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Varun Shipping + Ahluwalia Contracts – Initiating Coverage

January 2, 2008

SBI Caps has initiated coverage on Varun Shipping and Ahluwalia Contracts with a BUY recommendation.

Varun Shipping:
Varun Shipping Ltd. (VSL) is the largest hydrocarbon shipping company is a serious player in the area of shipping energy in the country. Given its prominent presence in this niche segment, where charter rates are less volatile, coupled with its fleet expansion and foray into the lucrative offshore segment, we expect Varun to register 15% revenue CAGR over FY07-FY10.

Varun has increased its presence in the lucrative offshore segment by acquiring 2 high-end Anchor Handling Tug Supply (AHTS). The company executed a $320 million capex over the last two years in which it expanded its fleet size from 14 vessels in FY05 to 20 in Q2FY08. Another $80 million capex is in the pipeline to be executed by end of FY08.

Despite the cyclical nature of its business, Varun has one of the best dividend paying track records in the industry. It has been paying dividends consistently for the last 23 years. Using NAV, EV/EBITDA, P/B and P/E as valuation tools we assign a target price of for the stock which is a 39% upside from the CMP.

Ahluwalia Contracts: ACIL
ACIL’s order book position has been growing robustly with the growth witnessed in the civil construction space. The order book position has increased from Rs7.8bn in FY05 to the current order book position of about Rs31.4bn.

Our Newsdesk had reported that the company has bagged one of the largest housing construction contracts in the country – the Residential Complex for Commonwealth Games 2010.

The company had been operating at an EBIDTA margin of 9.6% in FY06 which improved to 10.4% in FY07. The demand – supply situation is in favor of ACIL with large number of construction projects and a limited number of players to execute them. The operating margins is expected to improve further led by the pricing power to 11.9% and 12.8% in FY08E and FY09E respectively.

At the CMP of Rs339, the stock is trading at a P/E multiple of 40.5x its FY08E EPS of Rs8.4 and 25.1x its FY09E EPS of Rs13.6. On an EV / EBIDTA basis, the stock is trading at 18.7x FY08E and 12.0x FY09E respectively. SBI recommends a BUY and value the stock at 35x its FY09E EPS of Rs13.6, arriving at a price target of Rs476, an appreciation of 39%.

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