Fw: Investor's Eye: Update - ITC (Cigarette sales may dip in FY2014), Zee Entertainment Enterprises (Margin pressure ahead)

 

 

Investor's Eye [March 22, 2013]  Sharekhan www.sharekhan.com

Summary of Contents       STOCK UPDATE ITC  Recommendation: Buy Price target: Rs340 Current market price: Rs305 Cigarette sales may dip in FY2014 Key points VAT rate on cigarettes increases in key states: Taxing tobacco and tobacco products has always been considered a way of generating revenues by the central and state governments especially in times of sustained inflationary pressures and uncertain macro-economic environment. After the significant increase in the excise duty (of about 18%) announced on cigarettes in the Union Budget 2013-14, almost every state increased the value added tax (VAT) on cigarettes in its state budget. The states such as Maharashtra, West Bengal and Kerala (which together account for close to 30% of ITC's cigarette sales volume) have increased the VAT rate on cigarettes by 5% each in their respective budgets (please refer the table below). On the other hand, Delhi, Tamil Nadu and Andhra Pradesh had kept the VAT rate unchanged for FY2014. Likely price hike of about 16%: We believe ITC has to implement a price increase of around 15-16% in its portfolio to mitigate the impact of the central excise duty and VAT rate hikes (in most states) on the margin of the cigarettes business. This will be the second consecutive year of above 15% price increase for ITC. Though the company has not officially increased the prices, the retailers in most of the markets in India are selling ITC's 84mm cigarette brands at a price of Rs7 per stick (which is ~20% higher than the packed price). This hike was in anticipation of a significant price increase by ITC in its cigarette portfolio in the coming months. Cigarette sales volume to remain under pressure: The second consecutive price increase of above 15% (if implemented) will definitely have an impact on the cigarette sales volume of ITC. We expect the sales volume to remain flat in FY2013 but slightly decline by 1.0-1.5% in FY2014. We believe ITC would strongly promote the recently launched cigarette in the 65mm category and launch some of its prominent brands under this category. The national launch under this category is likely to take place in the next three to four months. Hence we are expecting a marginal decline in the sales volume in FY2014. Outlook and valuation: We broadly maintain our earnings estimates for FY2014 and FY2015. Though the cigarette sales volume is price inelastic, a price increase of above 15% for two consecutive years would put pressure on ITC's cigarette sales volume in FY2014. However, the price hike in the portfolio would help in maintaining the profitability. Overall, we expect ITC's top line and bottom line to grow at compounded annual growth rate of 17.1% and 20.0% respectively over FY2012-15.  At the current market price the stock trades at 31.9x, 26.5x and 22.4x FY2013E, FY2014E and FY2015E earnings respectively. We maintain our Buy recommendation on the stock with a price target of Rs340.   Zee Entertainment Enterprises Recommendation: Buy Price target: Rs280 Current market price: Rs206 Margin pressure ahead We recently interacted with the management of Zee Entertainment Enterprises Ltd (ZEEL) to discuss the current state of business and the future outlook. The management indicated that the losses from the sports business would increase in FY2014 as compared with the losses in FY2013 (estimated at Rs90 crore) and that investments in newer channels and the launch of new channels would increase the overall loss in FY2014 to around Rs250-300 crore (overall loss estimated at close to Rs150 crore in FY2013). On the subscription front, the management expects the domestic subscriptions to grow by 17-18% in FY2014 (at a rate lower than the FY2013 rate). On the advertisement front, the management expects the growth to taper off in FY2014, after growing sharply in FY2013 (ex sports the business is expected to grow at a rate higher than the industry average of 8-9% in FY2014). On the margin front, the management indicated that margin would contract in FY2014 led by higher losses in the sports business and investments in new initiatives.  Margins to decline in FY2014, led by higher losses in sports business and investments in newer initiatives: The sports business' losses in FY2014 are expected to be higher than that in FY2013 (estimated at Rs90 crore; a loss of Rs46.6 crore already incurred in the nine months ended FY2013, another Rs45 crore of loss expected in Q4FY2013) led by three India series in FY2013-14. Further, investments in the new bouquets of channels (Ten Golf, HD channels, Ditto TV, Zee Alwan, Zee Bangla and Zee Q) and the potential launch of two new channels would increase the losses to Rs250-300 crore in FY2014 (currently the accumulated losses stand at Rs150 crore). On the back of these losses , the management expects the EBITDA margin to decline in FY2014 as compared to that in FY2013 (exit margin for Q4FY2013 will be closer to 21% and that for FY2013 will be around 25%).  Domestic subscription revenues could see upside surprise from digitisation, international subscription to remain soft in FY2014: The overall subscription revenues are expected to grow to 21% in FY2013, whereas overall subscription revenues for FY2014 would be lower than that achieved in FY2013. The domestic subscription revenues are expected to grow by 17-18% in FY2014 (by 23.5% in FY2013) whereas the international subscription revenues are expected to remain soft, led by lower currency benefits. The domestic subscriptions have yet to get the full benefits of the phase I of the digitisation exercise, as the multi-system operators (MSOs) are delaying furnishing the total subscribers' data. Even the implementation of the phase II, for which 60% seeding is already done, will be slightly delayed. Thus, with the upside still to reflect in the subscriber numbers, the management expects there to be room for upside in the domestic subscription revenues led by the incremental monetisation of the first and second phases of the digitisation process.  Ex sports, advertisement revenue growth to taper off in FY2014 but it would be higher than the industry average: After a strong growth of 27% in the advertisement revenues in the nine months ended FY2013, the management indicated that the growth would slow down in Q4FY2013. For FY2014, the management expects the growth to taper off to 16-17% (from 24% in FY2013). Ex the sports advertisement revenues the overall growth would be higher than the industry's average growth.  Pessimism priced in: In the last one and a half months ZEEL has corrected by close to 15%, led by the concerns over the margin decline and lower revenue growth in FY2014. Though the concerns seem to be factual but the recent correction in the stock price has priced in most of the concerns. Moreover, with the cash level on the balance sheet comfortable at around Rs800-900 crore and with the cash level expected to increase to around Rs2,000 crore by FY2015, we expect ZEEL to reward its shareholders with a higher dividend pay-out and share buy-back programme which could lead to further upside in the stock.  Valuation: We maintain our earnings estimates for FY2013, FY2014 and FY2015. However, based on the recent developments our estimates for FY2014 and FY2015 could be downgraded (we will review the estimates after the announcement of the Q4FY2014 results). At the current market price of Rs206, the stock trades at 22x and 18x based on the current earnings estimates and at 15x and 12x EV/EBITDA at the FY2014 and FY2015 estimates respectively. We maintain our Buy rating on the stock with a price target of Rs280. Click here to read report: Investor's Eye

