justlinc and Officelinc. These retail outlets are based on the idea of providing all stationary items under one roof. Having already set up a few stores in Kolkata, Linc is planning a nationwide rollout, going ahead.

Our View: We expect Linc to clock sales of at least Rs 300 crores in a year. Considering the same even if we were to value the company at 1x sales we have a triple bagger. We have a mid-term target price of Rs 150. Near-term target price Rs 110. Buy.

To read the full report: LINC PEN


Dolphin Offshore Ltd (Dolphin) reported a net loss of Rs 123.1 mn in Q1FY11 as against a net profit of Rs 120.1 mn in Q1FY10, which was well below CRISIL’s estimates. During the quarter, the company undertook significant additional work resulting in extra time and cost for two EPC contracts. However, the company has not booked the revenue against this as it is yet to receive change orders for such work. The company’s order book has increased by just around 4 per cent in Q1FY11 over the previous quarter due to the slow tendering process of its major client
– ONGC. This slow pace of order book addition has led us to lower our yearly projections for FY11. Assuming that the management will quantify and receive claims for the change orders for additional work done in the remaining quarters of FY11, we continue to assign Dolphin a fundamental grade of ‘3/5’, indicating that its fundamentals are ‘good’ relative to other listed securities in India. However, given its client concentration risk any delays in receipt of change orders or order book could result in a revision of its fundamental grade. We assign a valuation grade of ‘4/5’, indicating the market price has upside potential from its current level of Rs 273 (August 12, 2010).

Q1FY11 result analysis
- Dolphin’s Q1FY11 revenues declined by 51% y-o-y and 30% q-o-q to Rs 802 mn as
the company has not booked revenue against additional work done during the quarter
on 2 EPC contracts on which it is yet to receive change orders.

- The company’s EBITDA margins for Q1FY11 were in negative at around 12% as
against a positive 6% and 13.9% in Q4FY10 and Q1FY10 respectively.

- Dolphin registered a net loss of Rs 123 mn in Q1FY11 as it incurred heavy marine
spends on the additional work against which it couldn’t book revenues.

Order book growth remains subdued, increased competition to impact margins
- As on June 30, 2010, the outstanding order book of the company is Rs 2.4 bn - a net
addition of Rs 100 mn during Q1FY11. This was largely due to a delay in the
tendering process from ONGC, its major client.

- ONGC is expected to invite tenders for contracts worth Rs 30 bn in FY11. We expect
Dolphin to bag around 16% of these orders.

- Although we assume that the management will quantify and receive claims for the
change orders for additional work done in the remaining quarters of FY11, the lower
visibility on the company’s order book compels us to revise our revenue forecasts

- Further, on account of the steep decline in oil prices and the BP oil spill, there has
been a slowdown in the global oil field equipment and services market. As a result, lot
of overseas assets are lying idle and owners of these assets have been putting
pressure on prices in India to try and pick up work and get deployment. These factors
are expected to put pressure on the company’s margins in FY11 and FY12. These
factors have led us to reduce our EPS estimates for FY11E and FY12E by 10% and
6% to Rs 24 and Rs 35, respectively.

To read the full report: DOLPHIN OFFSHORE


Financial Technologies' (FT) standalone revenue (Rs0.74b v/s our estimate of Rs0.82b) and EBITDA margin (39.1% v/s our estimate of 48.7%) for 1QFY11 were below expectations, though PAT (at Rs0.45b) was in-line on lower than anticipated taxation on higher export revenues. Standalone business corresponds to FT's technology business.

FT's standalone revenue for the quarter was Rs0.74b (up 25.8% YoY, down 11.9% QoQ), EBITDA margin was 39.1% (down 620bp QoQ) and PAT was Rs0.45b (up 120% YoY and 3% QoQ) on lower effective tax rate of 4.5%.

MCX and MCX-SX continue their market leadership status, with 87% and 56% shares in the commodity and currency exchange segments, respectively.

The high court has directed SEBI to decide on allowance of equity and interest rate derivatives trading at MCX-SX by September 2010, reducing the scope of further delays in decision making by SEBI.

FMC (Forward Market Commission) has waived the requirement of selling 10% of MCX stake to government companies as a precondition for IPO, paving the way for MCX IPO filing post clarity on the SEBI MCX-SX tussle.

FT expects three of its exchanges to go live as scheduled - SMX (Singapore Mercantile Exchange) in August 2010, GBOT (Mauritius) in September 2010 and BFX (Bahrain) by October 2010.

We remain positive on the stock from a longer-term perspective and maintain Buy with an SOTP-based target price of
Rs1,606. We value the technology business at 13x FY12E earnings (Rs523/share), MCX at 18x FY12E earnings (Rs313/ share), MCX-SX at 30% discount to the last strategic sale transaction (Rs333/share), NBHC at 13x FY12E earnings (Rs60/share), and group investments at 1.5x invested capital (Rs377/share). However, we believe near-term triggers are contingent on [1] decision on transaction fee introduction in currency exchange segment at MCX-SX, [2] SEBI allowance of new instruments (equity, interest rate derivatives) in MCX-SX, and [3] success of impending new exchange launches.

To read the full report: FINANCIAL TECHNOLOGIES


Long awaited consolidation in Texmaco has finally come to an end after prices continued their upward march to finally surpass the resistance of ‘ascending triangle’ with improved volumes. As the stock has hit a ‘double top’ formation in Feb 2010, prices have retraced back almost 38.2% of its earlier up move beginning from March 2009 and has shown quiet a bit of resilience to hold above the levels of Rs132.

Prices on the Medium chart resemble ‘inverted head and shoulder’ formation and breakout may accentuate buying momentum as volumes have started to react positively to price increase. The
neckline of ‘inverted head and shoulder’ corresponds at Rs141 which should now act as strong support zone. This move also corroborates the minimum downside risk and very high upside potential.

To be more precise, the correction after Dec 2009 unfolded in a classical ‘zig zag formation’ followed by prices crossing above the long term Fibonacci moving average of 161 days and have sustained above same for three consecutive trading sessions. Analyzing earlier price history indicates that such an early attempt has turned out to be a mere whipsaw for couple of times.

Studying MACD oscillator, a crossover above the reference line accompanied with breakout from falling resistance line supports the argument for decent upside. One can also see horizontal breakout in RSC chart with Nifty which indicates that the stock is likely to outperform the benchmark index in the near term.

Based on ‘inverted head and shoulder’, we project conservative target of Rs175 which is marginally higher than Dec 2009 peak of Rs170.5. However, in case prices are able to sustain above Rs175, next leg of rally can take prices all the way to its all time peak of Rs196.

We thus advise accumulating the stock in the range of Rs141- 147 with stop loss of Rs132 for target of Rs176.

To read the full report: TEXMACO