Snapshots of recommendations from investment houses

This selection of research reports gives information and opinions on companies and industries. Such reports are often filled with jargon, which we must reluctantly inflict on readers since excerpts are verbatim. Six such terms occur in these extracts: EBITDA = Earnings Before Interest,Tax, Depreciation,Amortisation, EV = Enterprise Value, EPS = Earnings Per Share, PE = Price-Earnings, PAT = Profit After Tax and YoY= Year-on-Year.

Print Edition: December 14, 2006


TV 18
SSKI is “hugely positive” about TV-18 post-demerger: “TV18 is demerging into two entities, that is TV18 India (CNBC TV18, Awaaz and all the Internet properties) and Network 18 (holding company for TV18 India, Global Broadcast News, Studio 18 and HSN). The existing TV18 was delisted on 16 November 2006 and will be relisted subsequently. We maintain our positive bias on TV18 given the compelling properties in its kitty (CNBC TV18, Awaaz, CNN IBN, IBN 7, moneycontrol.com, commoditiescontrol. com, jobstreet.com, cricketnext.com, yatra.in, etc.) as also the management’s ability to monetise these.

We continue to see immense merit in the business, as we witness structural makeover on the broadcast distribution side. TV18
remains our top pick in the media space. However, TV18 has run up by 43% in the last month and we believe that is factored in the potential value unlocking from the demerger. Based on our assumptions, we arrived at a fair value of Rs 925 (upside of 7.5%).

Our huge positive bias on media continues, with top picks being NDTV, Zee TV and TV18. TV18 India will hold CNBC TV18 and Awaaz, 85% in Web 18 and the recently acquired Crisil Market Wire (renamed Newswire 18).

Network 18 will hold majority stake in TV18 India and Global Broadcast News (which owns CNN IBN and IBN 7), besides Studio 18
and Home Shopping Network.”

United Phosphorus
SSKI awards United Phosphorus’ buyout of Cerexagri a thumbsup: “United Phosphorus (UPL) has announced an agreement to acquire 100% of Cerexagri for Euro 111million at a valuation of about 0.55 times the sales of about Euro 200 million. Cerexagri has a strong presence in fungicides in key US and EU markets and it is the global leader in food treatment.

This will catapult UPL into a different orbit with 2007-8 exports sales at near $700 million. UPL will become the third largest agro-chem generic company globally. We expect UPL to increase its presence in US and EU as well as tap newer markets with a more comprehensive portfolio. Inclusion of Cerexagri’s highly experienced management pool will increase UPL’s management depth and enable it to maintain the current momentum on a much enlarged base. This will be funded from a recent $150 million ECB offering and not involve equity dilution. We have always been positive about the scalability of the business model and the stock has always been our Top 10 mid-cap pick.”

ICICI Securities maintains a buy on Aventis Pharma despite poor results in the June-September quarter: “Aventis’ performance hasbeen below expectations. Further, the company’s policy of not meeting investors has made it more difficult to forecast earnings. The performance on the exports front was poor. Exports registered a decline for four quarters in a row and were down 9% on the year-till-date to Rs 160 crore. Despite a robust 15% rise in domestic dosage form sales, Aventis’ EBITDA margin dipped 1.8 percentage points to 27.2%, thereby limiting recurring net profit growth to just 10% year-on-year at Rs 1.3 crore, which was below our estimates. Consequently, we trim our EPS estimate by 6% and 7% for 2006 and 2007 respectively.However, notwithstanding the downgrade, Aventis remains one of the best plays in pharma MNCs with a potential
upside from outsourcing by its parent, Sanofi-Aventis, the world’s third largest pharma company.

Falling exports continue to impact the company’s revenue growth and hence margins. The proportion of high-margin exports
in total revenues declined 23% in the year-till-date. This combined with higher other expenditure reduced the EBITDA margin.

