Market Commentary

Sensex touches life-time high of 9714

Impressive gains in L&T, ICICI Bank and HDFC among others saw the index close at a new high at 9686.
Appreciating further over its last close, the market today was in a belligerent mood through the trading session and in the process crossed
the 9700 mark for the first time during intra-day trades. After resuming 30 points higher at 9580, the index immediately edged past the 9600 mark and kept surging ahead as the trading progressed. While the market was in the midst of a strong bull run, the index scaled past the 9700 mark in noon trades on firm buying in blue-chip stocks and touched a new intra-day high of 9714. A late bout of profit-taking in select counters saw the Sensex shed some gains and still end at a new closing high of 9686, up 1.42% or 136 points. The Nifty, too, ended on an upbeat note with gains of 32 points at 2940.

Surprisingly, the broader market was negative. Of the 2,589 stocks traded on the BSE, 1,536 stocks declined, 988 stocks advanced and 65 stocks ended unchanged. All the sectoral indices ended on a higher note. Among the major gainers, the BSE CG index moved up by 2.83%, the BSE FMCG index added 2% and the BSE HC index was up nearly 1%.

Driving the rally L&T soared 4.95% at Rs2,038, ICICI Bank advanced 4.52% at Rs597, HDFC moved up 3.99% at Rs1,281 and ONGC rose 2.33% at Rs1,276. Among other gainers HLL shot up by 3.45% at Rs195, Hero Honda added 2.61% at Rs859, Dr Reddy's gained 3.80% at Rs1,083, Tata Motors jumped by 1.82% at Rs676 and Wipro was up 2.20% at Rs504. On the other hand select counters ended weak on profit-taking. SBI dropped 1.78% at Rs885, Grasim was down nearly 1% at Rs1,416 on disappointing Q3 numbers and NTPC ended lower at Rs113.

Capital goods stocks were in the limelight. Alfa Laval zoomed 10.18% at Rs1,175, Jyoti Structures flared up 9.63% at Rs385, Bharat Electronics advanced 7.32% at Rs1,193 and Esab India gained 6.16% at Rs464. KEC International, Batliboi, Asian Electronics, Honeywell Automation and Reliance Industrial Infrastructure were up 5% each.

ABB at Rs2,595, Bannari Amman Sugars at Rs1,400, Bharat Electronics at Rs1,204, BHEL at Rs1,685, Esab India at Rs489, Goodlass Nerolac at Rs885, GHCL at Rs135 and Himadri Chemicals & Industries at Rs181 touched new intra-day highs on the BSE.

Amar Raja Batteries at Rs217.10, Asian Electronics at Rs414.90, Honeywell Automation at Rs1,348.95, Shrenuj & Company at Rs37.80 and Reliance Industrial Infrastructure at Rs474.95 were frozen at the upper limit of the circuit breaker on the BSE.

Over 59.92 lakh LML shares changed hands on the BSE followed by PBA Infrastructure (41.68 lakh shares), Triveni Engineering & Industries (39.39 lakh shares), Reliance Industries (38.34 lakh shares) and Radha Madhav Corporation (30.20 lakh shares).

Reliance Industries registered a turnover of Rs265 crore followed by ICICI Bank (Rs159 crore), SBI (Rs148 crore), Bajaj Hindusthan (Rs92 crore) and PBA Infrastructure (Rs73 crore).

Motilal Oswal Reports

Shasun Chemicals

Himatsinga Seide

Godrej Consumer

Geometric Software

Stock Ideas

25 Jan 2006		Aplab	126	12 Month	380
23 Jan 2006	501343	Motor and general finance	27.75	6 Month	80

INOX Leisure - IPO

Multiplying its presence

Having tested success, it wants to grow fast

Inox Leisure is one of India’s larger multiplex cinema operators. It has eight operational multiplexes, with 32 screens across seven cities: Mumbai, Pune, Vadodara, Goa, Jaipur, Kolkata (two multiplexes) and Bangalore.

