Mundra Port and SEZ: Invest at cut-off

Investors with a three-five year perspective can consider subscribing to the initial public offer of Mundra Port and Special Economic Zone (Mundra Port). Superior growth in cargo and container volumes handled in relation to other ports in the region, an integrated business model comprising port operations and services and long-term tie-ups that secure business, are positives for this port developer.

A multi-product special economic zone (planned) in the location is also likely to provide steady captive business.

The offer is at a price band of Rs 400-440. The earnings per share for FY-07 on the existing equity base was Rs 5.2. When the additional capacities from the second multi-purpose terminal and container terminal go on stream, earnings may well grow at a 60 per cent compounded annual rate (CAGR) over the next three years, assuming volumes expand at a rate of 30-35 per cent (the last three years’ volumes have shown a CAGR of 56 per cent). Planned forays into container rail, inland container depots and SEZ would further scale up earnings. We have not factored these operations into our valuations.
Business and objectives

Mundra Port, part of the Adani Group, is a port developer and an operator. The company has a 30-year concession agreement beginning 2001, with Gujarat Maritime Board and the Gujarat Government for a non-captive private port in Mundra located in the Kutch district of Gujarat.

This port, which has been operational since 2001, provides services for various types of cargo such as food grains, coal, petrochemicals and crude.

The company plans to raise Rs 1,610-1,770 crore through this offer (see table for current businesses and offer objectives).
Indian ports

Over 90 per cent of the country’s export-import trade volume is routed through sea ports. While the 12 major ports (regulated by the Centre) handle 70 per cent of this volume, limitations in proper berthing, cargo handling and storage facilities and labour productivity-related issues have for long increased the turnaround time for vessels docking at these ports.

This leads to increased costs and a longer working-capital cycle for exporters and importers, driving demand for more efficient alternatives.

The strong prospects for ports such as Mundra arise from the fact that unlike a number of public ports that were originally developed as ‘need-based’ ports, these private ports have the benefit of being ‘planned ports’ built with future commercial traffic in mind. The Ministry of Shipping, Road Transport and Highways estimates traffic at Indian ports to increase by about 90 per cent to 1,225 million tonnes in 2014, from the present levels.

As existing public ports are already witnessing congestion, new ports could attract a good number of waiting vessels to their shores if they offered the twin advantage of strategic location and good infrastructure.

Securing sustainable business

The company has sub-concession agreement with Mundra International Container Terminal (MICT) for container cargo operations and an agreement with Railways, both of which earn substantial revenues. Mundra Port has also secured long-term contracts from IOC and HPCL for providing a single-point mooring facility for crude oil transport.

The company plans to develop a terminal and provide cargo handling facilities for imported coal to be used in the Ultra Mega Power Project by Tata Power in Mundra and also for Adani Power’s plant in the same region. The company has long-term agreements for the above.

While these are likely to provide steady stream of revenues from big-ticket clients, the company faces the threat of pricing pressure with major ports such as JNPT and Mumbai Port Trust expanding their container terminals. Mundra is attempting to secure its competitive edge by offering port-related value-added services. It has plans to make strategic investments in container rail operations and inland container depots.

This would be executed through investments in Adani Logistics (which has licence to operate container trains in India) and Inland Conware respectively. It is also investing in new port locations such as Dahej — a joint venture with Petronet LNG, located along the Vadodara-Mumbai corridor. The above businesses, if successful, would convert Mundra Port to an integrated player in port solutions, perhaps the first in India.
Financials

Mundra Port has managed a compounded annual growth of 51 per cent in sales and over 200 per cent in net profits over the past three years. Sales and profits for FY-07 were Rs 580 crore and Rs 187 crore respectively. Operating profit margins remained at 53-60 per cent in the last five years. While this growth has been exceptional, we expect growth rates to moderate after 2010, when there may be other new ports vying for business. Profit margins may also be tempered.
Risks

Excess supply of port capacity in the region, over the long term, in the light of expansion by existing ports and the rise of new ones such as Rewas, may usher in competition. The sub-concession agreement with Mundra International Container Terminal (MICT) appears to be running into rough weather as the latter has issued a notice of breach of agreement. Further, Gujarat Maritime Board has also issued a notice against the change in ownership of P&O Ports (now acquired by Dubai Ports World), which holds MICT.

These two events could cause some uncertainty over effective operations at the container terminal, if not resolved quickly. Such disruption could affect this segment which contributed 15 per cent to FY-07 revenues. The offer is open from November 1 to 7.

Lending an edge

A few key features of the Mundra Port lend it a competitive edge over others in the region.

