Stock views on NTPC, Aban Offshore, Everest Kanto Cylinder,

CITIGROUP on EVEREST KANTO CYLINDER

EVEREST Kanto Cylinder (EKC) is the largest domestic manufacturer of high-pressure gas cylinders used for storage of industrial gases and CNG. Citigroup believes EKC is uniquely positioned to capture the significant growth potential in India for high-pressure gas cylinders, driven largely by increasing CNG penetration, both in India and abroad. While the CNG segment in India is still at a relatively nascent stage, cost economics, improving refuelling infrastructure, visibility of gas supplies and clarity on regulations should accelerate the trajectory for city gas distribution and consequently, CNG penetration, thereby boosting demand for CNG cylinders. The 12-month target price for EKC of Rs 280, based on 15x September ’09E consolidated earnings — which includes contribution from India, Dubai, US-based CP Industries and the China plant — is in line with the fair value multiple range for its manufacturing/engineering peers in India. Citigroup prefers comparing EKC with capital goods companies that manufacture industrial goods and have a similar growth profile.


EDELWEISS on ABAN OFFSHORE

EDELWEISS initiates coverage on Aban Offshore with a ‘reduce’ recommendation. Day rates for Aban Offshore’s rigs that are on short-term contracts are likely to ease, in line with Edelweiss’ lacklustre jack-up industry outlook. Jack-up day rates are expected to ease 18-19% year-on-year (y-oy) in both CY09E and CY10E and test industry return on average capital employed (RoACE) of 8%. This is based on expectations of a lower jack-up demand (down 14.5% and 5.3% y-o-y in CY09E and CY10E, respectively) and a significant supply coming on stream in CY08-10E. Weak demand is likely due to low commodity prices, revision/deferment of small company and exploratory spend, and weak global outlook. Lacklustre industry outlook, a weak rupee (impacting debt) and short-term contracts/uncontracted Singapore assets are expected to be an overhang on the stock. This renders low fair value of Rs 685. Global drillers’ comparative multiples like EV/EBITDA (at 3.2x two-year forward), price/earnings (at 3.4x two-year forward), and price/book value (at 0.7x two-year forward) have shrunk on the back of low crude prices and economic weakness.


JP MORGAN on NTPC

JP MORGAN upgrades its rating on NTPC to ‘overweight’. The key risks to the target price of Rs 185 include major execution delays and a shortage of coal. NTPC’s size, strong balance sheet and assured-return structure put it in a strong position to achieve its growth plans. JP Morgan advises investors to use share price corrections due to hiccups in execution, if any, to buy the stock, as near-term delays do not affect its valuation much. Apart from execution, customers’ ability to absorb the rise in tariffs and the impact of coal shortages on incentives are the key concerns. With coal prices declining, the cost of debt is the main inflationary factor — power tariff can rise 6-7% per annum if interest costs rise by 500 bps. Access to KG Basin gas is an important potential catalyst to improve gas stations’ PLF and incentives. NTPC is trading at 15.6x FY10 P/E, 2.2x FY10 P/BV and is close to the March ’10 target price of Rs 185. This includes Rs 11/share value for NTPC’s 2 billion tonnes mineable coal reserves. Any positive news flow when coal production commences can improve this valuation. A replacement value-based approach for current capacities suggests a fair value of Rs 140, indicating the market is paying a reasonable premium for 2x capacities in the pipeline.