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STOCK UPDATE Eros International Media
Recommendation: Buy
Price target: Rs240
Current market price: Rs163 Price target reduced to Rs240 Result highlights Ahead of expectations: In Q4FY2013 Eros International Media Ltd (EIML)'s performance was ahead of our expectations, with a better than expected growth in both the top line and the bottom line on a year-on-year (Y-o-Y) basis. The fiscal gone by was soft for EMIL on account of the deferment of the big-budget movie "Kochadaiyaan" and the lower monetisation of the movie catalogue on account of the launch of the premium advertising-free movie channels, HBO DEFINED and HBO HITS (in joint venture with HBO Asia). -
The consolidated revenues rose by 2.6% year on year (YoY) to Rs212.3 crore (ahead of our expectation of Rs169 crore). The better than expected top line performance was driven by the higher monetisation of satellite rights in Q4FY2013. In Q4FY2013, the company released a total of 17 films out of which four were Hindi, 13 were in Tamil and other regional languages (vs 16 films in Q4FY2012). During Q3FY2013, the company had released 21 films: 18 films in Hindi and three films in Tamil and other regional languages. In FY2013 the total revenues rose by 13% YoY to Rs1,067.9 crore. In FY2013, EIML released 77 films in multiple languages: 30 in Hindi and 47 in Tamil and other regional languages (vs 77 films in FY2012). Out of the 44 Tamil films released in FY2013, five were mainstream, high-profile releases (vs one Tamil mainstream release in FY2012). -
In Q4FY2013, the EBITDA margin (including amortisation) of the company stood at 19.6%, up 310 basis points YoY (but lower than our estimate of 22.6%). The margin performance was lower than expected on account of the lower than expected margin performance of the stand-alone business (whose margin improved by 300 basis points sequentially) led by fewer movie releases. On the other hand, the subsidiary (Ayngaran International) continues to see a strong margins performance, with the margin improving by 500 basis points YoY to 39.3% in the same period. In FY2013, the operating profit margin (OPM) was down by 70 basis points quarter on quarter (QoQ) to 21.2%. The management expects the margin to improve in FY2014 on account of an improvement in the monetisation of TV syndications and big movie releases. -
On the back of a better than estimated top line performance, the net income of the company grew by 7% YoY to Rs31.8 crore in Q4FY2013. In FY2013 the net income rose by 5% YoY to Rs154.6 crore. Valuation: The fiscal gone by was soft for EIML in terms of earnings performance; however, the company made inroads into some long-term strategic initiatives like joining hands with HBO Asia and launching EROS Now (a digital platform) as well as strategic alliances with Endemol India and Sony for movie productions. In FY2014 we expect the growth to resume on the back of a higher monetisation of the TV syndication (the company has forgone some part of its revenues on account of the launch of the TV channels in alliance with HBO Asia) coupled with a higher number of big movie releases. However, in view of the fact that the company has gone slow on acquisitions of "Super A" category movies, we have reduced our earnings estimates for FY2015 by 7% and kept our estimate for FY2014 intact. Consequently, we have reduced our price target for the company to Rs240. We expect EIML's earnings to grow at a compounded annual growth rate (CAGR) of 17% over FY2013-15. At the current market price of Rs163 the stock trades at 8.4x and 7x FY2014E and FY2015E earnings respectively. We maintain our Buy rating on the stock with a revised price target of Rs240. Indian Hotels Company
Recommendation: Hold
Price target: Rs61
Current market price: Rs52 Downgraded to Hold, price target revised to Rs61 Result highlights -
In Q4FY2013 business fundamentals remained subdued, stand-alone margins improved YoY: Indian Hotels Company Ltd (IHCL)'s stand-alone performance remained subdued in Q4FY2013, as a rising supply surpassed a subdued demand (affected by the slowdown in foreign tourist arrivals and domestic leisure travels as well as cut-down in business travel and hotel spending by corporates). The revenues of IHCL stood almost flat at Rs555.8 crore. The quarter is estimated to have witnessed occupancies of 75% and average room rate (ARR) 5% lower year on year (YoY). The stringent cost-saving measures implemented at various levels of operating cost aided the operating profit margin (OPM) to improve by 159 basis points YoY to 30.0% in Q4FY2013. The operating profit grew by 4.8% YoY to Rs166.8 crore. The decline in the interest cost led to a 10% growth in the profit before tax (PBT) to Rs118.2 crore. The extraordinary expense of Rs423.6 crore resulted in a reported loss of Rs337.9 crore in Q4FY2013 as against the reported profit after tax (PAT) of Rs65.2 crore in Q4FY2012. However, excluding the exceptional loss the adjusted PAT would stand at around Rs85 crore for the quarter. -
