Accumulate SREI Infra; target of Rs 110: Emkay

SREI Infrastructure Finance (SREI) has reported Rs 315 million of net profit (standalone) for Q4FY07, driven by hefty tax write backs. The operational performance was in line with expectations with adjusted NII growing by 37.1% yoy to Rs 527 million, pre-provision profit growing by 20.0% to Rs 321 million. Albeit, the NIMs have contracted significantly over last year, driven by increase in cost of funds and lower securitisation, they have shown improvement on sequential basis. The company has done full year provision for the bad and doubtful debts during the current quarter, which has resulted in flat PBT of Rs 218 million. With hefty tax write back of Rs 97.3 million, the net profit has almost doubled over last year to Rs 315.0 million.

We remain positive on SREI’s business and see tremendous potential in the asset financing business. The private equity management business has also been doing exceedingly well and has shown 80% growth in the AUM. . We also expect the company to significantly expand its project-financing book now with the capital in the parent company having been released.

We would like to wait for more clarity on the numbers for the company post restructuring and revise our numbers then. We change our rating on the stock to ACCUMULATE with price target of Rs 110.


Buy Graphite India; target of Rs 67: SKP Research

1. Net sales were up by 22.26% to Rs. 240.77 crores in Q4FY07 over Q4FY06, which is explained by strong demand and higher realisation.

2. The Operating Margins (OPM) of the company stood at 14.94% for Q4FY07 in comparision to 19.92% in the same period last year. The fall in OPMs was largely due to rise in raw material and power costs relative to sales. The raw material to sales ratio has increased by 427 basis points in Q4FY07 compared to Q4FY06, which is primarily due to increasing needle coke prices. This effect is going to stabilize from the current quarter due to higher growth in realizationsfrom graphite electrodes compared to needle coke prices. Total power costs to sales ratio has increased by 209 bps in Q4FY07 compared to Q4FY06 due to additionalcharges made by DVC for the whole year during the current quarter.

3. Profit after tax decreased by 12.73% to Rs 240.6 million due to lower operating profit, higher interest and depreciation cost relative to sales growth. Higher taxes also reduced the profit after tax of the company.

4. Graphite India had increased its graphite manufacturing capacity from 36,500 mtpa in FY05 to 55,000 mtpa in FY06. This has been further increased to 60,000 mtpa in the current financial year. This will help the company to meet the growing demand in years to come.

5. The company has declared a final dividend of Re 1 per share on the face value of Rs 2 per share.

Outlook & Recommendation

Visualising the demand for graphites in the steel industry, Graphite India Ltd (GIL) had increased its manufacturing capacity through both
organic and inorganic routes. GIL being the largest graphite manufacturer in India will be able to realize the benefits of rising demand and increasing prices. At current market price, the stock trades at 5.48 x FY09E EPS of Rs 9.66 and looks attractive.We maintain our BUY recommendation on the stock stock with a price target of Rs 67.


Buy Indian Hotels; target of Rs 175: Sharekhan

FY2007 - consolidated results

The FY2007 results of Indian Hotels Company (IHCL) are slightly above our expectations. IHCL has reported a profit after tax (PAT) of Rs 369.9 crore for FY2007 against our expectation of Rs 363 crore. However, on a stand-alone basis the FY2007 results are not comparable with those of FY2006 as the former take into account the effect of the merger of five companies into IHCL w.e.f. April 1, 2006.

The total income for the year ended March 31, 2007 stood at Rs 2,665.8 crore as against Rs 1,914.1 crore for the year ended March 31, 2006. That implies a growth of 39%. The company has reported a PAT of Rs 369.9 crore for FY2007 compared with Rs 248.7 crore in FY2006, resulting in earnings per share of Rs 6.1.

Q4FY2007 - stand-alone results

For Q4FY2007 IHCL has reported a top line growth of 39% at Rs 505.2 crore against Rs 363 crore in Q4FY2006. The other income for Q4FY2007 went up from Rs 8.36 crore in Q4FY2006 to Rs 33.71 crore and included the profit realised on the sale of an investment of Rs 16.7 crore as well as a foreign exchange gain.

The occupancy rate in Q4FY2006 had been flat at 83% whereas the average room rate grew by 12% to Rs 11,082 in the quarter under review.