While consolidating its position in the exhibition business, Inox Leisure has entered the film distribution business, acquiring the distribution rights for certain Hindi film titles in select distribution circuits. It had invested Rs 7.5 crore in financing the film, "The Rising’.

Inox Leisure’s present IPO is to raise finance its expansion. The company is setting up around 11 multiplexes in locations like Hyderabad, Vishakapatnam, Jaipur, Kolkata, and Bangalore at an estimated cost of Rs112.82 crore.

Strengths

• Inox Leisure has developed a strong patronage in the last couple of years. Over 2003-05, the number of patrons has shown a robust CAGR of 52% to 38,88,547 and in the half-year ended September 2005, it touched 80% of the numbers in FY 2005, at 31,25,801.

• The revenue has shown a impressive CAGR of 57% to Rs 61.48 crore over 2003-2005 and touched Rs 50.25 crore in the six months ended September 2005, which was 80% of the full year sales of FY 2005. OPM has grown steadily to 33.6% end FY 2005, from 28.7% in FY 2003. In six months ended September 2005, it stood even better at 40.3%. The bottom line grew from mere Rs 9 lakh in FY 2003 to Rs 8.24 crore in FY 2005. In the six months ended September 2005, the profit after tax was Rs 9.73 crore.

• The Indian multiplex industry is on a high growth trajectory, with its increasing share of the overall box office collections. The growth of multiplexes is fuelled by a rise in disposable incomes, a boom in organised retail, entertainment tax benefits given by several state governments and the corporatisation of the Indian film industry.

Weaknesses

• The promoter of the Inox Leisure, Gujarat Fluorochemicals (GFL), is not related to the film industry and is reducing its stake through offer for sale in the present IPO. About 10% of the total funds raised will go to GFL, and not to the company.

• Over 75% of the revenue comes from box-office collections. The poor success rate of Hindi films, inadequate enforcement of anti-piracy laws in India and increasing home viewing options such as DVD and cable TV may constrain the growth in the number of cinema patrons.

• The multiplex business enjoys relatively low breakeven due to higher ticket rates and entertainment tax benefits. However, tax benefits are for a limited period and ticket rates can be regulated by the states.

Valuation

The nearest comparable companies are PVR Cinema, Adlabs and Shringar Cinemas. PVR Cinemas, which is the largest multiplex cinema operator by number of screens, recently completed its IPO and is trading around 169 times its FY 2005 EPS, Adlabs is trading at a PE of around 60 times its FY 2005 EPS. Shringar Cinemas, which has yet to report profit, is trading around Rs 80.

On an expanded equity of Rs 60 crore, FY 2005 EPS of Inox Leisure works out to Rs 1.26. Based on this, PE stands at 79.4 and 95.2 at the price band of Rs 100 and Rs 120. In the first half, the company has already crossed the FY 2005 net profit. However, first half is the main season and one cannot annualise the figures. Nevertheless, one can expect over 100% growth in net profit in FY 2006, bringing down the PE to below 50.

Sharekhan Investor's Eye

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs674
Current market price: Rs561

Q3 results meet expectations

Result highlights

• The net sales of Godrej Consumer Products Ltd (GCPL) grew by 10.2% year on year (yoy) to Rs169.1 crore, powered by a strong 16% year-on-year (y-o-y) growth in the branded portfolio. The sales of the Godrej brand of soaps grew by 11.5% yoy whereas the personal care business grew by 21.2% yoy.
• The profit before interest and tax (PBIT) margin of the soap segment stood at 7.7% (down 20 basis points yoy). The decline was mainly on account of a change in the product mix (which shifted towards lower-margin, high-volume products), and higher ad spend during the quarter (8.9% of sales).
• The PBIT margin of the personal care business improved by 400 basis points yoy to 45.2% in Q3FY2006. The margin improved owing to the price hike effected by the company in its hair colour products in Q1FY2006.
• The net profit grew by 31.1% yoy on the back of the strong performance of the personal care business both on the revenue and margins fronts. The earnings for the quarter stood at Rs6.0 per share as against Rs4.6 per share a year ago.
• GCPL is currently trading at 19.5x its FY2008E stand-alone earnings and 16.7x its FY2008E consolidated earnings. We believe the valuations are attractive considering the strong growth momentum expected in its earnings over the next two years. We maintain our Buy recommendation with a price target of Rs674.
  

