Sharekhan Investor's Eye dated November 23, 2007

 

STOCK UPDATE

Grasim Industries        
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,950
Current market price: Rs3,627

Price target revised to Rs3,950

Result highlights

• Grasim reported a 25.3% yoy topline growth to Rs2,519.2 crore during Q2FY2008 on the back of robust realisations of the VSF division as well as pick up in the sponge iron and chemicals division.
• The overall EBITDA jumped by 51.3% yoy to Rs805.5 crore driven by a whopping 81% yoy growth in VSF profits which stood at Rs316 crore. The cement division's profits grew by 24.2% yoy to Rs442 crore whereas the sponge iron and chemicals division's profits jumped by 292% to Rs269 crore.
• Overall margins expanded by 550 bps to 32% mainly as the VSF margins expanded by 900 bps to 40%. The cement margins expanded by 110 bps to 32.3%.
• Interest expenses were up 13% yoy to Rs27.2 crore due to higher borrowings in the quarter whereas the depreciation increased by 15.8% yoy to Rs87.5 crore due to part commissioning of VSF expansion in FY2008.
• The other income increased by 14% yoy to Rs57.3 crore thanks to deployment of surplus cash. Consequently, the PAT was up 48.1% yoy to Rs500 crore, beating our expectations
• As we mentioned in our earlier reports, Grasim is expanding its cement capacity by 10.4 MMT including a 4.4 MMT plant at Shambhupura and 4.5 MMT Greenfield plant at Kotputli. The capex is progressing as per schedule whereby the facility at Shambhupura is expected to get commissioned by Q4FY2008 and at Kotputli by Q1FY2009.
• The company is expanding its VSF capacity by 94875 tonne to 366000 tonne including a 63875 tonne expansion at Kharach, Gujarat and 31000 tons at Harihar in Karnataka. Additionally, the company also has announced an Rs.840 crore Greenfield plant of 88000 tons at Vilayat,in Gujarat which is expected to be commissioned in the next 24 months. 
• The VSF division is peaking at the right time for the company in the wake of an expected downturn in the cement cycle in the next one-year. Going ahead the strong volume growth for the VSF business coupled with better realisations and cost control, will drive the cashflows of the company more than offsetting the fall in the cashflows of the cement business. Also, any surprise on the cement prices will only be positive for the company. Consequently, we believe this is one of the most comfortably placed companies in our cement pack. At the current valuations, the stock trades at 13.7x its FY2008E EPS and 15.7x its FY2009E EPS. The company's cement business is trading at valuation of USD 125 on the expanded capacity which is cheap considering the fact that benchmark valuations have gone up as mentioned in earlier reports. Taking cognizance of the cheap valuations of the cement business coupled with the positive outlook for the VSF business, we are upgrading our SOTP price target to Rs3,950 per share.

ICI India        
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs581
Current market price: Rs530

Diwali sales deferred to Q3

Result highlights

• The Q2FY2008 results of ICI India are not comparable on a yoy basis due to divestment of several businesses in FY2007. The net sales for the quarter stood at Rs239.1crore.
• The paints business revenue grew by 5.6% yoy to Rs202.2 crore in Q2FY2008. The growth appears subdued due to high base effect as the festive sales on account of Diwali got deferred to Q3 as against most of it being registered in Q2 of FY2007. Thus we expect the paints division to record handsome growth in Q3FY2008.
• The continued chemical business grew by 21.9% yoy to Rs36.8 crore. Thus the overall revenues of the continued businesses grew 7.8% to Rs239 crore. The discontinued business (surfactant and advanced refinish) had contributed Rs22.8 crore to the company's total revenues in Q2FY2007.
• The PBIT in the paint business declined by 3.8% yoy with a 90 basis-point contraction in the margin to 9%. The PBIT in the continued chemical business grew 41.9% yoy with the margin expanding by 234 basis-points to 16.6%. After the sale of the Uniqema business, the chemical business now contributes only 15.4% to the top line as against 21.7% in Q2FY2007.
• Overall, the operating margin stood at 12.5% against 13% in Q2FY2007. With a higher other income at Rs6.5 crore for the quarter against Rs3.9 crore in Q2FY2007 the adjusted net profit grew by 3.5% yoy to Rs21.3 crore.
• Pursuant to the scheme of buy back, till the end of the quarter the company has bought back 15.87 lakh shares against a target of buying back ~36.7 lakh shares (worth Rs211.06 crore). 
• The outlook for the business remains positive with the company following a strategy of divesting non-paint businesses and focusing more on growing the paints business. Further a cash pile of ~Rs700 crore leaves open inorganic growth opportunities for the company. 
• We have realigned our estimates for FY2008 and FY2009 considering H1FY2008 performance. The buyback of shares and the expected open offer by Akzo make the stock attractive for investors. Thus we expect the stock to remain an outperformer. We shall revisit our numbers and target price on further moves by Akzo Nobel. At the current market price of Rs530, the stock trades at 18x its FY2008E adjusted EPS of Rs29.4 and 16x its FY2009E adjusted EPS of Rs33.1. We maintain our Buy recommendation on the stock with a price target of Rs581.