Fw: Investor's Eye: Update - ITC (Cigarette sales may dip in FY2014), Zee Entertainment Enterprises (Margin pressure ahead)

 

 

Investor's Eye [March 22, 2013]  Sharekhan www.sharekhan.com

Summary of Contents       STOCK UPDATE ITC  Recommendation: Buy Price target: Rs340 Current market price: Rs305 Cigarette sales may dip in FY2014 Key points VAT rate on cigarettes increases in key states: Taxing tobacco and tobacco products has always been considered a way of generating revenues by the central and state governments especially in times of sustained inflationary pressures and uncertain macro-economic environment. After the significant increase in the excise duty (of about 18%) announced on cigarettes in the Union Budget 2013-14, almost every state increased the value added tax (VAT) on cigarettes in its state budget. The states such as Maharashtra, West Bengal and Kerala (which together account for close to 30% of ITC's cigarette sales volume) have increased the VAT rate on cigarettes by 5% each in their respective budgets (please refer the table below). On the other hand, Delhi, Tamil Nadu and Andhra Pradesh had kept the VAT rate unchanged for FY2014. Likely price hike of about 16%: We believe ITC has to implement a price increase of around 15-16% in its portfolio to mitigate the impact of the central excise duty and VAT rate hikes (in most states) on the margin of the cigarettes business. This will be the second consecutive year of above 15% price increase for ITC. Though the company has not officially increased the prices, the retailers in most of the markets in India are selling ITC's 84mm cigarette brands at a price of Rs7 per stick (which is ~20% higher than the packed price). This hike was in anticipation of a significant price increase by ITC in its cigarette portfolio in the coming months. Cigarette sales volume to remain under pressure: The second consecutive price increase of above 15% (if implemented) will definitely have an impact on the cigarette sales volume of ITC. We expect the sales volume to remain flat in FY2013 but slightly decline by 1.0-1.5% in FY2014. We believe ITC would strongly promote the recently launched cigarette in the 65mm category and launch some of its prominent brands under this category. The national launch under this category is likely to take place in the next three to four months. Hence we are expecting a marginal decline in the sales volume in FY2014. Outlook and valuation: We broadly maintain our earnings estimates for FY2014 and FY2015. Though the cigarette sales volume is price inelastic, a price increase of above 15% for two consecutive years would put pressure on ITC's cigarette sales volume in FY2014. However, the price hike in the portfolio would help in maintaining the profitability. Overall, we expect ITC's top line and bottom line to grow at compounded annual growth rate of 17.1% and 20.0% respectively over FY2012-15.  At the current market price the stock trades at 31.9x, 26.5x and 22.4x FY2013E, FY2014E and FY2015E earnings respectively. We maintain our Buy recommendation on the stock with a price target of Rs340.   Zee Entertainment Enterprises Recommendation: Buy Price target: Rs280 Current market price: Rs206 Margin pressure ahead We recently interacted with the management of Zee Entertainment Enterprises Ltd (ZEEL) to discuss the current state of business and the future outlook. The management indicated that the losses from the sports business would increase in FY2014 as compared with the losses in FY2013 (estimated at Rs90 crore) and that investments in newer channels and the launch of new channels would increase the overall loss in FY2014 to around Rs250-300 crore (overall loss estimated at close to Rs150 crore in FY2013). On the subscription front, the management expects the domestic subscriptions to grow by 17-18% in FY2014 (at a rate lower than the FY2013 rate). On the advertisement front, the management expects the growth to taper off in FY2014, after growing sharply in FY2013 (ex sports the business is expected to grow at a rate higher than the industry average of 8-9% in FY2014). On the margin front, the management indicated that margin would contract in FY2014 led by higher losses in the sports business and investments in new initiatives.  