Location: The port has one of the deepest water depths enabling it to handle large-sized vessels. The natural draft of 15-17.5 metres also allows significant reduction in dredging costs compared to other ports.

The port is supposed to be an ‘all-weather facility’ owing to its location in the Kutch region. It has in the past aided in decongesting ports such as JNPT during rains.

This location also places the port at a proximity to the western and northern hinterland which contributes over 55 per cent of India’s exim trade.

Infrastructure: Mundra is connected by rail, road and pipeline to the inland regions of Western and Northern India. Mundra Port has built its own broad gauge link that connects to the Railways.

The company not only earns revenue for this stretch of rail link but also helps its users save on freight as the connectivity has also enabled a rail distance advantage of about 218 km over ports in Mumbai, for Delhi-bound cargo.

Gauge conversion being carried out by the Railways in Northern India, once complete, is expected to provide significant distance advantage (450 km) over Mumbai on traffic to the upper Punjab regions.

A four-lane approach road connects the port to Mundra’s national and state highways, lending road-distance advantage as well.

Development potential: Mundra retains 4,000 m of leased undeveloped waterfront land that can be utilised to expand its port facilities. If the company is able to capitalise on this to cater to increasing demand, it may be able to prevent queuing and resultant increase in turnaround time of vessels seen in other ports.

Finally, the unique feature of this port is the planned development of 15,665 acres of land surrounding it for a multi-product SEZ.

Interestingly, unlike other SEZs which have been stalled by problems of land acquisition, Mundra Port has had a smooth sail as the land in the region is arid and unoccupied.

We expect industries such as textiles, chemicals and petro-products with a high exim component to tenant this SEZ, given the logistical advantage of proximity to the port. Mundra Port would, therefore, not only benefit by way of lease income from the SEZ; it would also secure sustainable business from the industries in the SEZ.

This SEZ we believe would be the biggest advantage that this port would possess relative to others in India.

Trader's Corner

The ancient Japanese employed extremely picturesque terminology while talking about chart patterns. For example, no one in a healthy state of mind can feel happy when they hear terms such as ‘hanging man’ or ‘abandoned baby’. These patterns imply downward reversals. Though the term ‘harami’ might sound insulting to those who speak Hindi, its meaning is pretty innocuous. The word harami means pregnant in Japanese.

The harami pattern consists of two candlesticks. One long candlestick followed by a small candlestick that is completely within the body of the first candlestick. In bearish harami pattern the first candle is white and the second is black, though the colour of the second candlestick is not important. The upper and lower shadows of the second candlestick do not have to be limited within the body of the first candlestick. However, it is preferable if the shadows are limited.

Bearish hanging man pattern is a distinct candlestick pattern. It looks like a cross and occurs near the end of an uptrend. The pattern is formed when the stock opens high and there is an intra day sell-off followed by a sharp recovery that brings the stock back near its opening level. So, the pattern has a small body with a long lower shadow (twice the length of the body).

Though both the bearish harami and the hanging man pattern do signal an impending trend reversal, it is best to wait and see the candlestick patterns on the subsequent days before selling the stock. A long black candle with a shaven head would be ideal for confirming the trend reversal. You can also confirm the signal with the help of other tools such as oscillators, moving averages etc. before deciding to act based on these patterns.

Sanghvi Movers: Buy

Investments with a two-three year perspective can be considered in the stock of Sanghvi Movers, a company that hires cranes. Buoyant demand , combined with Sanghvi’s established presence, suggest good prospects for growth. Sanghvi’s strong earnings growth, planned expansion in capacities and its conscious move to reduce dependence on the windmill sector are also positives.

At the current market price of Rs 185, the stock trades at about 11 times its likely FY09 per share earnings on a fully diluted basis. Investors, however, can accumulate the stock in lots, given the volatility in broad markets.
Business

Sanghvi, which enjoys a near monopoly in the organised crane hiring business with over 50 per cent market share, offers a proxy to the ongoing infrastructure boom in the country. The increasing capital expenditure across user industries such as power and refineries is likely to present a huge growth opportunity for the company.

Our optimism also stems from the company’s strategic position in the crane hiring segment. One, a fleet size of 260 cranes backed by a well-dispersed presence (through depots) across the country, poses a high entry barrier to other players. Notably, Sanghvi has also set up depots in Jamnagar and Cuttack to leverage on the increased business from Reliance and power projects of BHEL in the northeast respectively.

Two, Sanghvi’s continuous investment in capacity over the years has helped it meet the rising demand for cranes. This strategy has resulted in a higher dependence on debt, but has helped the company take advantage of rising demand, without significant capacity constraints. The company has consistently enjoyed high operating profit margins in recent times, which have more than made up for the financing and capital costs.

