ISMT?s Q3FY2010 results were below our expectation on account of a lower than expected operating profit margin (OPM). The Q3 OPM was below our expectation due to higher than expected energy expenses.
The total income from operations declined marginally by 1.1% year on year (yoy) to Rs304.2 crore?in line with our estimate of Rs303.7 crore. The net sales of the tubes segment was down by 23.3% yoy to Rs196.3 crore while sales of the steel segment grew by 112.8% yoy to Rs110 crore.
In the tubes segment, the sales volume grew by 5.2% yoy (and 10.9% quarter on quarter [qoq]) to 30,500 tonne on the back of a 50% year-on-year (y-o-y) growth in the domestic volumes though exports declined by 50% yoy. The strong domestic sales in the quarter were led by robust demand from the power and bearing sectors. The net realisation went down by 26.1% yoy (and 4.4% qoq) to Rs65,000 per tonne.
The OPM shrank by a sharp 719 basis points yoy to 14.7% (versus our expectation of 17.3%) due to a 60.5% y-o-y increase in the energy expenses (the power cost per unit increased to Rs5.7 per kwh in the quarter from Rs4.8 per kwh in the same quarter of the last year) and a higher proportion of steel sales in the total sales (36% in the quarter versus just 17% in the corresponding quarter of the last year). Consequently, the operating profit dipped by 33.5% yoy to Rs44.8 crore.
The profit after tax (PAT) declined by 23.7% yoy to Rs14.9 crore mainly due to lower operating profit. The decline in the net income was limited due to foreign exchange (forex) gain of Rs2.5 crore in the quarter as against a forex loss of Rs14.9 crore in the same quarter of the last year and a 4.5% y-o-y decline in interest expenses.
The management has indicated the completion of 317,000 tonne per annum (TPA) capacity expansion of the tubes segment. However, the commercial production will get delayed to Q1FY2011, as the company has still to fix the additional equipment required to manufacture the products according to customer?s needs. The operation at Baramati facility was also impacted due to opeartionalisation of higher capacity furnace in the quarter.
We have revised our earnings estimates for FY2010 and FY2011 to factor in: 1) The lowered production as the new Baramati facility will come into commercial operation from Q1FY2011; 2) The higher power cost; and 3) We are now not considering depreciation and interest expenses for the new Baramati plant in FY2010, as the plant will come into operation only from Q1FY2011 and hence the capitalisation of assets will also take place in FY2011. Consequently, our revised earnings per share (EPS) estimate now stands at Rs5.1 and Rs8.9 for FY2010 and FY2011 respectively. We are also introducing our FY2012 earnings estimate and expect an EPS of Rs11.5 for the fiscal.
We expect the company?s profit to post a compounded annual growth rate (CAGR) of 50% over FY2010E-FY2012E on the back of strong domestic demand and expected decline in the power cost with the start of its new power plant. At the current market price, the stock is trading at attractive valuation of 6.2x its FY2011 earnings estimate and 4.8x its FY2012 earnings estimate. We maintain our Buy recommendation and price target of Rs62 (we have rolled over our target multiple to the average of FY2011 and FY2012 expected earnings estimates).
Network 18 Media & Investments Cluster: Emerging Star Recommendation: Buy Price target: Rs126 Current market price: Rs102
Price target revised to Rs126
Result highlights
Network18 Media & Investments (Network18)?s Q3FY2010 numbers are not comparable to the year-ago quarter (Q3FY2009) due to the inclusion of Viacom18?s financials from Q1FY2010. The key highlight for quarter was the profit of the group as a whole and the profit of majority of its businesses turning earnings before interest, depreciation, tax and amortisation (EBIDTA) positive.
The two important highlights of the quarter has been adherence to the stringent cost controls and cost reduction measures across businesses, and good overall revenue growth on the back of impressive viewership gains especially in Viacom 18.
For the quarter, the group?s revenues grew by a strong 66% year on year (yoy) to Rs370.1 crore. On a good revenue growth and stringent cost controls, the group achieved breakeven at EBIDTA levels posting a small operating profit of Rs2.3 crore in the quarter against a loss of Rs45.2 crore and Rs46.8 crore in Q3FY2009 and Q2FY2010 respectively. However, it should be remembered that Q3 (October-December) is one of the best quarter for media companies (especially the entertainment business) due to festive season and the revenue traction in the quarter was partially aided by the same. The lower other income on a year-on-year (y-o-y) basis restricted the reduction in the net loss to Rs20.8 crore from a loss of Rs42.6 crore and Rs63.7 crore in Q3FY2009 and Q2FY2010 respectively.
We believe, the overall performance of the group is likely to improve significantly due to pick-up in advertising market that would help the group?s businesses across the board to rake in higher advertising revenues. Further, the strong leadership in the Hindi general entertainment space (GEC) space established by Colors and good viewership standings of other Viacom 18 channels are likely to bring in strong revenue growth for Network18 group as a whole. TV18 could see revenues improving on the back of the pick-up in corporate (clients) earnings together with a much-improved capital market. With learning from a tough FY2009, the costs in TV18 and news businesses in IBN18 are likely to be kept tight.
The balance sheet de-leveraging initiatives taken by the group primarily through equity issuances though will lead to significant reduction in debt across businesses has led to substantial dilution in equity over the past year. Thus, the interest cost is likely to decline significantly in the coming quarters and would further reduce the overall losses. We maintain our Buy recommendation on the stock with a revised sum-of-the-parts (SOTP) price target of Rs126.
SECTOR UPDATE
Oil & gas
Kirit Parikh Committee recommends freeing of fuel prices Kirit Parikh Committee appointed by the government on the pricing of petroleum products has presented its recommendations. And the petroleum ministry has said that the recommendations would be processed expeditiously. We highlight here that the issues of under-recoveries and aligning the prices of petroleum products to international prices are not new and the government?s action on this front has not been encouraging over previous such reports in the past few years.
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