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VIEWPOINT 

Siemens        

Forex gain boosts profit

Result highlights

• In Q4FY2007, on a standalone basis, Siemens reported a 46.2% yoy growth in the net sales to Rs2,193.2 crore led by 90% growth in the revenues of the transport business and 65% growth in the revenues of the power business.
• Adjusting for the mark-to-market gain of Rs128.5 crore. The operating profit grew by 73% yoy to Rs216.7 crore, resulting in an OPM of 9.9%. The OPM improved by 150 basis points.
• The net profit before exceptional items grew by 24.3% to Rs170.1 crore. The reported net profit grew by 125.6% to Rs308.6 crore.
• For FY2007 the net sales grew by 70.7% to Rs7,753.7 crore. The operating profit grew by 47.7% to Rs600.7 crore. For the full year OPM declined by 130 basis points to 7.7%.
• For FY2007 the net profit (before extraordinary items) stood at Rs432.1 crore which was up 20% yoy basis. The reported net profit grew by 65.6% to Rs596.5 crore.
• The company has announced a bonus issue in the ratio of 1:1 and a dividend of 240% (Rs4.80 per share). 

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Next Multibagger : Himalya International adopted by Reliance Retail

CMP : Rs 23.09

Target: Rs 100 in 15 months

BSE:526899

 

Business Profile
Himalya International (HIL) was incorporated in the year 1992. The company is promoted by Manmohan Malik and Sanjeev Kakkar. It is engaged in mushrooms and vegetables. The plants of the company are located in Paonta Sahib (Sirmaur, Himachal Pradesh).

The company works in close cooperation with CFTRI (Central Food Technological And Research Institute) located in Mysore, India.

HIL provides variety of products including mushroom products, potato products, dairy products and various products related to this. The company sells its products only in Indian market and in the US market.

It is also certified by the United States Department of Agriculture as a member of National Potato Promotion Board.

The company has a wholly owned subsidiary namely, Global Reliance, which takes care of all the shipment work of the company. It started importing food products from US department of agriculture and will market these products in India.

Financials

Himalya International registered a 91.27% growth in net profits to Rs 25.40 million for the quarter ended in September 2007 from a profit of Rs 13.28 million for the quarter ended in September 2006

Net Sales rose 31.88% to Rs 107.68 million for the quarter ended September 2007 from Rs 81.65 million for the quarter ended September 2006.

Recent Developments
13-NOV-07
Himalya International entered into an agreement with Reliance Retail, the largest retail player in the country, for selling its products in domestic market.

09-NOV-07
Himalya International entered into a contract with Dr. Beyer of State College, Pennsylvania, USA for biological consulting for its mushrooms operations and new plans to augment capacity. Under the contract, the company will be provided with latest technology that will boost mushroom yields from current levels by atleast 50%. Dr. Beyer will be paid fixed fee besides rewards based on increased yields. Dr. Beyer will also assist the company for its mega expansion plans of mushroom facilities.


Future Plans
The company decided to convert 100% EOU into DTA under EPCG scheme of the government of India. It has targeted a turnover of Rs 1,000 million by the year 2010.

In order to meet growing demands of foreign food products in India, the company forayed into importing.