Outsourcing and IPR (intellectual property rights) hold the key. Note that exports have been volatile in the past and hence, future growth in exports would have a direct bearing on margins and profits. We believe on the back of exportinitiatives, exports could pick up in the next few quarters. The launch of IPR-recognised products from 2008 is also likely to boost margins.

Reiterate: Aventis remains one of the most profitable pharma MNCs in India. At our 2007 PEestimates of 17, the valuations are
reasonable. Maintain buy.”

KPIT Cummins
Enam Securities likes KPIT Cummin’s long-term strategy: “The management has charted a well-defined growth strategy to achieve $250 million revenues in 2009-10. We believe KPIT is distinguishing itself from other mid-tierplayers by planning ahead.

KPIT has articulated its objectives and envisioned its targets for achieving a topline of $250 million and PAT of $40 million in 2009-10.

Key takeaways:

Retain focus on solutions for manufacturing, and financial services (financial and accounting BPO) companies.

Increase penetration in European and Japanese markets, as both these markets have a sizable potential (total IT spend for
calendar 2006 estimated at $579 billion and $163 billion respectively by www.forrester.com), and a large manufacturing base.

Develop a global delivery model by establishing offshore and near shore centres (like the one setup in Poland recently).

Cross selling services and offering integrated IT+BPO solutions to strategic clients; thereby adding greater value whilst also creating stickiness.

The implied CAGR growth to achieve the 2009-10 topline and PAT stand at about 35% and about 52%, respectively. This would imply that the company intends to expand margins through using the usual levers of rationalisation of general and administrative costs and by dint of a higher proportion of off-shoring.

At the current market price, (Rs 584) the stock trades at 20.6 times 2006-7 and 15.9 times 2007-8 earnings of Rs 28 and Rs 37 (if we assume full dilution to Cummins, though this is unlikely), respectively. It trades at 16.7 times the basic 2006-7 EPS of Rs 35 and 12.9 times the basic 2007-8 EPS of Rs 45.”

Stepping on the Gas

Continued economic growth has spelt good news for auto firms. There has been double-digit sales growth across every segment but margins have tightened on higher raw material costs and competition. The following snapshots are extracted from IDBI Capital’s October 2006 report on the auto sector.

Ashok Leyland BUY: Revenues at Rs 1,709 crore grew 35% year-on-year. Operating profits at Rs 169 crore registered growth of 27%, YoY. Margins declined 1.24%. Net profit for the quarter grew 27% to Rs 95.4 crore. With a good product mix, Ashok Leyland, the second largest medium and heavy commercial vehicles player in India, is geared for growth. The company is expected to rise on ongoing structural changes, buoyant economy and improved road development.

Bajaj Auto HOLD: Bajaj Auto reported impressive growth numbers for the second quarter 2006-7. Revenues at Rs 2,578 crore were up 31%. Operating profits at Rs 507 crore grew 12%. However, margins declined 1.9%. PAT for the quarter grew 10% to Rs 318 crore.

Hero Honda HOLD: Hero Honda’s second quarter 2006-7 results were much below street expectations. Total revenues grew 4% year-on-year to Rs 2,289 crore. Operating margins declined 2.7% to 12.7%. PAT at Rs 216 crore declined 9%.

Mahindra & Mahindra BUY: M&M announced very good second quarter 2006-7 results, which were significantly ahead of expectations. Revenues rose 32% to Rs 2,500 crore during the quarter. Operating profit grew 79% to Rs 443 crore. Operating margins increased 3.45% to 14.8%. PAT at Rs 387 crore registered growth of 146%. PAT before exceptional items (Rs 299 crore) was up 89%.

Maruti Udyog BUY: Maruti Udyog registered income (net of excise) of Rs 3,541 crore during the quarter, a growth of 12% YoY. Operating profits grew 30% to Rs 597 crore. Operating margins expanded 0.4% to 13.9%. PAT during the quarter stood at Rs 367 crore, a 40% growth on YoY basis.