Nicholas Piramal India

Cluster: Apple Green
Recommendation: Buy
Price target: Rs325
Current market price: Rs240

Price target revised to Rs325

Result highlights

• Nicholas Piramal's consolidated net sales for Q3FY2006 were up 17.3% year on year (yoy) to Rs402.6 crore due to additional revenues from the acquisition of Avecia and Rhodia.
• The earnings before interest, depreciation, tax and research (EBIDTR) stood at Rs62.2 crore. The EBIDTR fell by 12.5% yoy due to higher selling (promotional) costs, foreign exchange (forex) losses and lower revenues from the high-margin products like Phensedyl.
• The research and development (R&D) expense increased by 10.3%, causing the earnings before interest, tax, depreciation and amortisation (EBITDA) margin to decline from 17.1% in Q2FY2006 to 11.8%. The profit before tax saw a decline of 30.9% yoy to Rs28.7 crore from Rs41.6 crore in Q3FY2005 aided by increased depreciation costs.
• The adjusted profit after tax (PAT) stood at Rs23.4 crore, down 7.6% yoy. The company spent Rs13.7 crore on due diligence for its acquisitions in this quarter.
• At the current market price of Rs240, the stock is trading at 18.9x FY2007 earnings estimate. We maintain our Buy recommendation on Nicholas Piramal with the revised price target of Rs325.
  

Indian Hotel Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,474
Current market price: Rs1,244

Price target revised to Rs1,474

Result highlights

• The revenues of Indian Hotel Company Ltd (IHCL) increased by 27.4% year on year (yoy) to Rs317.5 crore in Q3FY2006. The growth was powered by a sharp rise in the average room rates (ARRs). The revenue growth was in line with expectations.
• The occupancy rates (ORs) in Q3FY2006 remained flat yoy at 75%, whereas the ARRs grew by a whopping 34.7% to Rs8,150. The ORs were flat mainly on account of a delay in the market's realignment with a 30% hike in the room rates in the prime properties.
• On the back of the strong revenue growth and the benefits of operating leverage (typical to the hotel industry), the operating profit margin (OPM) improved by 600 basis points yoy to 32.9% in the quarter.
• IHCL's profit after tax (PAT) increased by 76.2% yoy to Rs61.5 crore in Q3FY2006. The growth was in line with expectations. The earnings for the quarter stood at Rs11.1 per share.
• We have revised our estimates for FY2006 and FY2007. The stand-alone net profit estimate has been revised upwards by 15.6% to Rs166.7 crore for FY2006 and by 37.6% Rs256.4 crore for FY2007. The consolidated net profit estimate has been revised upwards by 7.3% to Rs190.8 crore for FY2006 and by 36.0% to Rs318.6 crore for FY2007.
• Considering the bright prospects for the company's business and the fact that its stock trades at an 11% discount to its replacement cost of Rs1,400, we maintain our Buy recommendation on the stock. We revise our price target to Rs1,474.0 (ie a target multiple of 27x, as the stock typically trades at 25-27x its one-year forward earnings), expecting an upside of 18.5% from the current levels.
  

