| Summary of Contents Eros International Media
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs247
Current market price: Rs186 Making of a blockbuster Key points -
Unique media property with a proven track record: Eros International Media Ltd (EIML) is one of the rare media companies that have shown an impressive and profitable growth even in the recent recessionary phase. Its revenues and net profit have grown at an exponential pace of 58% and 157% CAGR respectively during FY2006-10. To sustain its growth in future, the company has chalked out aggressive plans to invest close to Rs1,000 crore in co-production and acquisition of film rights over the next 18-24 months in order to more than double its existing gross block of Rs1,016.4 crore by FY2012E. -
A de-risked business model: Despite being in the film co-production and distribution business, its unique business model enables the company to recover the bulk of its cost upfront through pre-sales of overseas rights, music rights and broadcasting rights (on television and the other emerging delivery platforms like broadband and 3G), and in-film advertising. EIML has an exclusive tie-up with its parent company for international distribution rights that covers 39% of the cost (30% of total cost with a 30% mark-up, ie 39% of the total cost). Similarly, it has an arrangement with T-series for music rights (wherein it gets 10-15% of the total cost) while television rights cover additional 20-25% of the total cost, thereby taking care of almost 80-85% of the money invested by the company. -
Favourable revenue mix to further boost its profitability: EIML has shown a significant improvement in its OPM on the back of the efforts taken to exploit its vast content library. Consequently, its OPM has more than doubled in the past four years, aiding its operating profit to grow at a CAGR of 99% as compared to the CAGR of 58% recorded by its revenues in the same period (FY2006-10). The company?s management expects the OPM to expand further due to an improving trend in the revenue mix in favour of the exploitation of content library. Recently, it signed a deal with Zee Entertainment Enterprises (ZEE)' television network for exclusive broadcasting of the company?s movie library?this is a testimony to the successful penetration of the high-margin revenue platform by the company. -
Valuations?strong earnings growth of 32.1% CAGR during FY2010-13E: EIML is one of the largest integrated film studios in India with multi-platform revenue streams and a well-established distribution network across the globe. With its proven track record, de-risked business model and aggressive ramp-up plans, we believe the company is well poised to gain from the rising discretionary spending on film entertainment driven by the country?s favourable demographics. Thus, EIML is a compelling value play on the Indian media and entertainment industry. We initiate coverage on EIML with a 12-month price target of Rs247 (valued at 15x FY2012E).
STOCK UPDATE V-Guard Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs228
Current market price: R193 Non-south sales boost top line performance Result highlights -
Top line growth led by stupendous growth in sales in Non-south India and robust growth in south India: In Q2FY2011, V-Guard Industries Ltd (VGIL) once again recorded a robust growth in its top line (up 49.6% year on year [YoY]) to Rs158.8 crore (which was marginally above our estimate). The growth was driven by a stupendous growth in sales in the Non-south region as well in products like cables, low-tension (LT) cables and fans. The Non-south region formed 20% of the sales in the quarter under review as compared to about 15% in FY2010. -
Higher sales in lower-margin products led to a lower margin: The operating profit margin (OPM) at 10.9% was below our expectation of 11.5% mainly due to a lower growth in the sales of the higher-margin products like stabilisers. An increase in metal prices also led to a higher raw material cost, resulting in a lower margin. The company?s products enjoy different margins ranging from 4-6% in products like cable and fans to as high as 17-19% in stabilisers and solar water heaters. -
PAT up 21.4%: The interest cost jumped due to higher working capital borrowings during the quarter. However, the company?s management indicated that it is taking measures to contain the working capital requirement at the current level. The profit before tax (PBT) reported a lower growth of 17.1% YoY. However, aided by a lower tax rate, the company registered a growth of 21.4% to Rs8.8 crore, which was lower than our expectation of Rs9.5 crore. -