Margins to decline in FY2014, led by higher losses in sports business and investments in newer initiatives: The sports business' losses in FY2014 are expected to be higher than that in FY2013 (estimated at Rs90 crore; a loss of Rs46.6 crore already incurred in the nine months ended FY2013, another Rs45 crore of loss expected in Q4FY2013) led by three India series in FY2013-14. Further, investments in the new bouquets of channels (Ten Golf, HD channels, Ditto TV, Zee Alwan, Zee Bangla and Zee Q) and the potential launch of two new channels would increase the losses to Rs250-300 crore in FY2014 (currently the accumulated losses stand at Rs150 crore). On the back of these losses , the management expects the EBITDA margin to decline in FY2014 as compared to that in FY2013 (exit margin for Q4FY2013 will be closer to 21% and that for FY2013 will be around 25%).  Domestic subscription revenues could see upside surprise from digitisation, international subscription to remain soft in FY2014: The overall subscription revenues are expected to grow to 21% in FY2013, whereas overall subscription revenues for FY2014 would be lower than that achieved in FY2013. The domestic subscription revenues are expected to grow by 17-18% in FY2014 (by 23.5% in FY2013) whereas the international subscription revenues are expected to remain soft, led by lower currency benefits. The domestic subscriptions have yet to get the full benefits of the phase I of the digitisation exercise, as the multi-system operators (MSOs) are delaying furnishing the total subscribers' data. Even the implementation of the phase II, for which 60% seeding is already done, will be slightly delayed. Thus, with the upside still to reflect in the subscriber numbers, the management expects there to be room for upside in the domestic subscription revenues led by the incremental monetisation of the first and second phases of the digitisation process.  Ex sports, advertisement revenue growth to taper off in FY2014 but it would be higher than the industry average: After a strong growth of 27% in the advertisement revenues in the nine months ended FY2013, the management indicated that the growth would slow down in Q4FY2013. For FY2014, the management expects the growth to taper off to 16-17% (from 24% in FY2013). Ex the sports advertisement revenues the overall growth would be higher than the industry's average growth.  Pessimism priced in: In the last one and a half months ZEEL has corrected by close to 15%, led by the concerns over the margin decline and lower revenue growth in FY2014. Though the concerns seem to be factual but the recent correction in the stock price has priced in most of the concerns. Moreover, with the cash level on the balance sheet comfortable at around Rs800-900 crore and with the cash level expected to increase to around Rs2,000 crore by FY2015, we expect ZEEL to reward its shareholders with a higher dividend pay-out and share buy-back programme which could lead to further upside in the stock.  Valuation: We maintain our earnings estimates for FY2013, FY2014 and FY2015. However, based on the recent developments our estimates for FY2014 and FY2015 could be downgraded (we will review the estimates after the announcement of the Q4FY2014 results). At the current market price of Rs206, the stock trades at 22x and 18x based on the current earnings estimates and at 15x and 12x EV/EBITDA at the FY2014 and FY2015 estimates respectively. We maintain our Buy rating on the stock with a price target of Rs280. Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Fw: Investor's Eye: Update - Axis Bank (Recent fund raising to support growth), Logistics (Overall cargo volume remains flat; container volume recovers)

