Month: September 2007

Globally LNG projects continue to be delayed, and prices continue to rise. Domestically produced gas in India are US$4.0-5.5/mmbtu, making LNG economics unfavorable esp. in light of ever increasing indigenous supply prospects.

In the current high price environment for LNG, the likelihood of Petronet entering into a long-term agreement anytime soon to secure supplies for its Dahej expansion and greenfield Kochi terminal appear unlikely. Spot volumes will continue to drive earnings in the near term (FY09-10E earnings increased by 11-12%); despite increasing domestic supplies, we build in high long-term utilizations driven by sustained growth in gas demand. Power plans, though interesting, are at a preliminary stage and completely contingent on competitive pricing for long-term LNG.

Petronet LNG stock is up 47% in 1 month, Citi analyst believes that the stock more than adequately reflects the high capacity utilizations (95%) that is assume in numbers in the longer term. Inherent structural challenges (increasing domestic supplies + globally high LNG prices) lend to believe that the risk is now more on the downside and warrants us to change recommendation. The DCF values are quite sensitive to capacity utilization – every 5% dip in utilization affects fair value by Rs6. As a consequence Citi downgrades the stock to Sell (3M) from Buy (1M) with TP of Rs78 on roll-forward.

Nagarjuna Constructions Corp Ltd [NCCL] has six verticals comprising of Buildings and Housing, Transportation, Water and Environment, Electricals, Irrigation and Real Estate. Three verticals, Buildings and Housing, Transportation and Water and Environment together constitute 75% of the order backlog as well as turnover of NCCL.

NCCL has a well-diversified order book position, which is currently Rs 75.2 bn. The average execution period is 2.5 years, spread over more than 90 projects. Out of total order book, about 10% are overseas orders. Read Dalal Street News on Orders Secured by NCCL.

NCCL consolidated its real estate initiatives under NCC Urban Infrastructure (80% subsidiary, with promoters of NCC having 20%).NCCL in joint venture with Tishman Speyer & ICICI Ventures is planning to develop township on 400 acres site in Tellapur, Hyderabad and NCCL has a 26% stake in this project.

NCC has set up a separate company, Nagarjuna Infrastructure Holdings (NIH), to primarily focus on BOT related infrastructure projects. NCCL has an excellent track record of delivery among its peers portraying a reflection of its superior execution ability. US based Equity Fund, Blackstone ventures has bought 12.5% stake in the company.

NCCL’s foray into higher margin segments and the traction that its subsidiaries are expected to grow in the near future mean better visibility for revenues and profits going forward. On its fully diluted equity, it quotes about 18.5 – 19.5 times its FY09 earnings. HDFC recommends to accumulate NCCL in the Rs. 202 -224 band with an expected return of about 20% returns over the next 8-12 months.

Breaking News:Citigroup in a research report has initiated coverage on Educomp Solutions with a AGGRESSIVE SELL rating and has categorized the stock in “HIGH RISK” vertical.

The crazy Indian market is ignoring expensive valuations and high risks in Educomp’s business model and aggressive accounting policy, in our view. We see 20% downside for the stock. Citi forecasts 102% revenue CAGR and 95% EPS CAGR over FY07-10 as Educomp penetrates beyond tier 1 & 2 cities. Stable margins as pressure in school ventures and the ICT business is countered by leverage in Smart_Class and MathGuru. There is high execution and regulatory risks in Edu-Infra and Edu-Manage.

Investors should note High valuations paid to acquire start-ups Edu-Infra and Edu-Manage; b) Reasons for exit taken by private equity firm just before IPO; and c) High regulatory risk in the K-12 business.

SELL with a target price of Rs 2,380, which is based on 35x FY09E fully diluted EPS, derived using the stock’s historical trading band. Target multiple of 35x is at 20% premium to the stock’s average historical valuation to factor in the company’s stronger growth prospects. It is supported by valuation multiples of other educational services companies in the Asia Pacific region. Target multiple of 35x is at a premium to the average valuation for Indian IT companies.