Wednesday, August 29, 2012

>SUPREME INFRASTRUCTURE: Focus on execution & ‘cash contract’ orders to drive growth

We recently met the senior management of Supreme Infrastructure to get an insight on latest developments in various business verticals and overall industry scenario. With strong order inflow in 1QFY13, management is now focused entirely on execution. We retain Buy on the stock.

Order book swelling. Supreme’s order book (incl. L1 projects of `10bn) has grown 29% yoy to`43.8bn (2.7x TTM revenues). This is scheduled for completion in the next 24-30 months and gives good revenue visibility over FY13-14. It bagged orders of `11.5bn during 1QFY13 and
aims at orders of `26bn during FY13. Further, the company plans to bag more EPC orders (especially in the water and power segments) and is also exploring opportunities in foreign markets, mainly Oman & Qatar.

Robust outlook. Management is targeting a 20-25% revenue growth in FY13 and aims to maintain OPM. However, NPM is likely to be under slight pressure due to the rising debt (net debt/equity at 1.7x). Having bagged significant orders in 1QFY13, the company plans to focus on execution to achieve the desired topline growth and lower gearing.

BOT project funding in place. For ten road projects, it has an equity commitment of ~`7.5bn over FY12-15.Of this, `3.1bn will come from 3i India Infra Fund; Supreme already received `2bn in 1QFY13 and is likely to get the remaining in another month (awaiting NHAI approval for
change in holding structure). Of the balance `4.4bn, Supreme has already deployed `3.2bn through investment, advances and debt at the hold-co level; the balance will come over FY13-15.

Valuation. Our sum-of-parts-based price target of `350 (earlier `333) is based on 5x FY13e PE construction business (`313, a 45% discount to midcap target multiples) and 1x P/BV Sep’11 (`44). Risk: rise in interest rates, drop in operating margins.


>ABAN OFFSHORE: Interest charges mar profits

􀂄 Operational performance in line: Aban’s operational performance was in line with expectations, with top-line at Rs8.5bn (16.2% YoY growth and 5.8% QoQ growth). The depreciation in rupee was the major contributor to the top-line growth. Margins stood at 59.5% as against 62% in Q1FY12 and 52.5% in Q4FY12.

􀂄 Interest charges rise sharply with rupee depreciation: On account of ~70% of the loans being foreign currency loans, interest charges have moved up sharply with rupee depreciation, coupled with an increase in interest costs. Interest charges for the quarter stood at Rs3.1bn, 44% up YoY and 9.4% up QoQ. On account of this, increase in the company’s PAT stood at Rs521m, a decline of 41% YoY and 35% QoQ.

􀂄 Vessel status: Of the 18 vessel fleet, 16 are contracted. DD7 started its contract in June 2012 at a day rate of US$147000/day. Contracts for five vessels will expire in September 2012 and hence, their deployment is the key to watch out for. Other than one asset, all the assets coming up for re-deployment are new and hence, we do not foresee too much trouble in deployment of the same. However, since the company has not yet announced any new contracts, we expect a time lag in deployment.

􀂄 Valuations: We are valuing Aban at 6x FY14 which gives us a value of Rs413. We upgrade the stock to ‘Accumulate’.