 

 

Investor's Eye [March 18, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Axis Bank  Recommendation: Buy Price target: Rs1,570 Current market price: Rs1,325 Recent fund raising to support growth Axis Bank recently raised Rs5,568 crore of equity capital leading to an 8-6% expansion in our FY2013 and FY2014 book value estimates and about a 200-basis-point impact on the return on equity estimates (RoE; 17% in FY2014) of the stock. The capital raised will help the bank to achieve a strong growth in advances amid expectations of an economic recovery, which should drive the credit demand. In addition, the bank's operating performance remains strong and the diversification of its loan book into the retail segment is progressing well. The asset quality has largely remained stable and we expect the slippages and provisioning to be broadly in line with the management's guidance (ie an impairment of Rs1,000 crore per quarter). The recent media reports alleging money laundering by the bank seem to have been priced in the stock and the development should not have any significant impact on the broader performance of the bank. Currently, the stock is trading 1.7x and 1.4x FY2014E and FY2015 book value respectively and is at an 18-20% discount to the five-year mean valuation. We maintain our Buy rating on the stock with a price target Rs1,570.   SECTOR UPDATE Logistics Overall cargo volume remains flat; container volume recovers Key points After eight consecutive months of contraction, India's export-import (EXIM; exports + non-oil imports) growth has re-entered the positive zone in the last couple of months. The growth in February 2013 was, however, marginal at just 1% year on year (YoY). A closer look at the EXIM trend indicates that the worst may be behind us: from -10% YoY in the five-month period May-September 2012 the growth has improved to 0% YoY for the subsequent five-month period (October 2012-February 2013). The recovery in February (1% YoY) was largely possible on account of a 6% growth in the exports. The imports (non-oil), on the other hand, declined by 2%. The year-till-date (YTD) growth stood at -5% YoY for the April 2012 to February 2013 period as against 26% YoY during the April 2011 to February 2012 period. The total cargo volume at the major ports in February 2013 reported an increase of just 1% YoY mainly due to a 72% year-on-year (Y-o-Y) decline in the cargo at the Mormugao port. The Mormugao volumes have been suffering since June 2012 owing to a mining ban in Goa. Excluding Mormugao, the aggregate increase in the cargo at the major ports was 7%. The other ports that registered a decline in their cargo traffic were Mumbai (-12%) and VO Chidambaranar (-7%). On a YTD basis, the total cargo volumes reported a decline of 3% YoY. The container volumes in February 2013 expanded by 4% YoY after contracting for five months in a row. However, the flattish growth on a YTD basis (April 2012 to February 2013) continues to portray a bleak outlook for container volumes. We would have to closely monitor the volumes at the major container ports of the Jawaharlal Nehru Port Trust (JNPT) and Chennai in the coming months to conclude the recovery is sustainable. We believe that a recovery, if any, would be restricted to low single-digit growth rates as both these major ports are operating in excess of their capacity and will not be witnessing any capacity expansion for the next 18-24 months. A slowdown in EXIM as well as domestic trade has resulted in contraction of cargo volumes owing to which the logistic industry is undergoing a challenging phase. Container volumes reversed their declining trend in the last couple of months. The sustenance of growth in container volumes in the coming months would augur well for the logistic players. However, a sustained recovery, if any, would be restricted to low single-digit growth rates as the JNPT and Chennai ports, the major ports that handle a large chunk (two-thirds) of the total containers are operating in excess of their capacity and will not be witnessing any capacity expansion for the next 18-24 months. Thus, we expect the overall lacklustre performance to continue in the near term. However, we continue to prefer Gateway Distriparks Ltd (GDL) due to the robust long-term growth potential of each of its business segments, ie container freight station (CFS), rail and cold storage. The stock is currently trading at a PE of 7.3x based on its FY2015E EPS of Rs16.6.  Outlook and view A slowdown in EXIM as well as domestic trade has resulted in contraction of cargo volumes owing to which the logistic industry is undergoing a challenging phase. Container volumes reversed their declining trend in the last couple of months. The sustenance of the growth in the container volumes in the coming months would augur well for the logistic players. However, a sustained recovery, if any, would be restricted to low single-digit growth rates as the JNPT and Chennai ports, the major ports that handle a large chunk (two-thirds) of the total containers are operating in excess of their capacity and will not be witnessing any capacity expansion for the next 18-24 months. Thus, we expect the overall lacklustre performance to continue in the near term. However, we continue to prefer GDL due to the robust long-term growth potential of each of its business segments, ie CFS, rail and cold storage. The stock is currently trading at a PE ratio of 7.3x based on its FY2015E EPS of Rs16.6. Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Fw: Offer For Sale - NALCO - Valuations attractive at base price - Subscribe