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Turnaround : Western India Shipyard Will Scale New Heights Again

CMP: 23.80

Target: Rs 150 in 15 months    

BSE Code: 531217

 

Business Profile :Western India Shipyard
Western India Shipyard (WISL) was incorporated in the Union Territory of Delhi May 1, 1992. WISL is a composite ship and rig repair facility in the private sector. The company has the most advanced multi-dimensional and multi-purpose yard offering modern, streamlined, sophisticated ship and rig repair facilities and services. WISL is strategically located at Goa along the west coast of India. The construction of the `Jock Up Barge` namely, PMC-1 of the value of about Rs 188.1 million by the company for PMC Projects (India), is proceeding smoothly and the vessel is expected to be delivered sometime in Jan-Feb. 2007. The operations of the company`s floating dry-dock of 20,000 TLC capacity was suspended during the period from Jan. 21, 2006 to Feb. 10, 2006 to carry out mandatory repairs for the purpose of maintaining its statutory classification certificates. This had a material impact on the company`s operation and performance for the year ended Mar. 31, 2006.

Financials
The company reported a loss of Rs 21.36 million for the quarter ended Sep. 2006 as against the loss of Rs 24.94 million during the corresponding quarter in the previous year. Sales for this period increased 11.76% to Rs 141.50 million from Rs 126.61 million. WISL, for the year ended Mar. 2006, had reported a 10.70% increase in sales to Rs 427.93 million as against Rs 386.56 million for year ended Mar. 2005. The company incurred a loss of Rs 233.68 million in FY06 as against a loss of Rs 244.22 million in FY05.

Recent Developments
The company wins a major contract from PMC Projects (India), a Adani Group Company, for the construction of `Multi Utility Craft` valuing about Rs 35 million, under the India Flag.

The company wins 3 minor and medium size orders for repairing of 3 vessels namely MV Swatirani, MT Maratha and Pyari Amma valuing Rs 70.00 million totally.

Future Plans
WISL plans for the improvement of systems and ship repair methodology. It also plans to improve interaction with research agencies involved with ship repair and rig repair technology.

 

 

News Item1:

Source: http://www.equitybulls.com/admin/news2006/news_det.asp?id=19146

Western India Shipyard announces Scheme of Compromise and Arrangement

Western India Shipyard Ltd has announced about the Scheme of Compromise and Arrangement between Western India Shipyard Ltd (the "Company") with its Secured Lenders and Shareholders u/s 391 - 394 of the Companies Act, 1956 with ABG Shipyard Ltd as a confirming Party, as under :

"Background and Rationale for the Scheme :

The Company is presently engaged in the business of repairing, servicing, assembling and fitting of merchant ships and other sea going vessels. The Company had obtained various financial assistances / facilities by way of secured and unsecured loans, debentures, overdrafts, guarantees, working capital, etc. from various lenders. The account of the Company is a non-performing asset in the books of some of its lenders in terms of the provisioning guidelines issued by Reserve Bank of India (RBI).

The Company continues to have poor physical and financial performance since inception in spite of various reliefs and concessions extended by its lenders. The Company has entered into a number of debt restructuring efforts with its lenders, including the most recent corporate debt restructuring package by way of the Restructuring Proposal dated January 28, 2005 proposed by the Corporate Debt Restructuring Cell, a voluntary mechanism for Corporate Debt Restructuring (CDR), set up under the aegis of the RBI (the "Debt Restructuring Package"), but continues to remain a non-performing asset in the book of a majority of is its lenders. It has failed to meet its projections, making the various restructuring packages unviable. The Company also does not enjoy working capital limits required for turnover of approximately Rs 70 Crores as per the Debt Restructuring Package. Due to its poor financial performance, the Company has not been able to retire its debts lending to a huge debt burden. As of March 31, 2006, total debts of the Company were Rs 250.1 Crores, against fixed assets of Rs 122.8 Crores. Due to continuous poor performance and recurring huge losses, the net worth of WISL, has completely eroded. The accumulated losses as on March 31, 2006 are Rs 187.1 Crores. The Company faces a real threat of winding up if it continues its current state of affairs.

The Company has 424 permanent employees and around 250 employees on contract basis, whose interests shall be adversely affected if W1SL, is not revived. Taking into consideration the Company's financial position, any revival would require infusion of funds, settlement of debts and resolution of ongoing litigations.