In anticipation of a further firming up of demand, Sanghvi has outlined a capital expenditure of about Rs 200 crore each for FY08 and FY09.

The company plans to fund these through a mixture of debt, internal accruals, conversion of warrants allotted to promoters and money raised from preferential allotment. While increased reliance on debt could expand the overall financing costs, we expect the strong growth in volumes to more than offset this.

Another factor that reflects the strengthening of Sanghvi’s business is the reduced dependence on the windmills sector, which currently accounts for over half the revenues. An enhanced focus on sectors such as power and steel may help broad-base the company’s client base and reduce its vulnerability to a slowdown in the windmills sector. This could also help it benefit from the increased capex in other sectors.
Earnings scorecard

Sanghvi’s second quarter earnings reflect the growing demand for its business. It recorded a 21 per cent growth in revenues and a 28 per cent rise in earnings over last year. Helped by improving pricing, the operating profit margin expanded by about 2.4 percentage points to 74.9 per cent, while net profit margin expanded by 1.6 percentage points to 29.3 per cent.

Given the buoyancy in demand, realisations could see further improvement. While Sanghvi had managed a 90 per cent occupancy rate for its cranes during the last fiscal year, with an increasing fleet size, its ability to manage the overall utilisation levels of its cranes could be tested. Additionally, slowdown in capex by user industries also poses a downside risk.

TV Today: Buy

An investment can be considered in the stock of TV Today. The stock, at the current market price of Rs 163, trades at a reasonable valuation, relative to other media stocks, of about 19 times its estimated FY-09 earnings per share. With Aaj Tak consolidating its position as the leading Hindi news channel, advertising revenues are likely to remain buoyant. Subscription income may become a more significant revenue stream in the long term, with Aaj Tak likely to go on “pay” mode.

The merger with the group’s radio business will also present a new revenue stream, although it is unlikely to make a contribution to profits in the near term.

The company’s performance has been impressive in the first half of the year, reporting a three-fold rise in profits, led by buoyant advertising revenues.
Aaj Tak leads the way

Aaj Tak has secured its market share of 22 per cent, even as more than ten channels jostle for space in the Hindi news genre.

Its market share has given it the leeway to effect advertising rate hikes, though viewership gets increasingly fragmented. Income from advertising has so far been the chief source of revenues as all its channels have been free-to-air.

The weakness of other channels in its network has, however, been a drag on its profitability. Headlines Today has been a laggard in the English news channel space with its 8-9 per cent market share, while the other more recent channels have not made a significant mark. This has moderated the valuations of the stock.
Fresh revenue streams

However, there could be an upside to revenues and earnings as and when Aaj Tak becomes a pay channel. The management says it is in an advanced stage of negotiations with distributors and expects the channel to become a paid one by the end of the quarter. We do not expect this decision to have a significant impact on its advertising income in the near-term. As the progress of CAS is rather slow, the viewership numbers are likely to remain largely intact.

Additionally, subscription revenues will also get a boost from international operations; Aaj Tak is now being aired in Europe and the UK. However, unless the move to go pay fructifies, subscription revenue is likely to contribute less than 10 per cent of the topline in the near-term.
Tuning into radio

With the acquisition of the group’s radio broadcasting business, TV Today is making a move beyond television. “Radio Today” has licences to operate in Delhi, Mumbai, Calcutta, Shimla, Amritsar, Patiala and Jodhpur. Being a fairly late entrant in these markets, Radio Today hopes to capture advertisers’ attention by targeting exclusively women through its station “Meow 104.8 FM”, currently running in the metros. Only 30 per cent of the channel’s programming in the metros will be music-based, the rest will be talk-based. This will also limit the costs of music acquisition, which can be quite steep. The management expects to break-even in the next two-three years, as it has lower operating expenses than its peers. It acquired its seven licences at a fairly low cost of Rs 30 crore, compared to anywhere between Rs 55 and Rs 80 crore paid by some of its peers.

The company also intends to participate in the next round of bidding for licences later this month. While it has significant resources at its disposal, it has however, not been an aggressive bidder in the past.

Overall, the radio business, being at a nascent stage, is likely to provide an additional revenue stream to the business, but might not contribute to profits in the medium term. But further attempts by TV Today to widen the scope of its operations beyond television are likely to help the stock command better valuations.

Jubilant Organosys: Buy

Investors with a one-two year time-frame can consider taking exposure in the shares of mid-sized pharma company, Jubilant Organosys, an integrated contract research and manufacturing services (CRAMS) player.

