!!SAI PARSADAM!!
BIG BOSS
VIKAS PARSHURAM SAMWATSARE
DATED 25/12/12
Buy Sun TV Network Ltd For Target Rs.625
* Digitisation to provide fillip to Sun TV’s subscription revenues
Near term triggers from the implementation of digitisation in Phase I (Chennai) and Phase II cities should help boost Sun TV’s subscription revenues. With ~2 mn households in Chennai (~1.3-1.5 mn cable subscribers and ~0.5 mn DTH subscribers) and ~11 mn subscribers in five cities of Phase II (Bangalore, Hyderabad, Mysore, Coimbatore and Vishakhapatnam), Sun TV is well placed to benefit from the incremental subscriber additions. We expect Sun TV to be one of the biggest beneficiaries of digitisation and revenues are expected to grow at a 3 year CAGR of 14.6% to `2,778.0 crore (cable subscription revenues – 30.2% CAGR to `360 crore; DTH – 21.6% CAGR to `598 crore) by FY15.
We believe that the cable subscription income is expected to outperform DTH revenue stream owing to increase in paying subscribers post digitisation (by 31st Dec, 2012) and increased contribution of ~`2.5 crore per month (with upside risk) from Arasu Cable network in Tamil Nadu. Given the potential for deeper penetration of DTH services in the company’s key markets, the DTH revenue is likely to continue its momentum. The sharp jump in subscription revenues from 28.2% of total sales in FY12 to 35.8% in FY15 should bring more visibility and sustainability to the revenues besides providing diversification of revenue streams.
* Valuation
We initiate coverage on Sun TV Network Ltd (Sun TV) as a BUY with a Price Objective of `625 representing a potential upside of ~52.4% over a period of 24 months. At a CMP of `410, the stock is trading at 22.2x and 18.1x its estimated earnings for FY13 & FY14 respectively. Going ahead, pick up in advertising revenues and digitisation led boost to subscription revenues bode well for the company. Historically, the stock has traded at an average of ~23x one year forward earnings and we expect Sun TV to garner similar multiples going ahead. Moreover, we believe that the sharp underperformance by Sun TV v/s ZEEL (since May, 2011) prices in the political and legal risks associated with the company. We expect the valuation gap to narrow and expect Sun TV to trade at its historical levels owing to its robust business model.
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Buy Munjal Showa Ltd For Target Rs.80
Slowdown impact visible
Munjal Showa Q2FY13 results reflected the overall slowdown in the auto industry with net sales declining significantly on QoQ basis and remaining flat on YoY basis. The company witnessed significant decline in sales on the passenger car segment as compared to two wheeler segment. EBITDA declined 24.4% YoY and 15.6% QoQ to Rs 22.2 cr with EBITDA margin at 5.9% vs 6.3% in Q1FY13 and 7.8% in Q2FY12. Lower interest expenses and lower tax rate provided some respite to the company’s bottom line. The company reported an exceptional item of Rs 6.1 cr during the quarter as the company has capitalized Rs 7.04 cr as land cost of enhancement of Manesar land and has charged Rs 6.14 cr as interest cost.
Overall Industry volume guidance for two wheelers has been revised downwards by the Society of Indian Automobile Manufacturers (SIAM) to 5%-6% from 10%-12% for FY13E. Consequently, we expect the sales of Munjal Showa to remain under pressure. Considering the weak result and slow down in the overall environment, we have revised our estimates downwards.
However, low gearing ratio, superior return ratios and support from the promoter group provides comfort at these levels for the stock. Moreover, with lower tax rate as the benefit from Haridwar plant increases and lower interest expenses resulting from debt repayment is likely to boost the bottom line performance of the company.
Going forward, we expect the company to witness some improvement in sales owing to the festive season. Hero Moto Corp is set to launch new products which are expected to drive the sales of Munjal Showa. With a recovery in the overall auto sector and particularly Hero Moto Corp, we expect growth to witness some uptick in 2HFY13. With some improvement in sales, we expect margin to recover in coming quarter.
At CMP, the stock is trading at P/E of 4.66x FY13E earnings and 0.84x FY13E Book Value with an EV/EBITDA of 2.64x and RoE of 18.8%. We maintain BUY on the stock with a target price of Rs 80 (an upside of 29% from current levels).
* Sales were flat on YoY basis whereas sales declined 10.9% on QoQ basis. The company witnessed slowdown in sales in passenger cars segment and its key client Hero Moto Corp sales. Hero Moto Corp reported sales of Rs 5,187.5 cr in Q2FY13 (decline of 11% YoY and 17% QoQ).
* Going forward, Management expects volume growth to be ~6-7% in FY13E. We have factored in 6.8% growth in net sales for FY13E compared to Hero Moto Corp’s net sales growth of 2.2% for FY13E.
* Raw material costs as a % of net sales increased from 73.3% in Q2FY12 to 74.6% in Q2FY13 whereas employee expenses increased 10.1% YoY leading to a decline in the EBITDA by 24.4% YoY and 15.6% QoQ to Rs 22.2 cr in Q2FY13.