ABG is a company incorporated under the provisions of the Companies Act, 1956 having its registered office at Near Magttalla Port, Dumas Road, Surat - 395 007. ABC is engaged in the business of shipbuilding and ship-repair. ABG has the largest private-sector shipyard in the country and specializes in the construction of medium sized support and defense vessels. The ABG Group is a leading market player in the Indian marine and shipping industry. The group has interest in all major marine and shipping activities, viz. ship-building and ship-repair, owning and chartering of ships and port operations. Pursuant to discussions between the Company, its major secured lenders and ABG. ABG has evinced interest in being involved in a proposal to rehabilitate the Company. Accordingly, the Company is proposing this composite scheme of arrangement with its secured lenders, with ABG as a confirming party, with a view to rehabilitate the Company into a viable and profitable company, wherein ABG's involvement includes a combination of cash infusion into WISL, and acquiring a hares in the Company pursuant to the provisions of this scheme of arrangement. As a step towards rehabilitating the Company, and to demonstrate its commitment thereto, ABG shall, immediately upon filing of the Scheme with the High Court, provide a loan of Rs 25,00,00,000/- to the Company towards urgent business requirements of the Company, and has also agreed to provide technical and marketing expertise through a Service Provider Agreement, to be entered into between ABG and the Company simultaneously or contemporaneously to the filing of this Scheme.

The Scheme provides certain options for the restructuring / one time settlement of the debt of the secured lenders of the Company with the involvement of ABG, along with other matters connected with the compromise and arrangement, including reorganization of share capital of the Company."

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Sharekhan Investor's Eye dated November 15, 2007

 

SHAREKHAN SPECIAL

Broking companies have a lot to cheer

The stock prices of the listed broking companies have grown phenomenally in the recent past. We therefore decided to take a sneak peak into what actually is driving this upsurge. We feel that the significant increase in the market turnover, which would drive earnings growth for these broking companies and the re-rating possibilities of these companies based on valuations commanded by the ongoing initial public offer (IPO) of Edelweiss Capital are actually pushing their prices up. 

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STOCK UPDATE

Hindustan Unilever     
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs200

Results below expectations

Result highlights

• Hindustan Unilever Ltd's (HUL) Q3FY2007 results were below our expectations. Net sales grew by 9.7% to Rs3,364.6 crore on the back of a 9.5% year-on-year (y-o-y) growth in HPC sales and a 16.8% growth in the sales of foods business.
• The overall operating profit margin (OPM) expanded by 16 basis points year on year (yoy) to 13.3% despite one-off adverse impact of the seven-week closure of the Assam unit that manufactures ~30% of personal products.
• The operating profit grew by 11.1% to Rs447.6 crore. However, the net profit rose by only 6.9% to Rs409.3 crore due to the higher tax rate of 20% in Q3FY2008 against that of 17.5% in Q3FY2007.
• Sales of soaps and detergents grew by a robust 12.8% yoy to Rs1,572 crore and the segment's profit before interest and tax (PBIT) margin improved by 440 basis points to 16.7%. The performance of the personal product segment was affected by the strike at the Assam factory that led the PBIT margin fall by 260 basis points yoy to 24.2%. 
• Sales of processed food segment grew by 32.5% yoy to Rs128.9 crore. Modern Foods that was merged with the company contributed a major chunk to the sales growth with sales of Rs23.8 crore. Thus the organic sales of the segment grew by 8% yoy. While the margins in the processed foods business improved, the profitability of ice cream business declined sharply on account of costs related to setting a new factory.
• The quarter witnessed the launch of water purifiers in Delhi and Uttar Pradesh (UP) thereby expanding the water purifier business to eight states. Pureit, HUL's in-home water purifier now serves three million homes. The business is gaining ground but being in initial stages we expect it to continue its losses for the next few quarters.
• At the current market price of Rs200 the stock is quoting at 24.9x its CY2007E earnings per share (EPS) of Rs8.1 and 21.9x its CY2008E EPS of Rs9.2. We maintain our Buy recommendation on the stock with a price target of Rs280.

Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs188
Current market price: Rs149

Price target revised to Rs188

Result highlights

• Net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) grew by 2% year on year (yoy) to Rs216.9 crore. The chemical division and the fertiliser division contributed 69% and 31% respectively to the net sales. The revenue from the chemical division increased by 29% yoy to Rs155.8 crore on the back of a strong contribution from isopropyl alcohol (IPA), while the sales from the fertiliser division dropped by 32% yoy to Rs70.7 crore due to reduced availability of phosphoric acid in the international market and lower availability of material for trading.
• Operating profit during the quarter grew by 26% yoy to Rs32.2 crore. A strong contribution from the chemical division expanded the overall operating profit margin (OPM) by 290 basis points to 14.9%. The segmental profit before interest and tax (PBIT) for the chemical division reduced by 0.3% to Rs37.3 crore with the margin declining from 31% to 24%. The loss in the fertiliser division reduced to Rs1.5 crore from Rs6.6 crore. The increased raw material cost including that of the outsourced ammonia and propylene decreased the segmental PBIT margin for the chemical division, while the higher price realisation reduced the segmental loss for fertiliser division.
• Interest expenses were higher by 7% yoy on account of the increased outstanding debt issued for new projects and capacity expansions. The depreciation charge also increased by 21% yoy during the quarter.
• The adjusted profit after tax (PAT) increased by 21.4% yoy to Rs21.9 crore with the margin expanding by 160 basis points to 10.1%.
• With the completion of retrofitting of ammonia plant, the company has increased its capacity to 130,000 tonne per annum (TPA) from 90,000TPA. This along with the increased natural gas availability and the additional ammonia storage tank would help the company in reducing its raw material cost as well as enhancing its nitric acid capacity.
• The completion of Dahej-Uran pipeline would improve the natural gas supply to Taloja plant from December 2007, which would help in replacing naphtha with natural gas for steam generation, depending upon its supply. Natural gas at around $8.5 per Million British Thermal Units (MMBTU) would cost almost half the price of naphtha.
• The company is expected to complete land acquisition process for its ammonium nitrate project in Orissa by November 2007. The plant with a 300,000TPA capacity is expected to be operational by November 2009.
• The company's specialty mall Ishanya, for interiors and exteriors, is expected to commence operations from the third quarter, ahead of the festive season. The company has already leased out nearly 80% of the 550,000 square feet leasable area at an average rental price of Rs46 per square foot.
• At the current market price of Rs149, the stock is trading at 8.7x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.5x. The improved supply of natural gas would benefit the fertiliser division in the coming years, while its ammonium nitrate project would also start contributing from H2FY2010. In view of future earnings visibility, Ishanya, the company's specialty mall for interiors and exteriors is valued at Rs28.7 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs188 valued at 11.0x its FY2009E earnings.

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SECTOR UPDATE

Telecommunications

Bharti remains our top pick
GSM operators added 5.7 million subscribers during October 2007, increasing the overall subscriber base to 159.7 million during the month. There has been a slight increase in net additions from 5.6 million subscribers in September to 5.7 million subscribers in October. Thus the month-on-month (m-o-m) growth in subscribers has decreased from 3.8% in September to 3.7% in October in spite of the beginning of festive season.

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Sharekhan Investor's Eye dated November 16, 2007

 

STOCK UPDATE

Network18 Fincap     
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs651
Current market price: Rs452

Listing of Web18 to unlock value
Network18 group has grown by leaps and bounds over the last couple of years in the fast growing Indian media and entertainment space. Network18 Fincap Ltd (Network18) the holding company of the Network18 group controls TV18 that owns two premium properties in the business news genre CNBC TV18 and Awaaz. Network18 group also owns a majority stake in GBN, the company that runs the group's general news channels CNN-IBN and IBN7. GBN also represents the entertainment arm of Network18 with its planned entry in the general entertainment genre, the biggest segment in Indian television entertainment, with the launch of a Hindi general entertainment channel through Viacom18. 

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SECTOR UPDATE

Cement

Industry dispatches up 9% during October
The industry dispatches maintained its growth rate of 9% year on year (yoy) in October. Among the top majors, both ACC and Ambuja Cements resumed their pre-monsoon level dispatch figures. ACC recorded a dispatch growth of 6.7% yoy to 1.76 million metric tonne (MMT), whereas that of Ambuja Cements grew by 3.6 % yoy to 1.48MMT. As AV Birla group companies Grasim and Ultratech didn't witness any capacity additions in last one year, their dispatch growth remained flat.