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs170
Current market price: Rs152

Grand numbers

Result highlights

• ITC's net revenues grew by a robust 42.4% year on year (yoy) in Q3FY2006 to Rs2,556 crore, powered by a strong growth in all the business segments.
• All the businesses reported a high double-digit growth for Q3FY2006 with the main business of cigarettes growing at 19%, the highest growth ever in the last fifteen quarters.
• The adjusted operating profit grew at a slower pace of 30% yoy to Rs878.3 crore for Q3FY2006 as the operating profit margin (OPM) fell by 330 basis points yoy to 34.3%. The margin dropped on account of a margin contraction in the agri business.
• ITC's adjusted profit after tax (PAT) increased by 26.3% to Rs567.1 crore.
• To take into account the splendid performance of Q3FY2006, we have upgraded our numbers for FY2006 and consequently for FY2007. At the current market price of Rs152, the stock is attractively quoting at 21.7x its FY2007E earnings. We maintain our Buy recommendation on ITC with a price target of Rs170.
  

Hyderabad Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs700
Current market price: Rs500

Production problem affects results

Result highlights

• Hyderabad Industries Ltd (HIL) reported a 5.2% increase in its net sales in Q3FY2006 to Rs95.4 crore. However, on a like-to-like basis, the building product division's revenue grew by 18.8%.
• Despite a 5.2% increase in the top line, HIL reported a flat growth in the operating profit. The operating profit margin (OPM) declined by 59 basis points to 11.6%. The decline in the OPM was primarily due to an increase in the raw material cost. The raw material cost as a percentage of sales increased from 43% in Q3FY2005 to 48.2% in Q3FY2006.
• HIL is utilising its strong cash flows from operations to pay a large portion of its debt. The reduction in the debt lowered its interest cost by 61.2% to Rs0.9 crore in Q3FY2006.
• The company has reported a net profit growth of 22.5% for Q3FY2006 to Rs5.7 crore. However, the numbers are below our expectation and we are downgrading our FY2006 and FY2007 estimates. We expect the company to report a net profit of Rs42.9 crore in FY2006 and of Rs46.5 crore in FY2007. (Our earlier net profit estimates for FY2006 and FY2007 were Rs46.6 crore and Rs50.2 crore respectively).
  

UltraTech Cement
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs620
Current market price: Rs507

Price target revised to Rs620

Result highlights

• The Q3FY2006 results of UltraTech Cement Ltd (UTCL) are above our expectations at the operating profit level but below our expectations at the net profit level primarily because of a higher tax outgo during the quarter.
• UTCL's net sales for the quarter grew by 5% year on year (yoy) to Rs783 crore (after adjusting the freight and trading sales impact). The growth was driven by a 12.8% increase in cement realisation.
• Cement volumes were down 6.9% owing to floods in the southern region, which restricted production in the southern plants. As a result, the utilisation of UTCL's cement capacity fell to 87% during Q3FY2006 compared with 97% in Q3FY2005.
• The operating profits stood at Rs110.4 crore, up 108% yoy. The operating profit margin (OPM) during the quarter improved by 610 basis points to 14.1%, primarily because of a flat other expenditure. The improvement in the OPM could have been higher, but for an 18.7% jump in the per-tonne cost of power and fuel, and a 58% rise in the freight cost per tonne during the quarter.
• The tax outgo of Rs19.2 crore (at a tax rate of 44.6%) restricted the net profit to Rs24 crore.
  

3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs244
Current market price: Rs187

Product play

Result highlights

• The consolidated revenues of 3i Infotech have grown by 15% quarter on quarter (qoq) and by 47.2% year on year (yoy) to Rs112 crore. The sequential revenue growth was aided by the incremental revenues of Rs6.7 crore accrued from the three acquisitions made during the last quarter. The organic growth stood at 8.2% on a sequential basis.
• The operating profit margin (OPM) improved by 40 basis points qoq and by 170 basis points yoy to 20.9% in the third quarter. The increased contribution from the high-margin product business and the positive impact of the rupee depreciation are the key reasons for the improvement in the company's overall profitability.
• At Rs16.3 the earnings grew at 22% sequentially and at 56.5% when compared with the growth rate in the third quarter of the previous year. The earnings growth was boosted by a healthy jump in the other income component from Rs1 crore in Q2 to Rs2.4 crore. The company reported a positive impact of Rs1.6 crore from the foreign exchange fluctuations witnessed in the last quarter.
• Given the robust performance reported during the first nine months, the management has revised the revenue growth guidance from 25-30% to 40-45% for the current year. Earnings have been guided in the range of Rs9.2-9.6 per share as compared with the earlier indications of Rs8.5-9.5 per share.
• We maintain our Buy call on the stock with the one-year price target of Rs244.

