ABG Shipyard

The company, with reserves of Rs 200 crore and a strong balance sheet, is likely to find it easier to raise debt to fund the acquisition. It has time till August 24 to change its offer price

WITH ABG Shipyard jumping in the fray to acquire Great Offshore, the battle between it and Bharati Shipyard has intensified. As things stand, ABG Shipyard holds a 9% stake in Great Offshore and it has made an open offer to acquire an additional 23.5% stake in the company at Rs 520 per share, which will up its stake to 32.5% in Great Offshore. This would entail an outgo of Rs 654 crore. Compared to this, Bharati Shipyard holds a 19.5% stake. However, with both ABG and Bharati getting serious about their moves, analysts feel things will not end too soon and do not rule out a revision in offer price, even from here.

Buying Great Offshore is lucrative and the opportunity is hard to miss. ABG and Bharati make ships and supply vessels that are used by offshore oilfield firms like Great Offshore. The saga of Great Offshore dates back to December 2008, when chairman Vijay K Sheth approached his friend PC Kapoor, managing director of Bharati Shipyard for a loan of Rs 240 crore. This was an amount he owed two financial institutions — IL&FS and Motilal Oswal. In exchange for the funds, Sheth pledged 14.89% of his stake in Great Offshore with Kapoor. These shares were earlier placed as collateral with the two financial institutions.

Great Offshore is a rare case of an Indian promoter losing control on account of the stock markets crashing. Vijay Sheth raised the money in 2007 by pledging his shares in order to buy out his cousins’ stakes in the company. Under the Sheth family settlement in 2007, Vijay Sheth was to buy out the equity stakes of his cousins in Great Offshore which was carved out of Great Eastern Shipping as part of division of assets between the family members.

In May 2009, with Great Offshore unable to repay its loan, Bharati Shipyard acquired the shares pledged by Sheth in a cashless deal taking Bharati’s stake in Great Offshore to 14.89%. However with no management control, even rival ABG Shipyard took a fancy to Great Offshore.

Globally there are several instances of ship builders being asset owners. For rival Bharati Shipyard, it has an even higher synergy as Great Offshore has been its customer for many years.

As of now, one could say that the battle could move either way. While Bharati Shipyard has the advantage of being the first mover, having acquired the 15% stake at a lower price of Rs 320 per share, ABG Shipyard has acquired the 9% stake by paying about Rs 160-170 per share more than what Bharati paid. ABG Shipyard, has reserves of Rs 200 crore and with a stronger balance sheet, it would find it easier to raise debt to fund the acquisition as compared to Bharati.

The two companies have time till August 24 to change their offer price. Some significant shareholders who hold more than 1% stake in the company and could help clinch it are Videocon, financial institutions and mutual funds. As of now this one has the makings for a photo-finish.

Stock views on Hindustan Dorr-Oliver, Titan Industries, Hexaware Technologies, ITC, Reliance Communications, Pantaloon Retail

Macquarie on Pantaloon Retail

Macquarie maintains its ‘Outperform’ rating on Pantaloon Retail, however, it has cut the earnings estimates and target price to reflect the expectations of slowing same-store sales growth and the credit crunch. Same-store sales (SSS) growth for Indian retailers turned negative for the first time in 4Q08. Slowing growth, the spectre of job losses and the high base effect (from the good old days of 2007) impacted sales. The problem was sharper in the high-end product segment versus items for daily consumption. Pantaloon saw its SSS growth improve from -3.6% and -14% in December 2008 to 4% and 12% in January 2009 for value retail and lifestyle retail respectively. Based on the estimates, Pantaloon’s operations can support growth of around 1-2 million sq feet per year with limited external funding. The supply-demand dynamics have led to a rise in retail rents in the last three years. Macquarie expects this to continue and average rents to fall at least another 25% over the next 12 months. We expect Pantaloon to be able to ride this tough period given its high exposure to value retail and planned capital raising by equity dilution or preferential share allotment.


CLSA on Reliance Communications


CLSA maintains the ‘Buy’ rating on Reliance Communications. There was a good response to GSM launch. In January RCom’s added 5 million users, bringing the total to 66 million subscribers. These additions include CDMA and GSM subscribers, accounting for 33-35% of total industry additions, though RCom is yet to release details, including circle-wise breakdowns to the GSM-industry body. RCom has rolled out GSM service across 14,000 towns, while targeting to up dual-network coverage to 24,000 towns and 600,000 villages. However, these schemes coupled with Idea Cellular’s latest offers in select circles may trigger the industry’s growing share of dual SIM and inactive subscribers. We estimate the company will be eligible for incremental 2G spectrum in 14 circles at 11 million new GSM subscribers. Recently, RCom cut its FY09 capex by 15% to $5.3 billion and guided FY10 at $3.2 billion. The firm has $1.7 billion in investments and a net debt-to-equity ratio of 0.64x. CLSA expects a boost to RCom’s valuation with confidence of a successful execution and improving market share in revenue.


