Stocks Analysis - Titan, Great Offshore, MTNL

Analysis of stocks Titan, Great Offshore, MTNL from investment perspectives based on their recent results and performance

Titan Industries
CMP: RS 932

TITAN benefits from the presence of extremely strong brands in largely unorganised segments. The domestic jewellery market is pegged at Rs 75,000 crore, less than 5% of which is ‘branded’ and Titan controls 65% thereof. With extremely low penetration level, there is huge scope for the ‘democratisation of luxury’ in India.

With Titan now partially linking jewellery-making charges to gold value, profitability may not be so susceptible to the movement in gold prices, going forward. In the watches segment, JM has projected a compounded annual growth rate (CAGR) of 13% in sales between FY08 and FY11E.

Viewed in the context of India being an attractive retail market (more so in the luxury segment , in which India is still at the nascent stage), Titan emerges superior among retail players in terms of profitability, as well as return on capital employed (30%-plus ).

Also, y-o-y generation of free cash flow is a source of distinct advantage for Titan. In light of a slowing economy where future growth potential is a key concern, the P/E to growth (PEG) method of valuation appropriately recognises future growth rate and adjusts the P/E multiple accordingly.

Great Offshore
CMP: RS 250

Great Offshore has announced a combined contract for two of its assets — Malaviya Thirty Three (a heavy lift vessel) and Gal Ross Sea (an anchor handling tug) — for a total of $22 million for one year in the Khafji oilfields of Saudi Aramco.

The assets have been contracted out at a combined day rate of $63,000. Although the exact day-rate split between the two assets is not known, they estimate the heavy lift vessel to fetch ~ $55,000. This contract is a key positive, indicating strength in the offshore services segment, as opposed to the downtrend witnessed in segments such as dry bulk.

Citigroup retains a ‘buy’ rating on the stock, given a relatively stable business profile (75% of revenues from ONGC) and good earnings visibility (average contract durations ~2-2 .5 years), making it less exposed to a cyclical downturn in the offshore cycle.

Though spot rates have declined 10- 15%, the company has only five of its 41 vessels operating on spot. Q3 should see sequential growth in revenues and profits on account of commencement of new contracts, as well as higher dry-docking expenses in Q2.

CMP: RS 74

BNP Paribas initiates coverage on Mahanagar Telephone Nigam (MTNL) with a ‘reduce’ rating and target price of Rs 55, based on cash per share of Rs 39 and a core business valuation of Rs 16 at 2.5x FY09 EBITDA. Historically , MTNL traded close to its book value, but the valuation is now converging towards its cash per share as its return on equity (RoE) has declined to 3.3%, well below its cost of capital.

Moreover, one-fourth of its book value is amount recoverable from the Department of Telecom (DoT), which is unconfirmed and outstanding for several years.

Cash per share will dip to Rs 39 from Rs 61. BNP believes MTNL faces significant revenue risk as its wire-line segment, which contributes 70% of its revenue, will continue to decline due to subscriber loss and reduction in tariffs.

MTNL will find it extremely difficult to protect its wireless market share in competition with more efficient private operators, which are reducing tariffs, leveraging scale economies, coupled with superior customer service.