Sharekhan Investor's Eye

ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs750
Current market price: Rs575

Price target revised to Rs750

Result highlights

• ICICI Bank reported a strong 59.1% year-on-year (y-o-y) and a 22.4% quarter-on-quarter (q-o-q) growth in its net interest income (NII) in Q3FY2006. The growth in the NII was achieved on the back of a strong growth in the advances.
• The strong growth momentum in the bank's fee income continued--during the quarter the fee income grew by a strong 51.6% year on year (yoy).
• The operating profit for Q3FY2006 grew by 55% yoy to Rs1,194.5 crore with the core operating profit growing at even a stronger rate of 67.8% yoy.
• A higher provisioning and other adjustments pulled down the net profit growth rate to 23.7%. However, the adjusted profit after tax (PAT) grew by 17.9% yoy.
• The asset quality improved dramatically as the net non-performing assets (NPAs) stood at 0.8% of customer assets in Q3FY2006 against 2.29% in Q3FY2005.
• The capital adequacy ratio (CAR) improved to 14.5%, with the Tier I CAR at 10.5% after the recent equity issue by the bank.
• At the current market price of Rs575, the stock is trading at 2.3x its FY2007E book value. The valuation looks attractive if one considers the value of the bank's subsidiaries which works out to Rs150 per share of the bank. It also trades at substantial discount to its peers in the sector like HDFC Bank which is trading at 3.8x its FY2007E book value. We maintain our Buy recommendation on the stock with a revised price target of Rs750 at which it discounts its FY2007E book value by 2.5x.
  

ORG Informatics
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs194
Current market price: Rs160

Earnings grow exponentially

Result highlights

• The consolidated net revenues of ORG Informatics declined by 40% quarter on quarter (qoq) and by 3.7% year on year (yoy) to Rs29 crore in Q3FY2006. The sequential drop was largely due to the higher base effect resulting from the completion of a large system integration project in the previous quarter.
• However, the operating profit margin (OPM) zoomed up to 10.3% from 4.5% in Q2FY2006 and 3.9% in the corresponding quarter of the previous year. The higher contribution from the high-margin telecom business boosted the overall profitability.
• At Rs3 crore the earnings grew exponentially, by 867% yoy and by 301% on a sequential basis. The earnings were slightly ahead of our expectations due to a lower tax outgo during the quarter. Given the accumulated losses and the unabsorbed depreciation, the company created a deferred tax asset in the last quarter. The lower interest and depreciation charges also boosted its earnings growth.
• For the nine-month period, the earnings have grown at 619% to Rs4.3 crore. The performance is in line with our full-year estimates of Rs7.1 crore.
• We maintain our Buy call on the stock with a one-year price target of Rs194.
  

Maruti Udyog
Cluster: Apple Green
Recommendation: Buy
Price target: Rs850
Current market price: Rs699

Price target revised to Rs850

Result highlights

• Maruti Udyog Ltd's (MUL) reported better than expected numbers for Q3FY2006. Income from operations grew by 8% yoy on back of a 7% growth in volumes and a 1.1% improvement in realizations.
• The operating profit margins improved by 258 bps to 15% due to control on costs mainly on the raw material front and other expenditure.
• 77% reduction in interest cost and 35% lower depreciation lead to the Profit after tax for the quarter growing by 41% to Rs 339 cr.
• At the current market price of Rs 699, the stock is quoting at 15x on its FY2007E earnings per share (EPS) and 9x on EV/EBIDTA basis. We reiterate our Buy recommendation on the stock with a revised price target of Rs850.
  

