Q4FY2007 Media earnings preview
- The fourth quarter is the best quarter for the media industry as corporates exhaust their remaining ad budgets in this quarter.
- For the news channels, specifically the business news channels, the Union Budget is the major event that takes place in the fourth quarter, bringing in more ad revenues.
- The ICC Cricket World Cup West Indies 2007 was seen as a major event that was expected to affect the revenues of the general entertainment channels (GECs) but India's early exit is believed to have negated this to a certain extent.
- This was the first quarter of the roll-out of the conditional access system (CAS) in parts of Mumbai, Delhi and Kolkata. While 1.63 million cable homes fall under these CAS mandated zones, about 29% were estimated to have opted for set top boxes (STBs) till February 15, 2007 (source: FICCI- PWC Frames-2007).
- The penetration of CAS is expected to improve over a period of time with better subscriber awareness, the availability of STBs and its implementation in the other cities. CAS also provides an opportunity to alternative digital distribution platforms such as direct-to-home (DTH) and Internet Protocol TV to expand faster. We expect CAS to bring in transparency and curb under-reporting of subscriber base, thereby improving the profitability of broadcasters and MSOs.
STOCK UPDATE
Genus Overseas Electronics
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs293
Price target revised to Rs380
Result highlights
- The Q4FY2007 results of Genus Overseas are ahead of our expectations.
- The net sales for the quarter grew by 35% to Rs152 crore on the back of a strong order book of Rs470 crore at the end of previous quarter. The net profit grew by 58% to Rs12.7 crore.
- The operating profit for the quarter grew by 55% to Rs19.9 crore. The operating profit margin (OPM) for the quarter improved by 170 basis points to 13.1% as against 11.4% on a year-on-year (y-o-y) basis as the raw material cost as a percentage of sales declined to 73.1% from 77.2%.
- The interest expense for the quarter rose by 34% while the depreciation cost declined by 33% to Rs0.67 crore.
- The order book of the company stood at Rs403 crore (including export orders worth Rs15 crore) at the end of March 2007.
HCL Technologies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs425
Current market price: Rs316
Price target revised to Rs425
Result highlights
- HCL Technologies (HCL Tech) has reported a revenue growth of 7.6% quarter on quarter (qoq) and 39% year on year (yoy) to Rs1,577.1 crore for the third quarter ended March 2007. This is the third consecutive quarter of close to double-digit sequential growth in revenues (a 9.4% growth in dollar terms) which is far ahead of street expectations. The sequential growth was contributed by a 16.4% growth in the business process outsourcing (BPO) revenues. On the other hand, the infrastructure management service (IMS) and core software service businesses grew at a relatively lower rate of 6.4% and 6.5% respectively, on a sequential basis.
- The earnings before interest, tax, depreciation and amortisation (EBITDA) margin improved by 115 basis points to 23.3% on a sequential basis, despite the adverse impact of the steep appreciation of the rupee (1.6% appreciation in the average realised exchange rate against the US Dollar). The sequential improvement in the margin was largely aided by the cumulative impact of better realisations (including non-effort based gains), higher utilisation (especially in the BPO business) and a 70-basis-point saving in the selling, general and administration (SG&A) cost as a percentage of sales.
- In terms of segments, the EBITDA margin in all the three business lines improved on a sequential basis. The BPO business reported second consecutive quarter of a robust improvement in the margin, which was up by 360 basis points to 26.5%. The software service and IMS businesses reported an improvement of 85 basis points and 13 basis points respectively.
- The earnings grew at a robust rate of 15.9% qoq and 72.1% yoy to Rs331.8 crore (ahead of our expectation of Rs290 crore and the consensus estimate of a flat or negative growth sequentially, especially after the higher base resulting from the robust performance in the previous two quarters). The growth in the earnings was also aided by the foreign exchange (forex) gains of Rs41.8 crore on the open forward contracts, up from Rs34.7 crore reported in Q2FY2007.
- In terms of operational highlights, the ramp-up in the large deals is beginning to make a material impact on the overall performance. Moreover, the company continues to bag new multi-million, multi-year, multi-service deals and has announced six new deals in Q3�five in the range of $25-50 million each and one worth over $50 million.
- To factor in the higher than expected performance in the past three quarters and the continued traction in the intake of large deals, we have revised upwards the estimates for the FY2007 and FY2008 earnings per share (EPS) by 6.1% and 3.1% respectively. At the current market price the stock trades at 14.9x FY2008 and 12.6x FY2009 estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs425 (17x FY2009E earnings on a diluted equity base).
SKF India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs406
Current market price: Rs332
Annual report review
On the back of the buoyant expectations of the growth in the economy, and increased impetus for the automobile industry with the development of the Golden Quadrilateral and NSEW corridor, the company expects the demand environment for the bearings industry to remain strong. The growth in the automotive sector is expected to continue with excise cuts and the ambitious Automotive Mission Plan (AMP) undertaken by the government. The company also sees good growth in the capital goods industry, and strong potential in sectors like wind energy and the textile industry. All these factors are expected to accelerate the growth for the company going forward.
At the current market price of Rs332 the stock is discounting its CY2008 earnings estimate by 10.7x and its earnings before interest, depreciation, tax and amortisation estimate by 5.7x. We maintain our Buy recommendation on the stock with a price target of Rs406.