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ABG Shipyard + ONGC + Mphasis – BUY from Citigroup

June 27, 2007

Citigroup research has recommended a BUY on ABG Shipyard, Bharti Shipyard ONGC and Mphasis. We had a BUY on Mphasis much before Citigroup did.

ABG Shipyard and Bharti Shipyard:
Citi raiseed their target price for ABG Shipyard to Rs560 (Rs430 earlier) and Bharati Shipyard to Rs670 (Rs525 earlier) as we roll forward our target multiple for both companies to 12x FY09E PE (15x FY08E earlier), in line with valuations of similar-sized shipyards in the region.[Asia]

Both the companies are expected to report a EPS growth of 50% from 2008-10. Bharti Shipyard is expected to report a fully diluted EPS of Rs 38.53 and Rs 55.87 for FY08 and FY09. While ABG is expected to report EPS of Rs 29.92 and Rs 47.18 for FY08 and FY09.

The target multiple of 12x FY09E earnings for the Indian shipyards also compares favorably with the imputed target P/E (average 12.4x CY08E) of Korean shipyards.

ONGC:
Citi rates ONGC as Buy/Medium Risk (1M) with a target price of Rs1100. Despite near-term uncertainties on subsidy payouts, ONGC’s asset valuations have improved with higher net realizations and greater confidence in gas price deregulation.

The target price of Rs 1100 is based on a PER of 11x FY08E P/E (previously 10x) on account of greater confidence in adherence to a subsidy-sharing formula and the company’s recent successes in driving volume growth and potential improvement in reserve replacement. The new target price imputes EV/EBITDA of 5.5x FY08E. This is at the higher end of historical trading ranges – PER of 2.1x to 11.3x and EV/EBITDA of 0.8x to 5.6x – but in-line with regional peers.

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