From being a pure specialty chemicals company five years back, Jubilant has today emerged as a prominent player in pharma outsourcing with around 60 per cent revenues (Rs 1,159 crore) this fiscal coming from pharma and life-science products.

Industrial chemicals and performance polymers (IPP) account for the rest. The pharma/life sciences business has a higher margin profile and this indicates a conscious shift from a steady-growth to a high-margin segment.

At the current price of Rs 321, Jubilant trades at about 21 times its trailing 12-month earnings on current equity base and 24 times on a fully-diluted basis, which is at discount to focussed CRAMS players.

While the market has partially factored in the good performance of the company in the first half of FY-08 that saw 32 per cent revenue growth on consolidated basis, we feel the performance of newly acquired Hollister-Stier (Rs 110 crore) has the potential to add to earnings. The CRAMS segment looks good to contribute over 75 per cent to the pharma and life-science products business.

Successful integration with Hollister-Stier Laboratories leading to increasing traction on CRAMS side, long-term agreements in industrial polymers division ensuring stable earnings and foray into high-value areas such as bioinformatics, medicinal chemistry and clinical services, suggest a bright outlook on earnings.
New areas

Almost one-third revenues for Jubilant’s life-sciences business are from high-margin contract research and manufacturing done through Hollister, as well as custom synthesis. With the capacity expansion in the US-based Hollister happening on schedule, commercial operations should begin by March 2008. This has the potential to generate additional revenues, as capacity will more than double. Hollister was acquired in April.

The company’s custom synthesis segment is also growing well with about six products in the pre-clinical phase; 23 in phase I, 17 in phase II (failure rate is generally high) and 15 in phase III. Large number of products in the last segment ensures generation of good business as commercial production starts with receipt of regulatory approvals.

The company’s Drug Discovery & Development Services business also has emerged as an independent growth engine under life-sciences. Its subsidiary, Chemsys, offers medicinal chemistry services to drug discovery companies on molecule basis and works closely with another subsidiary, Biosys, in collaborative drug discovery research services areas.

The medicinal chemistry services business has seen revenue growth of 51 per cent year-on-year. Biosys, which serves clients such as Eli Lilly, deals with innovative informatics and structure-directed drug discovery solutions helping accelerate drug discovery.

The last segment of the drug discovery business is Clinsys, a full service clinical research organisation, providing a broad range of clinical research services which support Phase I-IV drug development.

This integrated approach helped Jubilant’s drug discovery and development business report Rs 80 crore as revenue for the first half of 2007-08. For the full year 2006-07, the same business reported Rs 65 crore. Jubilant targets revenues of Rs 175-200 crore for the full year.

With outsourced life-science products and services comprising 55 per cent of total revenues in the first half of FY-08, the future seems bright as pricing pressure and the urgent need to improve pipeline are forcing pharma, biotech and other life-science companies to increase outsourcing of products and services from low-cost locations such as India.
Legacy businesses

The industrial chemicals and performance polymers division has recorded a topline growth of 10.3 per cent and has shown decent profit growth during the September quarter.

Better margins, at 21 per cent, were realised in this segment mostly due to improved price realisation and favourable input cost environment. This factor is likely to remain in the company’s favour as prices of key inputs such as molasses and alcohol were lower in this quarter and are expected to remain soft in the future.

A global shift in capacity leading to increasing demand for this business in India, China and South-East Asian countries may benefit players such as Jubilant. Jubilant has recently raised its pyridines capacity by 24 per cent to 42,000 tonnes per annum.

While it does not plan to further increase capacity for the pyridines or industrial chemicals in the near term, de-bottlenecking existing capacity with minor investments is on the company’s radar.
Significant contracts

In September, Jubilant signed a new multi-million dollar long-term agreement with Syngenta for supply of pyridines, a basic organic chemical used in agrochemical, pharmaceutical and other industries. The contract starts from first quarter of 2008 and covers a period of five years, lending visibility to earnings.

Given the export component, rupee appreciation remains a concern. While negotiating higher contract prices may pose a challenge, funding of operations through dollar-denominated loans/FCCBs, provides a natural hedge against rupee appreciation.

On the bulk drugs front, the recent approval from USFDA for Oxcarbazepine to one of its customers has come as a big boost. Sales from the player (who has 180 days exclusivity) are expected to be reflected from the December quarter.

Oxcarbazepine is the active ingredient in Trileptal, used to treat epilepsy. In total, five clients are expected to procure the generic Trileptal from Jubilant. The drug had annual sales of $643 million in US.