Estimates maintained: The company?s management has maintained its Rs700-crore sales target for FY2011. This requires a revenue run rate of 45% for H2FY2011, which, we feel, is quite achievable looking at the robust demand in the Non-south region. The management has also indicated at an OPM of 10-10.5% for the same period. We have already built in a margin of 10.1% for the year. Hence, we maintain our estimates for the company in anticipation of a robust H2FY2011. We are expecting a 46.1% compounded annual growth rate (CAGR) in the company?s earnings over FY2010-12. -
Buy maintained: VGIL has been reporting a good financial performance in recent times driven by the successful introduction of new products, a ramp-up in its distribution network and an optimum mix of manufacturing and outsourcing of products. VGIL is expected to successfully scale up its operations in the coming quarters and post a 40%+ growth in its earnings over the next three years. Its products margin ranges from 4% to 19% and its product mix would be a key determinant of its future?s profitability. At the current level, the stock is trading at 10.6x its FY2012 estimates and the valuation appears very attractive, given its sound growth trajectory. Despite the recent rally in the stock, the stock is still available at a discount to its peers. We maintain our Buy recommendation on the stock with a price target of Rs228. Gayatri Projects
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs375 Price target revised to Rs552 Result highlights -
Net sales up 12%, below estimates: In Q2FY2011 the stand-alone revenue of Gayatri Projects (GPL) grew by 12% year on year (YoY) to Rs280 crore, which was below our expectation. The top line growth during the quarter was subdued due to a prolonged monsoon. Further, the execution of the irrigation projects in Andhra Pradesh (AP), which forms approximately 45% of the order book, was slow. A pick up in execution of AP orders is not expected for another six months given the political situation in AP. -
Better operating margin: Operating margins (OPM) expanded 90 basis points YoY to 12.6% on account of lower construction costs. Lower raw material prices helped in construction costs being controlled. The management expects to sustain margins in the range of 12-13%. Due to better margins, the earnings before interest, tax, depreciation and amortisation (EBITDA) for the quarter grew 21% YoY. -
Net profit growth muted at 6%: The net profit for Q2FY2011 grew by just 5.7% YoY to Rs11.6 crore (in line with estimates) despite a 21% growth in EBITDA. Higher depreciation and interest costs and higher tax outgo affected the results. -
Robust order book: The current order book of the company stands at around Rs8,000 crore as against Rs6,000 crore at the end of Q2FY2010 and Rs7000 crore at the end of Q1FY2011. It is 6.4x its FY2010 revenues, as 45% of the order book is still exposed to irrigation projects in Andhra Pradesh (AP) where execution is very slow. However, even if we remove the whole of the irrigation projects from it, the order book will be at 3.5x its FY2010 revenues, which provides good revenue visibility. During the quarter, GPL added Rs750 crore to the order book as balance of plant (BoP) contract for its upcoming power plant in AP. Further GPL is L1 in two road projects worth Rs1,100 crore. -
Attractive valuations: The present order book of the company, even excluding the irrigation projects, provides a strong revenue visibility for the coming two years. Further, in order to de-risk its business model and move up the value chain, the company has entered into new segments. It has built up a sizeable portfolio of seven road build-operate-transfer (BOT) projects, of which five would get operational this fiscal. It has also forayed into the power generation space and is setting up a 1,320MW power plant in AP which has already achieved financial closure. GPL expects to scale up its power portfolio further. At the current market price, the stock is trading at 7.1x and 5.9x its FY2011E and FY2012E earnings respectively and the valuations are attractive given the company?s growth plans. Further, the stock has corrected a lot over the past few months and provides a good investment opportunity here on. We revise our target price to Rs552 from Rs549 and maintain our Buy recommendation on the stock. We have built in one more road BOT project in our valuation since it achieved a financial closure this month (November 2010). We have also incorporated further investment done by GPL in its power project. However we have lowered our price earning (P/E) multiple for its core engineering procurement and construction (EPC) business to 6x FY2012E earnings from the earlier 7x, given there are no signs of improvement in the execution of irrigation projects in AP. Shiv-Vani Oil & Gas Exploration Services
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs500