The operating profit margin improved by 590 basis points from 36.1% in Q4FY2006 to 42.0% in Q4FY2007. The operating profit grew by 76% to Rs 245 crore in the fourth quarter.

The interest cost rose from Rs 3.59 crore in Q4FY2006 to Rs 22.86 in Q4FY2007. This was higher primarily due to the regrouping of elements after the merger of the five companies into IHCL.

The bottom line of the company grew by a healthy 71% to Rs 134 crore in Q4FY2007 from Rs 78.7 crore in Q4FY2006; this resulted in earnings of Rs 2.23 per share.

The company has merged Asia Pacific Hotels, Indian Resort Hotels, Gateway Hotels and Getaway Resorts, Taj Lands End and Kuteeram Resorts Pvt Ltd into itself with effect from April 1, 2006. This has led to an addition of around 400 rooms to the existing inventory. The results for the year ended March 31, 2007 are therefore not comparable with those of the previous year.

At the current market price of Rs 145 the stock is quoting at a price/earnings ratio of 23x FY2007E consolidated earnings per share of Rs 6.2. We maintain our Buy recommendation on IHCL with price target of Rs 175.


Buy Indian Hotels; target of Rs 187: Citigroup

Citigroup Research has recommended buy rating on Indian Hotels with a 12-month target of Rs 187. The stock is currently trading at 17x FY08E P/E, toward the median of its three-year historical range of 15-22x P/E, largely on par with domestic peers.

Robust results

Standalone 4QFY07 revenues and net profit grew 42% and 71% respectively YoY, while FY07 consolidated revenues grew 37% YoY and net profit grew 49% YoY; strong growth but below expectations due to

1) higher interest and depreciation cost on account of amalgamation of five subsidiaries/associate companies and acquisition of Taj Boston in 4QFY07 and

2) lower-than-expected consolidated margins because of higher-thananticipated proportion of revenues from overseas properties.

Margin expansion

4QFY07 standalone EBITDA margins increased 640 bps YoY while on a consolidated basis FY07 EBITDA margins expanded 80 bps YoY. Growth in revenue and profit was supported by strong occupancies of 73% and a healthy 28% increase in ARRs for FY07.

New developments

1) Dividend of Rs 1.6 per share announced for FY07.

2) In April 2007, the company acquired The Campton Place, a 110-room luxury boutique hotel in San Francisco, for USD 58 million.

Expansion plans

Indian Hotels plans to add five hotels to its portfolio in FY08 – two new hotels at Bangalore (ITPL) and Chennai (Mount Road) and three management contracts for hotels in Vijayawada, Trivandrum and Langkawi (Malaysia). In addition, the company plans to increase the number of 'Ginger' hotels to 30 by March 2009, up from eight at present.

Investment thesis

IHC is our top pick in India's growing hospitality sector. Our target of Rs 187 is based on 22x FY08E P/E, a premium to the sector average (18x). We expect a favorable macro environment to increase business and leisure travel traffic to India. This should trigger strong demand for hotel rooms, increase occupancies and average room rates (ARRs). Leveraging its large room inventories across key growth cities, premium brand positioning with 'Taj' and leadership in domestic markets, we believe IHC is poised for growth. Initiatives to de-risk the company's business model and further aid growth and profitability include: 1) Forays into budget hotels; 2) Expansion of service offering to spas, serviced apartments and F&B outlets; 3) Growth through management contracts; and 4) Greater presence in overseas markets. We see IHC's large room inventories in the key growth cities of Mumbai, Delhi, Chennai, and Bangalore as its most valuable assets providing it with competitive advantage and significant pricing power to drive earnings growth. Given the above and a scenario of a depreciating rupee and benefits accruing from high operating leverage driving margins, we expect earnings CAGR of 30% over FY06-09E. With growth fundamentals intact, improving capital efficiency and the stock offering better liquidity post split, we foresee a re-rating of current stock valuations of 18x FY08E P/E.

Valuation

Our 12-month target price of Rs 187 is based on 22x FY08E P/E, a premium to average sector valuations of 18x. The stock is currently trading at 17x FY08E P/E, toward the median of its three-year historical range of 15-22x P/E, largely on par with domestic peers, which we believe is unwarranted given:

1) IHC's market leadership and advantage of large room inventory;

2) the company's premium brand positioning with 'Taj';

3) Our expectation of strong earnings growth; and

4) the company's stronger business model with reasonable (and growing) presence in international markets. With growth fundamentals seemingly intact, improving capital efficiency and stock offering improved liquidity post split (1:10), we foresee a re-rating of current stock valuations.