HSBC on ITC

HSBC maintains its `Neutral’ rating on ITC with a price target of Rs. 172 per share. Considering the staggered price increase that ITC has been taking this year and that the budget has been delayed from February to June, questions are being raised whether there is one more price increase in the offing. While HSBC estimates a weighted average price increase, including mix effect, 14% has been implemented so far, and the probability of a further increase is small as ITC can manage decent growth in Q1FY10E without price increase, and ITC may not wish to jeopardise volume growth further when it is currently negative. If ITC decides to hike prices it could be implemented in the following order of priority:

• Goldflake Kings is likely to be the first option due to the price inelasticity in this segment.
• Bristol and Flake with price point of Rs 1.9 per stick; since loose buyers already pay Rs 2, trade margins can be cut;
• Goldflake regular though has had high price increases and has strong brand loyalty
• Scissors Regular is a less probable option since plains migration needs to take hold. HSBC derives a fair value of Rs 154 for the high tax and Rs 201 for the low tax scenario. At the target price, the stock will trade at 16.8x FY10E EPS.

Bank of America on Hexaware Technologies

Bank of America retains `Underperform’ rating on Hexaware Technologies. Though results were in line, Bank of America (BoA) was surprised by a very sharp revenue decline guided for 1Q at a negative 16% q-o-q with outlook being the weakest announced so far. This likely reflects high exposure to discretionary spends such as ERP (~29% revenue, -18% q-o-q). Estimates are cut by 5% to factor in a 17% cut in dollar revenues as reflected by weak 1Q revenue guidance and offset by higher margins due to falling rupee. Management highlighted that macro environment has worsened in 4Q; with clients across board rationalising IT spends. BoA expects margins to fall by at least 600 bps during 1Q. Also MTM losses in balance sheet increased to Rs 120 crore from Rs 100 crore q-o-q and are likely to impact CY09/10E profits if a weak rupee persists. Revenue grew 4% q-o-q to $64.4 million in constant currency terms in line with its guidance. Stock rose 40% before results on low valuations. BoA expects 1% earnings growth in CY09E and 8% CAGR over next two years. With 1Q results likely to disappoint and a poor revenue outlook, stock could correct.

EMKAY on Titan Industries

Titan Industries (TIL) is likely to face challenging times ahead on weakening macro economic indicators affecting its watch business, rising gold slowing its jewellery market share gains and its new business initiatives straining cash flows. TIL’s watch business is to report a 1.6% and 5.7% fall in revenues and EBIDTA , espectively in FY10E, and a revival thereafter. Emkay believes that it will be difficult for TIL’s jewellery division to garner market share at a similar pace as in the past, owing to rising gold and falling demand (3.6% in FY11E against 2.9% in FY08). The new business initiatives (precision engineering and eyewear) are still in investment phase, thereby denting TIL’s cash flows and EBITDA. Emkay expects moderation in growth with net revenue, EBITDA and adjusted net profit of TIL to grow at a CAGR of 16.0%, 12.8% & 7.7%, respectively during FY08-11E and an intermediate decline in FY10E. The above valuations are rich especially in the wake of moderation of growth and declining return ratios. We recommend a `Sell’ with a price target of Rs 671.

IL&FS Investsmart on Hindustan Dorr-Oliver

IL&FS Investsmart initiates coverage on Hindustan Dorr-Oliver with a ‘Buy’ rating, with a 15-month price target of Rs 55, providing an upside of 104%. HDO has made rapid strides in its core EPC business, engineering a ~5.4x growth in less then four years with significant contribution from the mineral beneficiation and environmental infrastructure business. However, the best is yet to come for HDO as the company is well positioned and has expertise to get into the bigger league with higher ticket contracts. The current order backlog of Rs 700 crore is 2.3xFY08 billings. Based on the pipeline bids, enquiries, and the capex cycle, order accretion is to gain momentum in the next few quarters and grow at 17% CAGR for the next two years. Traction is expected in the award of big ticket contracts in the next few quarters. IL&FS expects higher demand for its proprietary industrial products which is likely to prop the blended margin going forward with ~14% revenue contribution by FY10. HDO has all the characteristics to graduate to the next league and therefore the concerns reflected in the stock price are unwarranted; hence there is a good investment opportunity.