 

NALCO: Valuations attractive at base price - Subscribe OFS Floor Price Rs40, Target Rs44.6, Upside 11.5% Government of India has proposed an offer for sale (OFS) of equity shares of NALCO. The offer for sale will be for 257.7mn equity shares, constituting 10% of the paid up equity share capital. The government intends to offer 5% initially with an option to sell another 5% (Greenshoe) if the demand stands out strong. The floor price has been kept at Rs40/share and will raise Rs10.3bn on the complete issue getting subscribed. The floor price of Rs40 is at 10% discount to its previous day closing. NALCO's performance over the last two quarter has been impacted by lower availability of bauxite from its captive mines. Due to the closure of its Panchpatmali mines for a month and heavy rainfall in the region supply of bauxite declined. The company has managed to get a temporary working permit in mid-December for one year. With an increase in bauxite supply we estimate a ramp up in alumina production from Q4 FY13. We expect alumina production to jump from 1.7mn tons in FY13 to 1.9mn tons in FY14 leading to a 23% yoy increase in external alumina sales. We believe that the worst is behind us and the company has formed a bottom in profitability in Q2 FY13. An increase in alumina sales coupled with lower raw material costs and marginal improvement in metal prices would improve margins for the company. We expect OPM to improve drastically from Q2 FY13 levels to 12.2% in FY14 and 12.6% in FY15. We estimate operating profit to increase by 43.3% yoy to Rs9.3bn in FY14. With no major capex over the next two years, we estimate cash levels to increase from Rs49bn at the end of H2 FY13 to Rs60bn by FY15. Our FY14 cash levels account for 56% of the current OFS base price and would lend support to the stock price in the near term. At the OFS base price of Rs40, the company is trading at 4.9x FY14 EV/EBIDTA and 4.1x FY15 EV/EBIDTA, which is at huge discount to its historic average and is also lower than its international peers. We do not see much downside from the floor price of Rs40 and advice investors to subscribe to the offer for sale scheduled for today with a target price of Rs44.6.

Click here for the detailed report on the same.

