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Brokerage Recommendations

Monday, November 15, 2010

Prabhudas Lilladher calls a ‘Buy’ on Great Offshore 
CMP: Rs 383     Target Rs 497 
PAT ahead of estimates backed by strong margins: Despite Great Offshore’s (GOFF’s) revenues being marginally lower than expectations at Rs 2.01bn, a 12% YoY decline, a 16% QoQ decline it reported strong EBITDA margins to the tune of 53.1% as against 42.5% in Q2FY10 and 41.7% in Q1FY11, which resulted in PAT being ahead of estimates at Rs 281m. PAT increased by 5% on a sequential basis. However, it declined by 11% on a YoY basis. The revenue decline was on account of lower utilization of the OSVs which stood at 58% as against 78% in Q2FY10 and 68% in Q1FY11 as well as ‘Kedarnath’ (drilling vessel) being dry docked during the quarter. Project revenues were also absent. With a large majority of Kedarnath’s dry docking expenditure being capitalized and lower employee expenses due to larger idling of vessels, led to stronger margins for GOFF.

Fleet Status: Seven of GOFF’s assets are currently in the spot market as compared to six vessels in the first quarter. Of the company’s three drilling assets, only one was operational during the quarter as one was dry-docking and the other is yet to be contracted.
H2FY11 to look up: The second half of the fiscal is likely to witness stronger earnings as potentially all three drilling assets could be operational in Q4FY11. Besides, with winter setting in, day rates and utilizations in the spot market are likely to strengthen.
Valuation: As per the management, the insured value of the assets on its books stands at Rs 39bn, while the advance towards the rig and the MSV that Bharati Shipyard is currently building stands at Rs 8bn. This gives us a total NAV of Rs 46bn. After deducting the debt on GOFF’s books which stands at Rs 25bn, we get a per share value of Rs 552/share. We are basing our target price on 10% discount to NAV which translates to Rs 497. At CMP, the stock trades at 7.7x FY11E and 4.7x FY12E EPS. We maintain ‘Accumulate’ on the stock. 
Elara Capital calls a ‘Sell’ on Sun Pharmaceuticals 
CMP: Rs 2319     Target Rs 1820 
Domestic formulation maintains leadership in lifestyle drugs: With a leadership in major lifestyle drugs and lower base in H1FY10, the company has reported 36% YoY growth in Q2FY11. Sun Pharma continues to maintain leadership among psychiatrists, neurologists, cardiologists, pediatrists, and ophthalmologists for domestic formulations. Launch of 11 new drugs in Q2FY11 and 21 drugs in H1FY11 would help sustain growth in domestic formulations for the company.
Exports show flat growth on inclusion of Taro: Sun Pharma has reported 0.5% YoY growth in export formulations during Q2FY11. The company has added 8-10 days sales of Taro in this quarter post the integration in September 2010. It has started marketing generic Exelon during the shared exclusivity from Q2FY11. Sun Pharma has reported delayed sales of Eloxitin from distributor’s level though it had withdrawn sales of the same in June 2010 in the US. Core generic exports have regained the momentum in the US while the inventory pile up at distributor level has declined down growth in emerging markets. 
Valuation: Maintain Sell, target price up to INR 1820: While we believe that the company’s prospects post the integration of Taro would be EPS accretive, its valuation has priced-in all visible prospects for near to medium term. There could be a possibility of one- time inventory/debtors write off in Taro Pharma after the appointment of a new management. However, one-time benefit from para-IV sales of Exelon and few more products would drive non-core generic sales in the US. We maintain ‘Sell’ with a target price INR 1,820. 
Angel Broking calls a ‘Sell’ on Areva T&D 
CMP: Rs 291   Target Rs 247 
Areva T&D (Areva) 3QCY2010 results were significantly ahead of our estimates. Revenues registered 40% yoy growth to Rs 1,048cr, while PAT surged by over 181% yoy to Rs 63cr. We had estimated sales and PAT at Rs 864cr and Rs 32cr, respectively. Going forward, the pricing scenario continues to be grim on account of increased competition and relaxation of pre-qualification norms by PGCIL. We maintain our Sell recommendation on the stock.
Strong volume driven growth: Despite the price erosion of 10-15% in the T&D segment, Areva managed to register 40% yoy rise in revenues to Rs 1,048cr backed by strong growth in volumes. EBDITA margins for the quarter also expanded by 425bp to 12.7% on the back of lower staff cost and other expenses. Other expenditure also included the reversal of mark-to-market losses on forex derivatives of ~Rs 10cr booked earlier. Consequently, net profit posted a sharp jump of 181% to Rs 63cr.
Outlook and Valuation: Acquisition of Areva’s global T&D business by Alstom & Scheidner continues to play on the stock. The Alstom & Scheidner combine had previously made an open offer at a price of Rs 295.3, which was subsequently withdrawn during 2QCY2010 pending the clearance from SEBI. Post the clearances received from SAT, the same offer will now remain open between November 6 -25, 2010. Management continues to maintain cautious outlook given the pricing pressures, especially in the T&D segment on account of increased competition from foreign JV’s and relaxation of pre-qualification norms by PGCIL. At the CMP of Rs 293, the stock trades at 30x CY2011E EPS. We maintain a Sell on the stock.



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