Buy Great Offshore; target of Rs 950: Ventura Sec

Rising oil consumption leading to increased E & P activities augurs well for the offshore oil field services providers

On the back of increased oil prices and India’s policy to achieve National Energy Security, domestic E&P activities are expected to increase at a rapid pace. The rise in E&P is in turn expected to generate huge business for companies offering offshore oilfield services to oil & gas majors. GOL being a major player in the field is expected to reap benefits from the same.

Buoyant demand for OSVs, Rigs and Tugs to firm up day rates

The rise in E & P activities coupled with high demand and long gestation period of new builds has created a shortage of OSVs and led to an increase in their prices. Currently 11 PSVs and 28 AHTSVs are available in India as against the demand for 18 PSVs and 46 AHTSVs.

Timely Fleet expansion to capture the current E & P boom

To capture the boom in the E & P industry, GOL, in November 2006 embarked upon a USD 225 million (approx. Rs.10 billion) expansion plan for acquiring offshore support vessels over the next three years. Post expansion, the fleet size has increased from 33 in FY06 to 40 in FY07 and will touch 42 by April ‘09.

Rising oil consumption leading to increase in E & P activities augurs well for the offshore oil field services providers

Together with the country’s impressive growth, India has also become a significant consumer of energy resources. According to EIA estimates, India was the fifth largest consumer of oil in the world during 2006 with a usage of an estimated 2.63 million bbl/d (barrels per day) as against a production of merely 846,000 bbl/d. The combination of rising oil consumption and only a moderate rise in production levels has left India increasingly dependent on imports to meet consumption needs. To achieve National Energy Security, the government has introduced policies aimed at increasing domestic oil production and oil exploration activities. As part of this effort, the Ministry of Petroleum and Natural Gas crafted the New Exploration License Policy (NELP), which for the first time permits foreign companies to hold 100 percent equity ownership in oil and natural gas projects. Various private players were also awarded exploratory blocks in the six rounds of NELP bidding. NELP VI received an overwhelming response with 165 bids for 55 oil blocks in 2006. Global energy giants like British Petroleum, British Gas, Italy’s ENI, Petronas and French Multinational Total were among the bidders for the NELP VI (which covered 3.52 lakh sq. km.). Most discoveries of reserves in the past two years have been offshore, including the recent ones at KG, Cambay and Mahanadi basins.

With aggressive implementation of NELP programme, the domestic E&P activities are expected to increase at a rapid pace. This increased E&P activity in new oil & gas fields is expected to generate huge business for companies offering offshore oilfield services to oil & gas majors. GOL being a major player in the field is expected to reap benefits from the same. The number of offshore rigs operating in India has gone up to 42 rigs from the FY06 figure of 35. This is despite the fact that worldwide rig availability is difficult. Average rig utilization in India has been 95%.

Timely Fleet expansion to capture the current E & P boom

To capture the boom in the E & P industry, GOL, in November 2006 embarked upon a USD 225 million (approx. Rs.10 billion) expansion plan for acquiring offshore support vessels over the next three years. Post expansion, the fleet size has increased from 33 in FY06 to 40 in FY07 and will touch 42 by April ‘09. GOL has recently ordered one multi role support vessel to be commissioned in Q1FY10, and one jack-up rig to be received by Q3FY09. The total committed capital expenditure towards these purchases will be financed through a mix of debt and equity, in the ratio of 25% internal accruals and 75% debt. GOL is also open to buy second-hand vessels if the opportunity exists.

Valuation

The impressive fleet expansion and growing efficiency coupled with rising day rates and firm industry outlook will result in increased profitability for GOL. However, we expect the company to be on a higher growth trajectory once the Jack Up Rig and OSV will be added to the fleet in FY2009. We expect the company’s revenues & profits to grow at a CAGR of 12.7% and 22.1% respectively, over the next 2 years. At the CMP of Rs. 790, the stock is currently trading at 16.1x the FY08e earnings & 11.5x its FY08e EV/EBIDTA. Considering the robust demand for offshore services, we recommend the investors to ACCUMULATE / BUY on dips with a price target of Rs 950 over a period of 15 months.