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs355
Current market price: Rs260

Net profit zooms

Result highlights

• Orchid Chemicals' net sales for Q3FY2006 were up 37.9% year on year (yoy) to Rs237.6 crore due to high revenues from ceftriaxone sales in the USA.
• The operating profit was up 67.7% yoy to Rs69.26 crore as the operating profit margin (OPM) went up by over 500 basis points to 29.1%.
• The profit after tax (PAT) saw an increase of over 400% from Rs5.76 crore in Q3FY2005 to Rs28.97 crore in Q3FY2006. The net profit margin jumped by close to 900 basis points to 12.2% during the quarter.
• The company had earnings per share (EPS) of Rs4.1 in Q3FY2006. At the current market price of Rs260, the stock is trading at 12.5x FY2007 earnings estimate. We maintain our Buy recommendation on Orchid with a price target of Rs355.
  

Emco
Cluster: Apple Green
Recommendation: Buy
Price target: Rs600
Current market price: Rs525

Price target revised to Rs600

Result highlights

• Emco's revenues for Q3FY2006 grew 67.0% year on year (yoy) to Rs97.1 crore on the back of higher order booking of Rs117 crore during the quarter.
• The operating margins were down 220 basis points yoy to 13.0% primarily on account of higher raw material prices (mainly copper). But on a quarter on- quarter (q-o-q) basis, the margins were maintained at 12.9-13.0% range.
• Emco's interest cost in Q3FY2006 came down by 14.4% yoy to Rs3.4 crore, conforming our assumption of interest cost saving in FY2006-08E.
• The net profit grew to Rs6.1 crore registering a y-o-y growth of 98.4%. The earnings for the quarter stood at Rs7.9 per share.
• Emco's order backlog grew by Rs20.0 crore (4.7% qoq) to Rs445.0 crore, thus imparting a strong visibility to the revenues and the ensuing earnings.
• We have revised our FY2008 revenue estimates by 12% to Rs600.9 Crore and net profit estimates by 15% to Rs39.8 Crore.
• Considering the robust macro economic scenario, high revenue visibility, strong earnings momentum, strong balance sheet, improvement in return ratios and attractive valuations (PER of 10.4X FY2008E earnings and Ev/Ebidta of 7.0X FY2008E); we revise our price target to Rs600 discounting its FY2008E earnings at 12X.

Jagran Prakashan

Indiainfoline - Download

Motilal Oswal Reports 24/01/2006

ICICI Bank

Vijaya Bank

Jagran Prakashan IPO

Leadership not backed by financials


The financial track record does not justify the high asking price. But strategic expansion in a favourable economic environment can produce strong growth

Jagran Prakashan publishes Dainik Jagran, the leading Hindi daily with the highest circulation and readership in any newspaper category worldwide. The newspaper has a readership of approximately 21.2 million readers per day as per NRS 2005 survey and had net paid sales of approximately 2.4 million copies per day in January-June 2005 as per ABC certified figures.

Promoted by the Gupta family, Dainik Jagran was first published in 1942. It is now published in 28 editions in 10 states.

Jagran Prakashan also publishes Sakhi, a monthly magazine targeted at women, Jagran Varshiki, an annual general knowledge digest, and various national and state statistical compilations. The company has 25 printing facilities in India with an installed capacity of approximately 1.32 million copies per hour.

Ireland-based Independent News and Media (INM) PLC, through its wholly owned subsidiary INMIL, acquired 3,212,486 equity Shares in Jagran Prakashan for Rs 150 crore in June 2005. Of this, Rs 110 crore was paid for 2,355,716 newly issued equity shares and Rs 40 crore to the promoter’s family shareholders to acquire 856,770 equity shares from them.

The objective of the issue is to raise finances for a capital expenditure of Rs 274.33 crore required to enhance its printing and publishing capabilities, to consolidate its infrastructure including printing facility and the editorial, marketing and administrative departments and launch a second brand. In addition to this, Jagran Prakashan also intends to use around Rs 43.39 crore from the public offer for acquisitions and investments in order to build a strong competitive force in its area of operation. Besides, there are plans to spend Rs 40 crore to expand its outdoor advertising business.