Current market price: Rs428 Price target revised to Rs500 Result highlights -
Results below expectation: Shiv-Vani?s Q2FY2011 results were dented by lower than expected revenues from the seismic survey business (on account of prolonged monsoons) and a jump in interest expenses (on account to deployment of its new onshore rigs) during the quarter. However, the outlook for H2 is quite positive and the management has guided for net profits of Rs230-250 crore for the full year. -
Top line declines by 9.9% in Q2: The net sales declined by 9.9% year on year (YoY) to Rs288.2 crore due to a delay in deployment in some of its rigs and much lower than expected revenues from the seismic survey business. -
Margins improve but spike in interest cost drags down earnings: The decline in the revenues was largely offset by a 357 basis point YoY improvement in the operating profit margin (OPM) to 45.6% (versus our estimate of 45% for the quarter). Consequently, the operating profit declined by only 2.3% YoY to Rs131.5 crore. But the adjusted net income declined by 39.1% YoY on account of a sharp increase in the interest expenses (up 94.8% to Rs79.5 crore) and higher depreciation expenses. The interest cost increased mainly due to ? 1) the remaining one rig for ONGC contract becoming operational in Q2FY2011 and thus interest on the same, which was earlier being capitalised, was charged to the profit and loss (P&L) and 2) the interest cost included Rs5 crore related to foreign currency convertible bonds (FCCB) issue expenses. -
Optimistic of winning new long term orders: Shiv-Vani?s management has indicated that the company would put in a tender for new long-term orders worth Rs1,000 crore in H2FY2011. The management also hinted at submitting tenders for some overseas orders. -
Maintain Buy with a revised price target of Rs500: In our view, Shiv-Vani is an excellent bet in the oilfield service sector given its strong order book of Rs3,000 crore (2.4x FY2010 revenues) and a equally strong order bid pipeline. At the current market price, the stock is available at 6.5x its FY2012E earnings and an enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) of 5.4x. We maintain our Buy recommendation on the stock with a revised price target of Rs500. Unity Infraprojects
Cluster: Vulture?s Pick
Recommendation: Buy
Price target: Rs151
Current market price: Rs110 Results in line with expectations Result highlights -
Q2FY2011 net profit up by 15%: Unity Infraprojects? (Unity) performance in Q2FY2011 has come in line with our estimates. The net profit grew 14.8% year on year (YoY) to Rs21.5 crore. The sales turnover came in at Rs346 crore, growing by 14.1% YoY, which is again in line with our estimates. The prolonged monsoon resulted in slower growth during the quarter, which was expected. -
EBITDA margin improves: The operating profit margin (OPM) expanded by 80 basis points YoY to 14.2% in Q2FY2011 as 51% of the revenue (vis-?-vis 25% contribution in Q2FY2010) came in from the water and irrigation segment which enjoys better margins compared to other segments. Even sequentially, the OPM improved by 116 basis points as in Q1FY2011; the water and irrigation segment contributed about 30% to the revenue. Unity expects to maintain its margins at around 13% given that 50% of the order book is from the water segment. -
Strong order book: Unity?s current order book stands at Rs3,633 crore (a growth of 4.5% YoY and 2.4% quarter on quarter [QoQ]), which is 2.5x FY2010 revenues, thus providing strong revenue visibility. During the quarter, the company saw order inflows of Rs265 crore. Furthermore, the company is also the L-1 bidder for contracts aggregating Rs500 crore. -
Attractive valuations: We have lowered the revenue estimates marginally for FY2011 and FY2012 by 5% and 3% respectively, given the slower order intake during H1FY2011 than our expectations. Further, the prolonged monsoon delayed the execution of projects to some extent. However, in H1FY2011, Unity surpassed our OPM estimates and thus we raise our margin estimates for FY2011 and FY2012, which will translate into an increase in the estimate for earnings by 4% and 3% respectively. At the current market price the stock is trading at 8.0x FY2011 and 6.2x FY2012 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs151. India Cements
Cluster: Ugly Duckling
Recommendation: Reduce
Price target: Rs92
Current market price: R116 Lower realisation, cost pressure hit bottom line Result highlights -
Earnings in line with expectation: India Cements posted a poor performance in yet another quarter and reported an adjusted net loss of Rs41.2 crore as against a net profit of Rs137.8 crore in the corresponding quarter of the previous year. However, the company?s earnings during the quarter were pretty much in line with our expectation of a loss of Rs41 crore. The poor performance of the company is on account of a sharp drop in the cement realisation and an increase in the overall cost pressure. -