Parsvnath Developers: Buy

nvestors with a 2-3 year perspective can consider an exposure in the stock of Parsvnath Developers. At the current market price, the stock is attractively valued at 16 times its trailing 12-month earnings. Strong execution skills, geographical and business diversification, and high earnings visibility from projects under construction are supporting factors to our recommendation.

Parsvnath’s land bank consists of registered land from private parties or land from the Government for which allotment letters have been received. The land portfolio’s clear titles and approved use mitigate execution risks. Of the total land bank, 76 million sq ft or 40 per cent of land held is already under development. A good portion of this has already been sold, essentially securing earnings, which would be booked over the next couple of years. Any slowdown in property demand at a later date is therefore unlikely to dent medium-term earnings.

The company’s current projects have a well-diversified mix of residential, commercial, township, hotels and build operate transfer (BOT) projects for Delhi Metro Rail Corporation. The geographical mix of land is also diversified across 48 cities with no location accounting for more than 10 per cent of the total land bank.

Two-thirds of the company’s land bank is, however, located in tier-III cities, generally considered risky. However, residential and integrated township projects form a chunk of the company’s projects. Of these, as mentioned earlier, a good proportion of residential projects have been sold.

Further, integrated townships provide flexibility to change plans to suit market requirements as they are only built in phases. We believe these features may provide some cushion against risk of high exposure in tier-III cities.

Another noticeable feature of Parsvnath’s project basket is the BOT project from Delhi Metro Rail Corporation wherein the company can develop and earn revenue from the land leased by Metro Rail. Although relatively less significant in terms of developable area, we believe that the company could leverage this experience to bid for similar projects in other cities. Given the huge land holding held by the Railways, there exists high business potential for developers if such land is unlocked by way of long-term lease.

We view the company’s move to apply for telecom licence with caution as the current business of real estate alone demands significant resource and skills. However, that the company plans to foray into this business (if approved) through a separate entity provides some comfort.

Q2FY08 Result Analysis - Part 3

Q2FY08 Result Analysis - Part 3

Q2FY08 Result Analysis - Part 2

Q2FY08 Result Analysis - Part 2bgcolor="#f7f7f7" valign="baseline">

Q2FY08 Result Analysis - Part 1

Q2FY08 Result Analysis - Part 1

Pakistan - Emergency Declared

Pakistan President Pervez Musharraf has declared state of emergency, a state television reported.

Musharraf's declaration on Saturday came ahead of the Supreme Court decision on legitimacy of his election victory. He was heavily criticized for running in the elections without giving up his position as head of the military.

The announcement gave no reason for the emergency but speculations persisted that Musharraf may move against current political turmoil rocking his administration as well as the rising Islamic militancy in areas near the Afghan border.

Seen as an act to humiliate the government, armed followers of a militant cleric have recently shown to the media 48 members of Pakistani forces in their custody.

Prisoners, garbed in civilian clothes, claimed insufficient firepower forced them to surrender to the militants.

The armed men were supporters of Maulana Fazllulah who has strong ties with the Taliban and al-Qaeda. Authorities have accused Fazllulah of airing messages from a radio station to attack Pakistani security forces.

Government troops are trying to regain control of Swat where Fazllulah attempted to imposed Taliban-rule.

Military reports said at least 70 rebels were killed in the clashes but the number of casualties has been disputed by Fazllulah's followers.

Via AHN

Mundra Port and Sez

Mundra Port and Sez

Larsen & Tourbo, BHEL, Grasim, M&M, HPCL, HT Media, Tata Steel, ITC, PNB, SBI, Shoppers Stop, Sterlite Industries

Larsen & Tourbo, BHEL, Grasim, M&M, HPCL, HT Media, Tata Steel, ITC, PNB, SBI, Shoppers Stop, Sterlite Industries

Asian Oilfield, M&M, BOB, Jagran, Indus Fila, Idea - BUY

Asian Oilfield, M&M, BOB, Jagran, Indus Fila, Idea - BUY

Grey Market - Edelweiss, Mundra, Reliance Power

Reliance Power -- 52 to 54


Mundra Port & Sez 400 to 440 450 to 460


Empee Distilleries 350 to 400 140 to 150


Edelweiss 725 to 825 675 to 700


Varun Ind. 60 40 to 42


Religare Enterprises 160 to 185 340 to 350


Barak Valley Cement 37 to 42 20 to 22


Rathi Bars 35 4 to 5


Allied Computers 12 14 to 16


SVPCL 40 to 45 3 to 5

Bank of Baroda, Shree Cement

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 85% 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.