Kotak - Tata Tea, Dish TV, Reliance Industries, Idea Cellular, UTI Bank, Torrent Pharma, Automobiles, Economy

Kotak on Tata Tea

Tata Tea reported 14.7% growth in revenues at Rs2.51 bn (we expected 12.2% growth) and 34% increase in EBITDA to Rs150 mn (we estimated Rs243 mn) during 4QFY07. While domestic branded tea sales continue to do well (9% volumes growth and 12% value growth for branded tea in domestic portfolio), higher wage expenses (wage increases and new accounting standards) resulted in lower EBITDA. Tetley continues to post marketshare gains in key markets. However, stagnant black tea market in UK remains a concern. Tata Tea has agreed for conditional sale of its stake in Energy Brands Inc (EBI) to Coca Cola. Tata group had earlier acquired 30% stake in EBI (25% held by Tata Tea and 5% by Tata Sons) for US$677 mn, in a bid to add a high growth beverage portfolio in the world's largest beverage market. With the sale of 30% stake to Coca Cola for US$1.2 bn, Tata Tea will need to redraw its plans for improving its growth profile. Tata Tea has reiterated its thrust on three verticals—Tea, Coffee and Water, and has announced the acquisition of a controlling stake in Mount Everest Mineral Water Limited (MEMW). We believe that given the robust macro environment in rural as well as urban India, domestic tea business will continue to do well. However, we have concerns on the Tetley business and need to watch out for Tata Tea's strategy to drive growth. We retain In Line rating on the company. Our revised target price of Rs992/share includes Rs91/share from investments in group companies (valued at 50% discount to market price). Our target price implies a P/E of 21.5X and 16.9X on FY2008E and FY2009E respectively.

Kotak on DishTV

We have downgraded Dish TV to IL from OP noting the fact that the stock is trading above our 12-month DCF-based target price of Rs125 and the stock's strong outperformance over the past few weeks. We continue to like Dish TV as a good play on India's emerging distribution opportunity. Indeed, we are most favorably disposed to the distribution portion of the media chain versus broadcasting and content given distribution's ownership of the last-mile, its more loyal audience and hence more predictable cash flows. We would wait for more visibility on the pace of adoption of DTH service in India, Dish's execution versus others and pricing strategy of new entrants. However, we model rapid uptake of DTH service in India given problems with the cable industry. Thus, Dish's current valuations leave limited scope for execution and macro-environment-related disappointments. We retain our earnings estimates.

Kotak on Reliance Industries

According to an article in Petrowatch (31st May 2007), Reliance's gas and oil production from KG D-6 block may be delayed by a few months. We do not expect a delay, if any, to have a material impact on valuations although it may be a modest negative for sentiment. We anyway use valuations based on FY2010E EPS discounted back to set our 12-month fair valuation for Reliance stock (see Exhibit 1). We have made some minor changes to our model—(1) exchange rate (Rs43/US Dollar for FY2008E-FY2010E versus US$44/US Dollar previously) and (2) use of gas for internal refining process for RIL refinery also; we already model this for RPL refinery. Our consolidated FY2008E, FY2009E and FY2010E EPS are Rs71.5, Rs98.5 and Rs153.5, respectively versus Rs73.2, Rs95.6 and Rs150.1, respectively, previously. Key upside risks to our 12-month target price of Rs1,400 (Rs1,375 previously) stem from continued high liquidity in the Indian market and new E&P discoveries.

Kotak on IDEA Cellular

Several newspaper articles over the past few days have reported discussions between Idea Cellular and Spice Telecom regarding a potential merger or acquisition of Spice by Idea. The managements of the respective companies have not confirmed the news. In our view, the reported merger is unlikely to change the competitive landscape in India. The merger will give Idea a presence in two new circles'Punjab and Karnataka'but would not address key issues including (a) lack of pan-Indian presence, (b) likely weak position in unaddressed and certain existing circles and (c) high risk to operating metrics from emerging price competition. We believe ongoing deterioration in pricing is the real issue and note that Idea is the most vulnerable in the emerging environment. We maintain our U rating on Idea stock with a 12-month forward DCF based target price of Rs100. Key upside risk is higher-than-expected profitability.