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Buy De Nora India Limited For Target Rs.228.00
De Nora India Limited (DNIL) is engaged in the manufacture and coating of anode and cathode for electrolytic process for application in the chlor-alkali & chlorate plants.
* The company is the market leader in the Chlor-alkali & Cathodic Protection Systems business.
* During the quarter, the robust growth of Net Profit is increased by 669.15% to Rs. 68.07 million.
* De Nora India Limited has signed an order of approximately Rs.160 Million for manufacture of Chlorate Cells.
* De Nora India Limited has bought back 246,500 equity shares through open market transactions for an aggregate amount of Rs.22, 879, 685.
* During the quarter, the robust growth of Revenue is rose 401.88% to Rs. 255.81 million from Rs. 50.97 million.
* Net Sales and PAT of the company are expected to grow at a CAGR of 58% and 48% over 2010 to 2013E respectively.
Outlook and Conclusion
* At the current market price of Rs.201.00, the stock P/E ratio is at 14.74 x CY12E and 10.84 x CY13E respectively.
* Earning per share (EPS) of the company for the earnings for CY12E and CY13E is seen at Rs.13.64 and Rs.18.55 respectively.
* Net Sales and PAT of the company are expected to grow at a CAGR of 58% and 48% over 2010 to 2013E respectively.
* On the basis of EV/EBITDA, the stock trades at 9.31 x for CY12E and 6.84 x for CY13E.
* Price to Book Value of the stock is expected to be at 3.22 x and 2.48 x respectively for CY12E and CY13E.
We expect that the company surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.228.00 for Medium to Long term investment.
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Buy R Systems International Limited For Target Rs.194.00
* During the June quarter, the company shown the robust growth in the Net Profit and the profit increased by 175.66% to Rs. 57.75 mn.
* During the quarter R Systems International Ltd added 5 Key Customers.
* R Systems is chosen by Canadian software development company as its development partner to build customized collaborative audio/video applications for windows as well as iOS platform.
* R Systems subsidiary ECnet Ltd to implement a financial consolidation & reporting solution along with corporate performance management solution for one of Malaysia’s largest public enterprises.
* R Systems added 96 (net) associates during the quarter.
* Net Sales and Operating Profit of the company are expected to grow at a CAGR of 8% & 2% over 2010 to 2013E respectively.
Investment Highlights
Results updates- Q3 CY12,
R Systems is an integrated Product Lifecycle Management (iPLM) company offering valued outsourcing services to Fortune 1000, Government and Mid-sized organizations, reported its financial results for the quarter ended 30th Sep, 2012. The third quarter witness a healthy increase in overall sales as well as profitability on account of Strong revenue from product sale & Rupee depreciation helped the company in improving Gross margin & EBITDA margin in this quarter.
The company’s net profit jumps to Rs.57.75 millions against Rs.20.95 millions in the corresponding quarter ending of previous year, an increase of 175.66%. Revenue for the quarter rose 13.00% to Rs.569.57 millions from Rs.504.04 millions, when compared with the prior year period. Reported earnings per share of the company stood at Rs.4.65 a share during the quarter, registering 171.79% increase over previous year period. EBITDA is Rs.101.65 millions as against Rs.57.30 millions in the corresponding period of the previous year.
Outlook and Conclusion
* At the current market price of Rs.172.00, the stock P/E ratio is at 24.88 x CY12E and 20.88 x CY13E respectively.
* Earning per share (EPS) of the company for the earnings for CY12E and CY13E is seen at Rs.6.91 and Rs.8.24 respectively.
* Net Sales and Operating Profit of the company are expected to grow at a CAGR of 8% and 2% over 2010 to 2013E respectively.
* On the basis of EV/EBITDA, the stock trades at 9.73 x for CY12E and 8.67 x for CY13E.
* Price to Book Value of the stock is expected to be at 1.06 x and 1.01 x respectively for CY12E and CY13E.
The first quarter witness a healthy increase in overall sales as well as profitability on account of Strong revenue from product sale & Rupee depreciation helped the company in improving Gross margin & EBITDA margin in this quarter. We expect that the company surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.194.00 for Medium to Long term investment.
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Buy Hindustan Media Ventures For Target Rs.200
Superior readership growth
We initiate coverage on Hindustan Media Ventures Ltd (HMVL) with a Buy rating and a target price of INR200 based on ~10x one-year forward P/E (45% discount v/s target P/E for DB/Jagran). Post sluggish EBITDA CAGR of 7% over FY10-12, HMVL is expected to post 35/44% EBITDA/PAT growth in FY13E, despite being impacted by the industry-wide ad slowdown. We expect 22% EPS CAGR over FY13E-15E driven by 13% ad revenue CAGR and continued margin expansion. HMVL has closed most of the margin gap compared to peers in Hindi print and hence is no longer disadvantaged with a significantly higher earnings sensitivity. However P/E discount is warranted given significant dependence on Bihar market (40% of readership), which might see competitive pressures in the medium term, and low dividend payout (16%).