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Sharekhan Investor's Eye dated November 02, 2007

STOCK UPDATE

Bank of Baroda    
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs375

Price target revised to Rs500

Result highlights

• Bank of Baroda's (BOB) Q2FY2008 profit after tax (PAT) grew by 13.5% year on year (yoy) to Rs327.2 crore. The PAT of Rs327.2 crore was in line with our expectation of Rs321 crore. The PAT growth was primarily driven by a higher non-interest income. The net interest income (NII) growth was better than most of its peers. The operating expenses surged due to a higher provisioning on account of transitional liability of revised AS-15 guidelines and restricted the overall profit growth.
• We have revised our FY2008 and FY2009 earnings estimates upwards by 5% and 4% to Rs1,372.7 crore and Rs1,640.9 crore respectively. The upward revision in the earnings is to factor in the higher non-interest income growth and higher AS-15 related expenses likely to be reported by the bank going forward, which were not envisaged at the beginning of the year. 
• BOB's total assets grew by 19.5% yoy and 4.9% quarter on quarter (qoq), while the reported NII grew by 17.1% yoy and 8.5% qoq and the NII (adjusted for amortisation and AFS redemption loss) grew by 15.7% yoy, but remained stable on a quarter-on-quarter (q-o-q) basis. Its adjusted net interest margin (NIM) remained under slight pressure and declined by 11 basis points yoy and 9 basis points qoq. 
• The non-interest income grew by 41.1% yoy and by 35.8% qoq to Rs454.1 crore, driven by higher treasury and foreign exchange (forex) incomes. The higher non-interest income growth has been an industry trend for all public sector undertaking (PSU) banks during Q2FY2008.
• The operating expenses jumped up by 33.8% yoy to Rs798.3 crore mainly due to a 38.6% year-on-year (y-o-y) jump in staff expenses. The surge in staff expenses was led by Rs90 crore of AS-15 related expenses charged during the quarter. Spreading the cost equally between the two quarters (Q1FY2008 and Q2FY2008) the operating profit should improve to 21.1% yoy from 13.2% yoy. However, the core operating profit growth was moderate at 6.9% yoy. 
• Provisions and contingencies declined by 8.2% yoy and 30.7% qoq mainly on account of a decline in investment depreciation. 
• The bank's business growth has moderated with global advances up by 27.1% yoy from a 40% y-o-y growth reported during March 2007. The deposit growth has also moderated from 33% to 22% for the same period. This moderation is welcome and should help in avoiding undue stress on the NIM and maintaining a healthy asset quality. The bank's asset quality has improved with gross non performing assets (NPAs) down by 45 basis points to 2.33%, while net NPAs declined by 12 basis points to 0.55% sequentially. 
• We feel BOB is one of the public sector banks, which have exhibited maximum improvement in its earnings growth and return on equity (RoE). We expect BOB to deliver a compounded annual growth rate (CAGR) of 26.4% in earnings and almost a 400-basis-point improvement in its RoE to 16.1% between FY2007-09E. At the current market price of Rs375, the stock is quoting at 8.4x its FY2009E earnings per share (EPS), 4.2x pre-provisioning profit (PPP) and 1.3x FY2009E book value (BV). If we exclude the value of Rs40 per share of which Rs22 is from its 25% holding in the Unit Trust of India (UTI) mutual fund (which is likely to come out with an IPO [initial public offering] in CY2008) and the rest Rs18 is for its other holdings such as NSE and Reliance Petroleum etc, the stock is available at 1.1x FY2009E BV. The valuations are extremely attractive when we consider the strong earnings growth and the improvement in RoE. We maintain our Buy recommendation on the stock with a revised twelve-month price target of Rs500. 

Shree Cement   
Cluster: Cannonball
Recommendation: Buy
Price target: Rs1,625
Current market price: Rs1,417