Warm Regards, Amar Ambani

Fw: Investor's Eye: Update - Lupin (Price target revised to Rs682), Insurance (APE growth continues to remain weak)

 

Investor's Eye [March 04, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Lupin  Recommendation: Buy Price target: Rs682 Current market price: Rs594 Price target revised to Rs682 Key points  Lupin to face competition from launch of generic Antara by Mylan: Lupin is set to face competition from generic players like Mylan Inc (Mylan), which started shipping of Fenofibrate capsules ( 43mg and 130mg), in the USA after getting the U S Food and Drug Administration (USFDA) approval and subsequently lifting of an injunction imposed by the US court on the launch of this product. Fenofibrate is currently marketed by Lupin under the brand name of Antara. Lupin obtained an injunction from the court of Federal Circuit to block Mylan from launching Fenofibrate on the ground of patent infringement. However, the court gave a green signal to Mylan to go ahead with the launch. The market for Fenofibrate is estimated at $60 million in the USA of which Antara commands over 60%. We believe the launch by Mylan is set to impact Lupin's revenue stream from Antara. Besides, other generic players are also likely to enter in this space gradually. We assume 30-40% erosion in revenues from Antara due to the competition in initial couple of months and that may dip further with more players joining the fray. Brand extensions, launch of niche products and para-IV filings are saving grace; we remain positive on the stock: Apart from competition in Antara, Lupin is set to focus on Suprax, which contributes nearly 60% of the branded portfolio in the USA. Having launched different dosage forms in the USA, it has recently received the USFDA approval for Suprax drops, which will help make up for the fall in revenues from the mature products. Besides, its focus on niche product launches (over 20 launches annually), including launch of para-IV, would help Lupin substantially mitigate the impact of competition in the US market. Thus, we remain positive on the stock. We fine-tune our estimate and revise price target down to Rs682: We have reduced Lupin's revenues estimate from the US business by 6% in FY2014 mainly to factor in the decline in revenues from Antara due to the competition. This resulted in our earnings estimate getting revised down by 2.7% to Rs30.8 for FY2014. Accordingly, our price target stands revised down by 3% to Rs682, which is 20x average earnings for FY2014E and FY2015E. We maintain Buy rating on the stock.      SECTOR UPDATE Insurance APE growth continues to remain weak The growth in the annual premium equivalent (APE) of the life insurance industry declined for the seventh consecutive month during January 2013 as it declined by 41.1% year on year (YoY). The slowdown was mainly contributed by the Life Insurance Corporation of India (LIC), which showed a decline of 53.4% YoY in the APE. On the other hand, the private players reported a decline of 5.8% YoY in January, with MetLife India Insurance Company (MetLife; down 60.1% YoY), Tata AIA (down 44.2% YoY) and Aviva Life (down 31.4% YoY) posting the steepest decline in the APE. On the other hand, HDFC Life Insurance (HDFC Life; up 22.1% YoY) and Max Life (up 7.8%) posted an increase in the APE on a year-on-year (Y-o-Y) basis. On a year-to-date (YTD) basis (April 2012-January 2013), the private players fared relatively better as their APE declined by mere 2.4% YoY as compared with a 21.3% Y-o-Y decline by the LIC and a 15.0% Y-o-Y decline by the industry. The growth (April 2012-January 2013) in the APE of the private players was mainly led by the players like SBI Life (up 16.2% YoY) and HDFC Life (up 7.1% YoY). On a month-on-month (M-o-M) basis, the APE for industry declined by 19.3% with the private players and LIC showing a decline of 22.1% and 17.2% respectively. On an M-o-M basis, 16 out of the 22 players posted a decline in their APE. The companies like SBI Life, Max Life and ICICI Prudential reported a decline of 61.6%, 42.1% and 11.9% respectively in their APE. The market share of the private players improved by ~490 basis points to 37.9% (LIC, 62.1%) in April 2012-January 2013 compared with 33.0% in the corresponding period of the previous year. During the period under review, the companies like SBI Life, HDFC Life and ICICI Prudential turned out to be major gainers as their market share improved by ~200, 130 and 120 basis points respectively.  The growth in the life insurance premiums has been disappointing for the past several months. Therefore, compared with a 15-20% growth expectation at the beginning of the fiscal, the market expects the premium growth to be flattish in FY2013. The Union Budget for FY2013-14 has tried to ease some concerns for the sector as it has liberalised the branch opening and allowed the banks to enter insurance broking, which aims at improving the distribution. Besides that, the transition towards the newer regulations (proposed for traditional products) will continue to impact the premium growth. Click here to read report: Investor's Eye       Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.