Impairment of investments led to a one-time hit of Rs373 crore on bottom line: During the quarter the company decided to take a hit of Rs373 crore on the bottom line in recognition of the decline in the fair value of some of the past investments other than the temporary investments in select entities. This covers a diminution of Rs305 crore in the company's investment in Taj International (HK) Ltd, which, in turn, holds investments in the company's various international entities (including Orient Express Hotels Ltd [OEH]). Around Rs68 crore has been recognised in the company's investment in BJeTs Pvt Ltd. -
Consolidated FY2013 performance was marred by weak international performance: The consolidated revenues of IHCL grew by 8.7% YoY to Rs3,743.4 crore in FY2013. The company's revenues and profitability at the stand-alone level (accounting for 50% of the consolidated revenues) stood almost flat during FY2013. Though the company made a profit of Rs147 crore at the stand-alone level in FY2013, but the losses of the subsidiaries (Rs124.4 crore) and of the joint ventures (Rs9.02 crore) resulted in an adjusted loss of Rs6.6 crore at the consolidated level in FY2013. The US properties continued to make losses at the operating level which affected the profitability of the consolidated entity. -
Downward revision in earnings estimates: We have revised downwards our stand-alone earnings estimates for FY2014 and FY2015 by 17% each to factor in the lower than expected occupancy rate and ARR. The consolidated earning estimates for FY2014 and FY2015 are revised downward to factor in the subdued performance of the international properties. -
Outlook and valuation: We don't expect IHCL to see a strong improvement in its operating performance unless the business fundamentals (including occupancies and ARRs) in the domestic and international markets improve significantly. The company expects the US portfolio of hotels to break even at the operating level in the next five years. In the meantime, the company is focusing on reducing its operating cost by initiating some cost-saving measures, such as alternative energy sources at most of its hotels in the domestic market. The company is avoiding any stress on the balance sheet by not having any new hotel project on its own books. It continues to focus on management contracts and strategic alliance.
We believe the company will see pain in the near term, but will be a key beneficiary of the improved demand environment in the domestic market because of its strong room inventory. The company expects the government to implement some strong actions to improve the macro-economic environment, which should help the overall tourism industry in India. We believe the second half of FY2014 will have to be keenly monitored in terms of IHCL's performance. Hence, we downgrade our recommendation on the stock to Hold with a revised price target of Rs61 (due to a reduction in the earnings estimates and valuation multiples). At the current market price the stock trades at 55.4x its FY2015E earnings per share (EPS) of Rs0.9 and enterprise value (EV)/room of Rs0.5.
SHAREKHAN SPECIAL Q4FY2013 Banking earnings review
Challenges continue for PSBs Key points - Earnings growth below estimate: During Q4FY2013, the earnings of Sharekhan's banking universe declined by 6.7% year on year (YoY) and was lower than estimated. The earnings of the public sector banks (PSBs) continued to disappoint (down 21.2% YoY) despite a helping hand from a higher treasury profit and a lower tax rate. The sluggish growth in the net interest income (NII) and higher provisions affected the overall earnings of the PSBs. However, the private banks continued to report a strong growth in their earnings (up 23.2% YoY).
- Operating performance weakens: The NII of our banking universe grew by 6.1%, slightly lower than estimated, mainly contributed by the private banks (up 21.8% YoY). The operating profit grew by merely 2.0% YoY as a strong growth posted by the private banks (up 22.3% YoY) was offset by a decline in the operating profit (down 5.8% YoY) of the PSBs. The margin continued to decline (YoY) which affected the NII growth. The higher treasury gains cushioned the profit though.
- Mixed trend in asset quality: The slippages remained high, even as the gross non-performing assets (NPAs) declined sequentially for the Sharekhan banking universe aided by increased write-offs and recoveries. Also, the fresh restructured loan additions remained high in Q4FY2013 but were helped by the Reserve Bank of India (RBI) guidelines, thereby keeping the restructured book stable on a Q-o-Q basis.
