WOW - Cinemax, ITC

Rapid expansion mode taken while focusing in Gaming Business with limited interest in Mall development?  In its report dated 13th April, 2007 Emkay Research (Emkay) initiates a Buy coverage on Cinemax India Ltd (CIL) at its current price of Rs.126 with a target price of Rs. 193.

Emkay Research (Emkay) states that Cinemax India (CIL) is a part of the Mumbai based Kanakia Group, which has developed over five million square feet of residential and commercial real estate. Emkay points out that CIL is focused on the exhibition and gaming business with limited interest in mall development. Emkay also adds that the Company is also one of the largest owner of multiplex properties in India with 33 screens spread over 155,000 square feet area. Emkay says that CIL also operates Giggles-The Gaming Zone, at Eternity mall in Thane which is spread over 13,000 square feet and offers 50 games. CIL has also developed over 200,000 square feet of mall area at Eternity mall with tenants including Globus, Proline, Planet M and Archies Gallery.

Emkay highlights that CIL''s exhibition chain is a combination of high-end multiplexes and budget retrofit single-screens. According to Emkay, CIL has established itself in Mumbai, Thane and Nashik with over 12000 seats housed in 33 screens across 10 properties and now plans to expand its operations on a pan India basis across 42 locations in 11 states by the end of FY 2009E.

Emkay further points out that CIL stock trades at EV/EBITDA 7x FY08E and 5x, FY09E and on a relative valuation basis, CIL trades at 13.5x FY08E and 9x FY09E, which is at a discount of around 58% to PVR and 21% to Inox Leisure based on FY08E.

Emkay initiates a BUY on the stock with a price target of Rs 193 based on the DCF approach, at their target price the stock will be valued at 8x EV/ EBITDA FY09E
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Increasing price to protect Bottom line but thats negative !  In its report dated April 12,2007 Merrill Lynch (ML) downgrades Indian Tobacco Company (ITC) to Neutral at its current price of Rs. 159.85.

Merrill Lynch (ML) reports that Indian Tobacco Company (ITC) has recently hiked filter cigarette prices by avg. 25% to pass on the 12.5% new VAT levy and 5% excise hike in the Budget. There is no change in ML''s forecasts and ML expects cigarette volumes to fall by 11% in FY08 and the sharp price increase to protect margins. Since ITC''s P&L is far more sensitive to price changes than to volume changes, ML believes passing on tax increases is more appropriate
versus protecting volumes.

ML informs that market has reacted positively to ITC''s sharp cig. price hikes. According to ML, expectations are also running high on cigarette volume decline not likely to be harsh given the growing income levels. Indeed volume decline may be lower than ML''s forecast of 11% in FY08, but nonetheless, ML expects FY08 to be a difficult year with earnings growth at best in single digits. This would not support further stock performance, adds ML.

ML believes ITC remains a quality play on India''s growing consumption. Though the cigarette volume growth story for now is dented ML believes recovery should set in FY09 as was the case last time in FY02 when excise increased 15%.

ITC is close to ML''s PO of Rs165/sh. and is now trading at P/E of 20xFY08E & 17xFY09E. ML believe there is now limited further stock upside as ML expects the steep VAT levy (12.5%) on cigarettes to cripple EPS growth to merely 5.5% in FY08. Looking beyond into FY09, ML forecasts EPS growth of 17% which implies PEG of 1x. which is historically been ITC''s peak valuation.