Kotak on UTI Bank

On Friday, the UTI Bank shareholders approved the change of bank’s name to 'Axis Bank Ltd' from 'UTI Bank Ltd' and appointment of Dr. P.J Nayak as whole-time Chairman of the bank. The later is subject to the approval of RBI. Simultaneously at its board meeting the UTI Bank board finalized its plan to raise US$1bn of capital to meet the bank’s growth plan through a preferential issue to existing promoters and a equity/GDR issue. We believe that amongst private banks UTI Bank has strong growth potential, is well run and has delivered strong financials. A large part of this credit goes to Dr. Nayak, who has been with the bank for the last seven years. Even assuming that RBI clears Dr Nayak’s appointment it still leaves two long-term crucial issues unresolved - i.e long-term succession plan and potential sell down of stake to a public sector. We believe that the issuance was an opportune time to reduce holding of the government owned organization, which it appears, is unlikely at this stage. The current valuations of 19.5XPER and 4.0X PBR FY2008 therefore appear rich and reduce the margin of safety for investors and we retain our Underperform rating.

Kotak on Torrent Pharma

We recently met the Torrent management. Outlook continues to be robust, with strong revenue growth and margin expansion. For FY2008, we have modeled revenue growth of 18%, 130bps margin expansion (10.8% EBITDA) and 36% growth in net profit. We estimate an EPS of Rs15 and Rs17.4 for FY2008 and FY2009 (versus Rs13.2 and Rs16.1 earlier). Amongst key markets, India, Brazil and CIS are doing very well, a trend, which is likely to continue. Company expects sharp margin expansion in the Brazil market, which will equal investments/loss in Mexico (for product filings). Investment/losses in the US market will continue this year too (for product filings), as revenues are expected to begin from next year. Germany continues to be a dark spot (Rs230 mn loss in FY2007). We have rolled over our DCF to March 2009 and our revised price target is Rs260 (Rs200 earlier), or 15x FY2009 earnings. Key risks include inability to improve profitability of international operations, mainly Germany

Kotak on Auto Sales

May saw a weak sales growth across all segments of the auto industry. CV sales declined impacted by high interest rates. The 2W industry witnessed a decline in volume growth across all players thus raising concerns of a slowdown in demand. Hero Honda along with its peers reported a 6% yoy decline in May. Maruti continued with its growth backed by the launch of the Sx4 sedan and the success of Swift and Zen Estilo while Mahindra- Renault's Logan had a decent launch with 2,786 vehicles being sold in May. Tata Motors reported a 17% yoy drop in volumes of M&HCVs for May. LCV sales however grew at 10% for the month resulting in a 6% yoy decline for domestic CV sales. Car sales for Tata Motors, too, declined 7.6% in May.

Kotak on India Economy

India’s merchandise trade deficit expanded sharply to US$ 7 bn in April 2007 from US$3.9 bn in April 2006 (Exhibit 1). This reflects strong non-oil import demand suggestive of sustained economic activity (abetted by a stronger Rupee). Robust capital goods imports (32.4% during April 2006 ‘ January 2007 vs 39.9% last year), in particular, point to sustained investment. In any case, imports pick up in 1Q of the FY (Exhibit 2). We nevertheless continue to expect non-oil import demand to moderate with a slowdown in real GDP growth (8.2% in FY2008E from 9.4% in FY2007). Although still robust, we also expect some slow down in exports in FY2008E (US$148 bn lower than the commerce ministry’s bullish US$ 160 bn projection) on account of the IMF’s estimate of slower world GDP growth (4.9% 2007E from 5.4% 2006) and a somewhat higher Rupee (Rs43/USD in FY2008E up from Rs45.1/USD in FY2007). The current account deficit is now forecast at a pretty doable 1.4% of GDP in FY2008E, assuming stable oil prices (US$65/bbl Dated Brent). Every US dollar increase in the India basket barrel price hits the current account deficit by about US $ 500-600 mn.