Stock update: Alphageo India

Alphageo’s pending order book as on 31 March 31 stood at Rs114 crore (versus Rs63 crore as on 31 March, 2008). The strong pending order book provides revenue visibility for FY2010 and beyond.

We highlight here that the company is yet to get clearance from ONGC to commence Rs38.9 crore Nagaland project, as the agreement between ONGC and the government of Nagaland is still pending.

The company is focused to diversify its revenues from north-east India (where heavy rains during monsoon severely impedes seismic survey work) to other regions that have differential monsoon pattern. In line with this, the company has bagged order worth Rs39 crore from ONGC in Cauvery basin (Tamil Nadu), which would be executed during monsoon.

The company’s cash flow from operating activities declined to Rs20.4 crore in FY2009 as compared to Rs25.9 crore in FY2008 due to steep decline in the net profit and deterioration in the net working capital (deteriorating to 42 days of sales in FY2009 from -19 days in FY2008).

On positive side, the company’s debt to equity ratio narrowed down to 0.2x in FY2009 from 0.4x in FY2008 and 1x in FY2007. With the cash flows expected to improve in FY2010, the company is likely to continue its debt repayment programme.

The company’s return ratios decreased in FY2009. Owing to 53% year-on-year (y-o-y) decline in the net income, the return on net worth (RoNW) declined to 11.5% in FY2009 from 32.6% in FY2008. The return on capital (RoCE) employed also plummeted to 19.5% in FY2009 (from 37.6% in FY2008).

Valuation

We have revised our earnings per share (EPS) estimates for FY2010 and FY2011 to Rs16.9 and Rs21.2 respectively based on updates from FY2009 annual report.

We have rolled over the price target to the average of FY2010 and FY2011 earnings. Consequently, we have revised our price target to Rs230. However, due to the limited upside from the current market price of Rs212, we are downgrading the stock to HOLD.

At the current market price the stock trades at 12.5x FY2010 and 10x FY2011 estimated earnings.