Tata Motor HOLD: Net sales at Rs 6,572 crore, up 37.4%, driven by strong volume growth in commercial as well as passenger vehicle segments. This represents the second-highest quarterly turnover achieved in the past 14 quarters. EBITDA margins dropped 0.5% on higher raw-material prices. The current price discounts 2006-7 estimated EPS of Rs 43.2 by 19.5 times and 2007-8 EPS of Rs 49.7 by 17 times. We expect strong volume growth to continue through 2006-7, margins to improve with cost cutting.

TVS Motor HOLD: Net sales at Rs 1,078 crore up 36.6% YoY. This represents the highest ever quarterly turnover achieved by the company. While revenue for the second quarter 2006-7 is in line with our expectations, the PAT is considerably lower than our expectations. EBITDA margins took a hit of 2.9% on higher raw-material prices and extreme competition.

We have downgraded our 2006-7 EBITDA estimate by 23% to Rs 267 crore and PAT estimates by 24% to Rs 97.9 crore. The current price discounts our revised 2006-7 EPS estimate of Rs 4.1 by 26.8 times and 2007-8 EPS of Rs 5.7 by 19.4 times. We expect strong volume growth to continue in the second half of 2006-7; operating and net margins are estimated to improve with cost cutting measures and an improved product mix.

India Cements
Edelweiss advices investors to accumulate India Cements: “India Cements’ strategy is to become a pan-India player in the long term. To this effect, the company has acquired limestone bearing lands in Rajasthan and land in Satna. The Himachal project, where India Cements proposes to set up a 2 metric tonne per annum plant, is at a nascent stage with basic infrastructure like roads being laid out currently.

Despite strong demand drivers in Andhra Pradesh, we believe that leading south players such as Madras Cements and India Cements are aiming to grow beyond Andhra Pradesh. India Cements is aiming to increase its presence in Maharashtra.

We believe that cement prices will increase by about Rs 20-25 per bag by June 2007 and are positive on the near-term prospects. However, post September 2007 monsoons, probability of cement prices increasing is low. Hence, while 2007-8 will be an extremely profitable year for cement companies, earnings growth is likely to slow down from the second half onwards except for companies adding volumes or lowering costs. India Cement’s current valuations at enterprise value per tonne of $160 (EV/tonne of $173 in 2006-7 estimated), EV/EBIDTA of 9.2 times in 2006-7 and 7.4 times in 2007-8 remains attractive relative to peers. Given impending overcapacity we maintain our Accumulate recommendation.”

Sterlite Industries
Enam says Sterlite “continues to fire on all cylinders”: “Sterlite reported a 347% rise in second quarter, 2006-7 EBITDA, led by strong volume growth and margin expansion from copper, zinc and aluminium. Margins expanded, led by steep increases in zinc and aluminum prices. Depreciation was higher due to commissioning of expanded capacities. Sterlite’s consolidated PAT (net of minority interest and exceptional items) surged 309% . Earlier, Sterlite outlined its plan to raise Rs 12,500 crore, mostly for its commercial power venture Sterlite Energy, andthe consolidation of its holding in Hindustan Zinc.

June-September 2006 highlights:

 Copper: EBITDA grew 125% on higher treatment/refining charges (TCRC), higher LME prices and better operating efficiencies.

Zinc: EBITDA grew 507% from Rs 310 crore to Rs 1,910 crore on higher LME prices and volumes.

Aluminium: EBITDA grew 333% year-on-year to Rs 264 crore from Rs 61 crore. Aluminium prices continued to remain firm and production was higher by 92% at 69,000 tonnes.

We expect a major rise in copper volumes in 2007-8 to offset any drop in TCRC. Similarly, aluminium volume and lower alumina cost would offset decline in aluminium realisation in 2007-8. Also, to factor in changes in our dollar:rupee forecast, we revise our EPS forecasts for 2006-7 and 2007- 8 to Rs 69.8 and Rs 67.0 respectively. At the current market price (Rs 545), we believe Sterlite provides an indirect play on zinc and offers diversification in the non-ferrous metals space. We reiterate our Outperformer rating.”

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