DATED 22/1/2013

Buy Den Networks Ltd 

Outlook
Although the valuation of stock seems expensive at 35.8 & 29.4x for FY13/14, we maintain a BUY. Given the fact that subscriber additions remain strong and the benefits of digitization would start accruing to the top line from Q1FY14. Further with not much significant costs being associated with the incremental revenues, the profitability should be positively affected. We have not yet modeled this incremental revenue, as we would like to see proof of the pudding before revising our forecast.
The Ministry of information & broadcasting (MIB) has demonstrated the seriousness of DAS implementation in phase 2 cities. This can be reiterated from the various key initiatives (such as increasing intervals of review meetings and conducting workshops) taken by MIB to achieve the superior results. Given that MSO’s are expected to be the biggest beneficiaries of digitisation, we believe Den Networks Ltd is well placed to reap the benefit on the back of its strong subscriber revenue base of ~11 mn and aggressive management team.
Key Takeaways
• According to the management, various steps are being initiated by the Ministry of Information & Broadcasting (MIB) to lay emphasis on the seriousness of digitisation in phase 2 cities. Some of the initiatives include increasing the intervals of review meetings (from every 10 days to 3 days), one day workshop with all the nodal officers and IAS officials (of 38 phase 2 cities) to discuss various issues (queries related to customers, stakeholders, technologies, etc). Further, state level meetings are also likely to be held with participants being LCOs, MSOs and nodal officers.
• Den Networks reported strong set sets of numbers during the quarter with 13.3% QoQ top-line growth in its cable business led largely by consolidation of acquired JVs and successful completion of Phase I. Consolidated revenues were at Rs 241.8 crore during the current quarter. It is to be noted that consolidated top-line is not comparable with corresponding period of previous year due to the change in accounting policy at Media Pro which has started reporting revenues on a net basis (Gross revenues – Cost of Distribution rights).
• Moreover, the company has been able to save on operating costs (64.8% v/s 66.0% of sales QoQ) in cable business which has lead to significant improvement in margins by 260 bps QoQ (25.5% v/s 22.9%). Consequently, consolidated EBITDA was at Rs 60.4 crore (+21.8% QoQ). PAT growth (+12% QoQ) was offset by higher depreciation (+21.4% QoQ; higher deployment of set top boxes) and higher interest expense
• During the quarter, company added over ~9,00,000 more set top boxes taking its total universe to ~2.4 mn (~1.8 mn in Phase 1 cities; ~0.6 mn in Phase 2 cities). Moreover, the company expects to seed another 0.2 mn set top boxes in Kolkata in Q4FY13. We remain upbeat on the company as it has analog network of over 3.75 mn subscribers in Phase 2 cities (presence in 60% of all Phase 2 cities) and is likely to convert a significant portion. The company has a strong analog presence in Phase II cities across Uttar Pradesh (7 cities), Maharashtra (5 cities), Gujarat (3 cities), Karnataka (2 cities), Rajasthan (2 cities) and Haryana (1 city).
• Den Networks Ltd has allocated ESOPs to employees in March, 2011 and as a result would amortise the ESOP premium over the next three years. The company has amortised Rs 0.81 crore during the quarter.
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Accumulate Bajaj Auto Ltd For Target Rs.2166 


BAL's 3QFY13 results came broadly on expected lines. Revenues grew by 8.6% YoY to Rs54,127mn. EBITDA margin came in below expectation on account of lower other operating income. However, other income was higher than expected leading to in-line profitability.We expect BAL's volumes in FY14 to receive boost from the new launches done over the past few months. Exports markets too are expected to improve, going ahead.Currency benefit in exports and product-mix improvement will boost margins in FY14. We revise our FY14 estimates upwards to factor in higher volume/realisation assumption and margin improvement. We raise our target to Rs2,166 (earlier Rs1,796) on the back of increase in our FY14 estimates and raising of our PE multiple to 16x (earlier multiple was 15x) on strong earnings growth outlook in FY14. We are positive on the company but due to limited upside from the current levels, we rate the stock as ACCUMULATE.
Outlook and Valuation
* We expect volume growth for BAL in FY14 to be aided by new launches and recovery in export markets. Company's recent new launches have done well and we expect their contribution to increase further in FY14.
* EBITDA margins are expected to receive boost from higher export realization and product-mix improvement.
* We have marginally tweaked our FY13 estimates and are raising FY14 estimates to factor in higher volume growth, higher realization on better product-mix and increase in EBITDA margin estimates.
* We raise our target to Rs2,166 (earlier Rs1,796) on the back of increase in our FY14 estimates and raising of our PE multiple to 16x (earlier multiple of 15x) on strong earnings growth outlook in FY14.
* We are positive on the company but due to limited upside from the current levels, we rate the stock as ACCUMULATE.
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