JK Cement                          
Cluster:              Cannonball
Recommendation: Buy
Price target: Rs330
Current              market price: Rs246
Price target revised to Rs330
Key points
-                JK Cement is expanding its capacity by 3.5 million metric tonne (MMT) through a greenfield plant at Karnataka, which will be accompanied by a 50-megawatt (MW) power plant at the site. The capital expenditure (capex) programme is in progress and the plant is expected to be commissioned by FY2009 end. This will augment the capacity of the company by 70% in FY2010 and will drive the volumes of the company going ahead.
-                Refurbishment of Nihon facility is expected to be complete by the end of Q4FY2008 and would increase cement volumes by 350,000 tonne in FY2009.
-                JK Cement's capex on captive power plants (CPPs) is progressing well. The company has already commissioned a 20MW pet coke based power plant and has replaced its 10MW turbine. It has partially implemented the 13MW waste heat recovery plant and expects the plant to get fully operational by FY2008 end.
-                With all CPPs in place, the company will be able to save Rs150-200 per tonne on power consumption from FY2009.
-                JK Cement's Q2 results were much above our expectations. The topline grew by a healthy 33% year on year (yoy) to Rs356 crore on the back of a blended volume growth of 12% yoy and a realisation growth of 17% yoy to Rs3,597 per tonne.
-                Strict control on variable costs led the operating profit grow by 58% yoy and the operating profit margin (OPM) expand by 450 basis points to 28.2%. The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne jumped by 40% yoy to Rs1,030 per tonne.
-                Lower tax provision of 13% during the quarter made the profit after tax (PAT) grow by a whopping 142% yoy to Rs72.7 crore. The PAT growth was much ahead of our expectations.
-                We have been bullish on the business prospects of JK Cement on account of its cost-cutting measures and capex programme. Savings in power costs from the CPPs coupled with higher volumes from its greenfield facility will be the major business drivers for the stock. The stock is trading at 10x its earnings and 6.6x its enterprise value (EV)/EBITDA on FY2009 earnings estimate. Even after a significant run-up in the last couple of months, it commands an EV per tonne of USD 84, which is lower than the benchmark asset valuation of USD 100-115 per tonne. Considering the cheap asset valuations, we maintain our Buy recommendation on the stock with an upgraded price target of Rs330, leaving an upside of 30%.
Saregama India                         
Cluster: Ugly              Duckling
Recommendation: Book Profit
Current market price:              Rs296
Book profit
Key points
Saregama India Ltd (SIL) reported disappointing results for                Q2FY2008. While the operating revenues fell by 2.7% year on year                (yoy) to Rs33.8 crore, the operating profit declined by 57.9% to                Rs2.7 crore. Consequently the net profit before extraordinary                items decreased by 44.7% yoy to Rs2.6 crore. 
               Operating profit margin (OPM) fell sharply to 7.9% in                Q2FY2008 against 18.4% in Q2FY2007. The OPM declined primarily due                to a sharp jump in royalty expenses that as a percent of sales                increased by 860 basis points yoy to 28.6%. Royalty payments went                up as royalty model has shifted from revenue sharing model to a                fixed minimum guarantee model. 
               SIL's audio sales declined sharply by 34% yoy in the last                four quarters. Sale of cassettes and CDs is continually falling as                consumers shift to non-physical formats of music such as radio and                TV. 
               SIL's share in acquiring new music rights declined to 9-10%                from about 30% in the past. With competition setting in, the cost                of acquiring these rights has gone up substantially. We believe                that the current scenario wherein music rights are awarded on                minimum guarantee as against revenue sharing in the past has                increased the risk for music companies. 
               Increasing competition, lack of aggression on the part of                the management and sharper decline in physical sales raise                concerns. We believe, the current market price of Rs295.5 fully                factors the risks and rewards associated with SIL's business and                thereby advice investors to book                profit.