Strengths

• Despite a number of broad-page English and Hindi dailies such as the Times of India, Hindustan Times, Dainik Bhaskar and Navbharat Times. Dainik Jagran has maintained its leadership, commanding a readership of 21.2 million per day. Readership of Dainik Jagran increased by 120.8%, from 9.6 million as per NRS 2000 to 21.2 million as per NRS 2005. This increase in readership was more than the combined growth of readership in the next four of the top five newspapers and was more than three times the growth in readership of the top six English daily newspapers. The growth in the readership and circulation reflected in the top line of the company, which shows a CAGR of 19% in the last five years to Rs 371.46 crore in FY 2005.

• More than 60% of the revenue in FY 2005 and six months ended September 2005 comes from advertising, which is the mainstream of revenue for any company in the print media industry. Ad-spends in India, as a percentage of GDP, is only 0.34%, which is very low compared to countries like Thailand (1.43%), China (0.54%), and Mexico (0.52%). Along with the fast growing GDP, India’s ad-spend as percentage to GDP is also expected to increase to 0.54% of GDP by 2015. Print media accounts for around 46% of the total advertisement spend. As Dainik Jagran has a pan-India presence and its expansion initiatives on various fronts are likely to strengthen its position, it can expect to grasp a larger share of ad-spend in India.

• Expanding printing capacity, particularly colour capacity, and modernising and upgrading existing printing centres in Noida are in addition to installing computer to plate (CTP) printing at some printing centres. The new modern printing facility will increase the ability to print color copies by fourfold. With this, ad rates are expected to go up. As colour advertisement is at a 70% premium to black-and-white ads, margin will be higher.

Weaknesses

• On its strong foothold in the vernacular segment, Dainik Jagran’s revenue has shown a robust CAGR of around 19% in the last five years to Rs 371.46 crore in FY 2005. However, in the same period, Jagran Prakashan’s bottom line has shown a negative CAGR of around 31% to Rs 1.54 crore mainly on high prices of newsprint, which is the main raw material for the company. The operating margin has kept fluctuating in the last five years, witnessing a low of 1.6% in FY 2002. According to BMO Financial Group Commodity Price Index, the international newsprint prices are forecast to move up to $645 per tonne by 2007, from $609 per tonne in 2005.

• The capital expenditure plans are likely to be commissioned only between March 2007 and March 2008 and yield benefits from FY 2008 onwards.

• Jagran Prakashan intends to venture into outdoor advertising and also launch a second brand, a Hindi tabloid in line with the Times of India's recent English tabloid, Mumbai Mirror. Around Rs 43 crore and Rs 40 crore from the issue proceeds will be invested in launching the tabloid and expanding the outdoor advertising business, respectively. Looking at the existing players in these businesses, Jagran Prakashan will have to face tough weather, at least in the initial years of operation, till the time the new businesses find acceptability in the market.

Valuation

FY 2005 was one of worst years for Jagran Prakashan as its operating profit margin (OPM) crashed by 720 basis points (bps) to 5.6%. Net profit was just measly Rs 1.54 crore on sales of Rs 371.54 crore. However, financial performance has improved, with the six months ended September 2005 OPM up by around 600 bps to 11.5%, leading to improved net profit of Rs 11.97 crore. Annualised six-month EPS on post-issue equity works out to Rs 4.6.The offer price band of Rs 270-324 discounts this 58 to 70 times. On the other hand, HT Media, which has revenue almost double the revenue of Jagran Prakashan, with better profitability margin, trades at a PE of around 62 times its annualised half-yearly EPS of Rs 7.6. Another listed player, Deccan Chronicle, trades at a PE of 27 times the first-half annualised EPS.