Superior readership growth v/s peers:
Significant investments, especially in the UP/Uttarakhand markets, have driven 'Hindustan's 'top-of-the-league' growth catapulting it to No.3 position. The newspaper has expanded its readership base from 9m in CY05 to 12.2m currently and has recorded 9% readership CAGR over the past three years, compared to 1-4% for other large competitors (except Patrika group). It is a leader in Bihar and Jharkhand market, ranked 2nd in Delhi in the Hindi genre and 3rd in UP.
UP/Uttarakhand investment likely near inflection; eyeing increased share in the largest Hindi market:
'Hindustan' has been on an ambitious expansion spree in UP and Uttarakhand markets, which are estimated to have a combined print ad market of >Rs10b. Its readership share in UP has increased from sub 10% in 2005 to ~19% currently, closing the gap v/s 'Amar Ujala' (32% share) and 'Jagran' (42% share). We believe that 'Hindustan' is achieving critical mass in UP, driving ad yield improvements. UP/Uttarakhand account for 37% of readership for 'Hindustan' but likely have negative contribution at EBITDA level.
Improved revenue growth and margin expansion to support earnings; potential market disruption in Bihar remains the key risk:
We expect 12% revenue CAGR and 19% EBITDA CAGR for HMVL, with newsprint costs expected to remain stable at ~39% of revenues. Company has relatively lower EBITDA margin v/s listed Hindi print peers, mainly due to investments in UP. Market disruption post potential entry of DB Corp in the Bihar market (no definite timeline) is a key risk as it would drive downward pressure on the cover price and upward pressure on circulation (and hence newsprint consumption).
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Buy Oil India Ltd. For Target Rs.557
OIL India’s (OINL’s) stock has corrected by ~5% over the last 12
months, underperforming ONGC (+4%), despite similar issues of ad-hoc
subsidy burden. The stock has de-rated significantly, trading at ~23%
below its historical average and 40% below its peak valuations.
Valuations are compelling at the current juncture, offering strong
downside protection. We believe the recent sharp correction in the stock
is technical in nature (impending FPO by the government).Macro risks in terms of high under-recoveries/higher upstream subsidy burden seems to be priced into the stock (stock discounts US$50/bbl of long term net realization in our DCF), whereas positives from macro (lower crude, appreciating currency) /micro (value accretive acquisitions, gas price hike) can push the stock substantially upwards from the current levels. Given the extremely attractive risk reward at the current market price, we upgrade the stock from ‘Accumulate’ to ‘BUY’, offering ~25% upside from the current levels.
* Significant relative de‐rating unjustified:
Despite being superior to ONGC on most comparable metrics, OIL is currently trading at a ~13% discount to ONGC, higher than historical discount of ~7%. On most micro parameters, OIL scores over ONGC, better production growth profile over the last four years (5% CAGR versus 0%), higher exploratory success ratio (60-65% versus 30-40%), better free cash flow profile owing to higher proportion of developed proved reserves (91% versus 61%). Given OIL’s earnings sensitivity to macro variables, (ie $1 decline in crude increases EPS by ~4%) is higher than ONGC, and the worst in terms of under recoveries/ higher upstream subsidy burden has been priced in, we prefer OIL over ONGC.
* Buy for absolute upside:
Our DCF based valuation (long term net realization ~US$60/ bbl from FY15) throws up Rs239/ share value of the company’s proved reserves, implying the market is ascribing zero value to probable (p2-p1) reserves and valuing cash plus investments at ~0.9x book, a reflection of the distressed scenario being discounted in the CMP.
* Significant relative de‐rating unjustified:
Ratio of OIL/ONGC stock currently stands at 1.69 times v/s an average of 1.81 times over the last couple of years. The same reflects the relative de-rating of OINL. We believe the relative de-rating of OINL over ONGC is unjustified, despite increase in its share of upstream subsidy burden and expectation that ONGC is likely to see a revival in its domestic production,.
We would like to highlight here that OINL de-rating in terms of PE multiple becomes even more glaring. OINL is currently trading at 13% discount to ONGC on the 1-yr forward PE, which is significantly higher than the historical average discount of ~7%. Some part of the recent widening of the discount could be attributed to temporary slippages in OVL’s performance in some of the fields adversely impacting ONGC’s earnings and expectation of volumes growth in case of ONGC from FY15 onwards.
However, we believe, the recent de-rating is also a function of the technical overhang of the impending FPO, as well as uncertainty on subsidy-sharing ratio. We have assumed 40% upstream subsidy share and OINL’s share to increase to 13.75% and 14% in FY13 & FY14, respectively. We believe, stock offers minimal downside from the current levels and prospective offer price is also unlikely to be significant lower than current market price. We perceive FPO as a positive for the stock as it would boost trading liquidity, increasing free float from 15% to 25%.
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VIKAS PARSHURAM SAMWATSARE DEC 2012
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