Outlook
The Q4FY2013 results reflect the challenges at the operating level for banks as a slower economic growth has affected the credit growth and asset quality of banks. In addition, the regulatory prescriptions (higher provisions for restructured loans, dynamic provisioning), wage hikes etc will affect the earnings growth. However, the bond yields have declined significantly (by 75 basis points in the year till date [YTD]) which will provide some cushion against the rise in provisions. Going ahead, further easing of the key rates by the Reserve Bank of India (RBI) and the pace of recovery in the economy will shape the outlook for the sector. We, therefore, maintain our positive bias for the private banks and remain selective on the PSBs. We prefer ICICI Bank (a strong growth and improved asset quality) and Federal Bank (attractive valuations) among the private banks. We also prefer State Bank of India (SBI) and Punjab National Bank (PNB) as these will benefit from any recovery in the economy and are trading at reasonable valuations.
SECTOR UPDATE Real Estate Tough environment; be selective The key takeaways from the recent results and our interaction with some of the real estate players are as follows: -
Stress is visible: Till recently, most large real estate companies were putting up a brave face and did not acknowledge the extent of the slowdown and the stress on their books. However, the skeletons have started tumbling out of the cupboard and the stress is visible not only in the financial performance but also in the management commentary of the real estate companies like HDIL (cancellation of airport project; weak TDR market), Hubtown (credit rating downgrade; slow moving projects), Unitech (debt issues; delay in completion of specific projects) and several other real estate companies with stretched balance sheets and cash flow issues. -
Strong getting stronger: As stated in our real estate switch idea report dated January 6, 2012, the stronger players have not only remained unscathed but have actually consolidated their position and emerged stronger than before. The companies with reputed brand and strong balance sheet identified by us, like Oberoi Realty, Mahindra Lifespace Developers (MLD) and Phoenix Mills, have shown resilience and distinctly outperformed the real estate index. -
Environment to remain tough; quality would continue to attract premium: The real estate market is not likely to recover soon. In fact it could turn worse in the run up to the general elections (and the assembly elections in six states by the end of 2013). The banks are already struggling with deterioration in the asset quality and would offer limited support to the real estate sector in general and the weaker players in particular. Thus, we believe that the large players with strong brand, healthy balance sheet and return ratios would continue to outperform. The weaker real estate counters would offer periodic momentum-driven rallies that could be used to bail out of them (number of such opportunities were available in 2012). Maintain Buy with a price target of Rs460: We continue to like MLD due to the quality of its management and its strong balance sheet that is expected to get leveraged for acquiring new land parcels in distressed markets and for better execution of the existing land bank. We maintain our Buy recommendation on the stock with a price target of Rs460. Automobiles Weakness persists Sales decline for most companies
The automotive sector continued to reel under pressure for the seventh consecutive month. A slower economic growth continues to weigh on the demand. For May 2013, most of the automotive players (except Mahindra and Mahindra [M&M] and Eicher Motors) reported a decline in the volumes. Apart from Tata Motors and Ashok Leyland, Maruti Suzuki (Maruti) too underperformed during the month on account of declining demand for the diesel cars. M&M outperforms
M&M outperformed the automotive industry despite the recent hike in the excise duty on sport utility vehicles (SUVs) and an increase in the diesel prices. The domestic automotive sales grew by 5% (on account of growth in the utility vehicle (UV) and the light commercial vehicle (LCV) space) as against the negative growth posted by the counterparts. The tractor sales saw a second consecutive month of a strong double-digit growth on expectations of a normal monsoon. Tata Motors and Maruti underperformed
Tata Motors' volumes declined by 23% year on year (YoY). The volumes of the passenger vehicles almost halved amid an overall slowdown and a lack of new product launches. Even the sales of the medium and heavy commercial vehicle (MHCV) and the LCV declined in the double digits during the month. Maruti surprised negatively reporting a 14% year-on-year (Y-o-Y) drop in the volumes. This is on account of a decline in the sales of the diesel cars even as the demand for the petrol cars recovers. The top-selling diesel models (Swift, Dzire and Ertiga) witnessed a volume decline. The export sales declined by 27%, putting further pressure on the volumes. Hike in diesel prices add to demand pressure
Apart from the macro-economic slowdown, the recent hike in the diesel prices has exerted pressure on the demand. The government in a bid to decontrol diesel has raised its prices by Rs2/litre in the past three months. The hike in the diesel prices has put further pressure on the MHCV demand. Also, the SUV segment, which is predominantly diesel, has witnessed a sharp moderation in the demand. Further, the sales of the diesel car have also been impacted due to an increase in the fuel prices, though it is partially offset by an increase in the petrol car demand. No signs of improvement in the near term
With the economic environment expected to be sluggish in the near term, the automotive volumes would remain subdued. We expect the volumes to remain under pressure for H1FY2014. We expect a recovery in H2FY2014 on account of an economic recovery, a further reduction in the interest rates and a low base of the corresponding period of the last year.
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