Drop in cement volume and realisation result in revenue contraction: The net sales of the company declined by 15% year on year (YoY) to Rs841.2 crore (in line with expectation). The net sales of Rs841.2 crore also include revenues from Indian Premier League (IPL), wind power and shipping businesses. The revenue from the cement division (which is its core business) declined by 17.7% YoY to Rs790 crore on the back of a combined effect of a drop in volumes (including clinker sales) by 2.7% YoY and contraction in the realisation by 15.4%. However, the present (post Q2FY2011) realisation is higher by over 12% compared to the average realisation of Q2FY2011. -
Margin contraction led by drop in realisation and cost pressure: The operating profit margin (OPM) declined by a sharp 26.7 percentage points YoY to just 3.4% (compared to our estimate of 4.5%). The margin contraction is due to a 15.4% drop in blended realisations and cost pressure in terms of raw material cost, freight cost and other expenses. Further, inspite of generating Rs34 crore (compared to Rs7.9 crore in Q2FY2010) of revenue from IPL, the company has not been able to generate any profit at the operating level. Consequently, the operating profit declined by 90.4% YoY to Rs28.6 crore. -
Reported net loss stands at Rs33.6 crore led by exceptional item and tax write back: The reported net loss for the quarter stood at Rs33.6 crore as compared to a net profit of Rs136.9 crore in Q2FY2010. The reported loss includes foreign exchange translation gain to the tune of Rs11.2 crore. Further, there was a tax write back of Rs13.1 crore and hence the loss before tax from operating income which stood at Rs58 crore has come down to Rs33.6 crore. However, the adjusted net loss works out to Rs41.2 crore. -
Commissioned 1.5 MTPA capacity in Rajasthan, overall cement capacity becomes 16 MTPA: On the capacity addition front, Indo Zinc, which is a subsidiary company of India Cements, commissioned a cement plant with an annual capacity of 1.5 MTPA at Banswara, Rajasthan. With the commissioning of the Rajasthan plant the overall cement capacity of the company has increased to 16 MTPA and the company will also be able to diversify its market mix. -
Downgrading estimates, maintain Reduce with price target Rs92: Though the earnings of the company during the quarter were in line with our estimates, we are downgrading our estimate for FY2011 and FY2012. The cement demand in India Cements? key market area (south India) was very sluggish in H1FY2011 and the management is of the view that the cement offtake is unlikely to improve in the coming couple of quarters on account of a poor execution of the projects. Further, the cost pressure in terms of higher imported coal price and increased freight cost through increase in lead distance will keep margins under pressure. However, we are factoring in a fall of 5.5% in the average realisations for FY2011 over FY2010 as compared to our previous estimate of a drop of 6.5% to incorporate the recent price hike in the south India region followed by supply discipline. The revised earning per share (EPS) for FY2011 and FY2012 works out to Rs3.6 and Rs5.6. We believe any increase in capacity and in volume offtake in H2FY2011 could break the supply discipline and consequently the price could again come under pressure. Hence we maintain our Reduce recommendation with a price target of Rs92. At the current market price the stock trades at a price to earning (PE) of 21.2x discounting its EPS for FY2012E and enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) of 7.8x its FY2012 estimated earnings.
SHAREKHAN SPECIAL Q2FY2011 FMCG earnings review The Q2FY2011 was yet another quarter of a volume driven top-line growth. The profitability was affected by a surge in the raw material prices, and higher brand building and promotional spends due to competitive pressures in the key categories (soaps, detergents, hair care and oral care products). Amongst Sharekhan?s coverage of the fast moving consumer goods (FMCG) stocks, ITC?s bottom line growth of 23.5% year on year [YoY] beat our expectation on the back of a strong performance by all its businesses. The recent acquisitions aided Godrej Consumer Product Ltd (GCPL) to post an above 30% bottom line growth (the stand-alone business registered a subdued performance). Despite a strong volume growth in the consumer business, Hindustan Unilever Ltd (HUL)?s profitability was affected by higher year-on-year (Y-o-Y) other expenses during the quarter.
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