Result marginally below expectations

Result highlights

• Fuelled by fresh capacities, Shree Cement's Q2FY2008 volumes grew by 34% year on year (yoy) driving its net sales by 48% yoy to Rs466 crore.
• The overall operating expenditure increased by 53% yoy to Rs264.8 crore on the back of rise in power & fuel costs and freight costs.
• On account of cost-push, the company's operating profit grew slower by 41% yoy to Rs201 crore. The margins fell marginally to 43.2%. The earnings before interest, tax, depreciation, and amortisation (EBITDA) per tonne expanded by Rs84 yoy and Rs55 quarter on quarter (qoq) to Rs1,348. 
• The other income jumped from Rs4.3 crore in the last quarter to Rs29.1 crore this quarter, as the company booked Rs16 crore as revenues from the sale of certified emission reductions (CERs) accrued to the company under the Clean Development Mechanism (CDM).
• Interest costs jumped by 214% yoy to Rs8.1 crore, whereas the depreciation provision more than doubled to Rs68.7 crore due to incremental capacities commissioned by the company at Ras. Consequently, the profit after tax (PAT) growth slowed down to 37% at Rs106.6 crore. 
• The company commissioned a 1.5-million-metric-tonne (MMT) line V clinker unit at Ras and a 2MMT grinding unit at Kushkhera in the first week of September. This will make available 2MMT of cement for the second half of the current fiscal.
• Taking cognisance of the commissioning of capacities ahead of schedule, we are upgrading our FY2008 volume estimate marginally by 2% and FY2009 estimate by 12%.
• Considering the higher volume assumption for FY2009, we are upgrading our FY2009 earnings per share (EPS) by 7% to Rs145.2. Also taking notice of the higher depreciation provision for the current year, we are downgrading our FY2008 estimates by 4% to Rs117.7 per share.
• Shree Cement has shown excellent project management skills by commissioning its capacities ahead of schedule. This has enabled the company to grow its volumes ahead of the industry. With the ongoing capital expenditure (capex), the company will be ramping up its capacity from 5 .6MMT to 9MMT by the end of FY2009. This will enable the company to sustain the momentum in the much needed volume growth. In the next couple of years, the company will become totally captive in its power consumption enabling it to exercise control over its power costs. Shree Cement's robust cash flows will aid the company in becoming debt free at the end of FY2009. At the current market price of Rs1,417, the stock trades at 12.0x its FY2008 EPS and 9.8x its FY2009 EPS. We continue to maintain our positive outlook on the stock with a price target of Rs1,625. 

Balaji Telefilms 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs339
Current market price: Rs287

Price target revised to Rs339

Result highlights

• Q2FY2008 results of Balaji Telefilms Ltd (BTL) have outperformed our expectations. Despite substantially lower content hours, BTL's operating revenues were marginally down by 4.4% year on year (yoy) to Rs77.9 crore against our estimate of Rs72 crore.
• BTL hiked the rates of some of its shows under the commissioned content category that led to a jump in realisations. The commissioned programming realisations were up by 47.3% yoy and a strong 13.1% quarter on quarter (qoq) to Rs37.9 lakh per hour. Even in the sponsored category that contributes about 7-8% to the total revenues from the television content, realisations improved by 71% yoy and by 7.1% qoq to Rs4.5 lakh.
• Aided by the rise in realisations, the operating profit margin (OPM) was up by 680 basis points to 42.4% and the operating profit rose by 13.9% yoy to Rs33 crore. 
• BTL possesses a huge pile of cash and cash equivalents of Rs224 crore that led to a 182% year-on-year (y-o-y) increase in the other income to Rs6.4 crore. Further, a lower tax rate led to a strong 36.2% growth in net profits to Rs26.3 crore.
• BTL has tied up for two shows on INX Media's forthcoming Hindi general entertainment channel and for another show on Sony to go on air in Q4FY2008. The company is also in talks with other players like NDTV and Viacom-18 for its content on their forthcoming channels. We expect BTL to scale up its programming hours in FY2009 aided by the buoyant scenario for its content and pursuant to its foray into broadcasting from Q1FY2009.
• BTL bagged distribution rights for Ram Gopal Verma's Sarkar Raaj for ~Rs37 crore. The movie is scheduled for release in January 2008. BTL distributed Darling and Bhool Bhulaiya, while the former did not fare well at the box office the latter is running successfully and is seen as a big hit. BTL's co-production Woodstock Villa is expected to be in cinema halls by February 2008. We estimate BTL's movie business to have made a profit of ~Rs5-6 crore in H1FY2008.
• BTL remains one of our preferred picks in the media and entertainment space. We revise our price target on the stock to Rs339, valuing the content business at 15x FY2009E earnings and BTL's interest in the broadcasting joint venture (JV) at 2x investment. We maintain our buy recommendation on the stock. 

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