Notably, INM had acquired a pre-issue 26% equity stake at Rs 144 per share (adjusted for bonus) in June 2005, which is at a 50% discount to the current offer price band. Post-issue, INM will hold a 20% stake, leaving scope for only another 6% foreign stake as the cap for foreign stake in the print media is 26%.

Entertainment Network (India)

Radio Mirchi going public

Well positioned to capitalise on the growth prospects of the FM business in the new licensing regime

Entertainment Network (India) (ENIL), operating FM channel Radio Mirchi, is issuing 120 lakh equity shares with a greenshoe option of an additional 12 lakh shares. The funds will be utilised to participate in the bidding for FM channels in new cities (seven bagged by January 2006) and finance the migration fee to shift to the new licensing regime in the seven cities (Mumbai, Delhi, Chennai, Kolkata, Ahmedabad, Pune and Indore),where it already operates FM channels. About Rs 10 crore will be invested in its 100% subsidiary in the business of event management and out-of-home media business. The ascertained project cost of Rs 230 crore will have a debt component of Rs 100 crore.

Due to the stiff licence fee, ENIL could not make profit since the past five years. After a new liberal policy, effective in the current year, the company’s licence fee obligation has come down drastically. It made a turnaround in the first half of FY 2006. Accumulated losses of over Rs 100 crore have been written off against equity and share premium account.

Before coming to the public, ENIL incorporated a 100% subsidiary, Times Innovative Media Private Limited (TIMPL), to take over the event management and out-of-home media business from the promoter company, Time Infotainment Media Company Limited (TIML). Bennett and Coleman Company (BCCL), the other promoter, had a 97% stake in TIML.

Strengths

*As compared to other developed and developing countries, advertising on radio has not been popular in our country. However, as consumerism in the country is on the rise, this medium can increase its advertisement share faster than other media as it is the cheapest mode of advertising and has a low base.

*As opposed to the old licensing policy, which had a provision of a flat 15% escalation of license fee per annum, the new policy provides for performance-based revenue sharing. This provides good opportunity for ENIL to expand rapidly to capitalise on its first mover advantage.

*ENIL has the largest radio network in the country: seven major cities including four metropolitan cities. The company operates in the same 93.5 MHz frequency band in all the four metros, giving it an advantageous position among frequently traveling listeners. Also, by having a pan-India presence, ENIL enjoys the advantage of providing greater advertising coverage to its clients. The brand, Radio Mirchi, is well recognized in the market, with 95% and 100% brand awareness in Mumbai and Delhi, respectively.

*The Times group enjoys rich patronage from advertisers due to its deep presence in the media and publication business, giving ENIL an edge compared to its competitors.

Weaknesses

*The entertainment and media industry is very much people-centric. Attrition rate will increase with the entry of many players after the new liberal licensing policy. This may put tremendous uncertainty on the listener-hold of existing channels.

*A substantial portion of the issue proceeds will go to bid for new stations. The revenue and profit from such new ventures is subject to uncertainty and gestation periods of varying degrees.

*ENIL is involved in a host of litigations relating to the sources of its contents. Any ruling against the company can have material financial implications.

*The 100% subsidiary of ENIL is engaged in event management and out-of-home business, where many unorganised players have a good presence, raising uncertainty on growth and profitability.

Valuation

In the half-year ended September 2005, ENIL reported sales of Rs 48.37 crore and net profit of Rs 11.05 crore. The company earns higher revenue and profit in the second half of the financial year due to the festive season. However, in the half year, it has not provided for around Rs 4 crore of amortisation charges related to one-time fee payable to shift to the new licensing regime. Its debtors amount to Rs 37 crore. As ENIL will be spending above Rs 70 crore for acquiring new licenses, it will have to take further hit on amortising these charges, as the new cities will take time to bring revenue. So one can not expect big EPS numbers in the short to medium term and P/Es will be high. Being the only listed player (at least for some time) in this field will stand it in good stead post-listing.

Motilal Oswal Reports - 23/01/2006 (continued...)

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Motilal Oswal Reports - 23/01/2006

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