Bank of America on Sun TV Network

Bank of America resumes coverage on Sun TV Network with a Buy’ rating and a target price of Rs 480. The target price is based on 24x FY12E in line with 2-year earnings CAGR. The `Buy’ rating takes into account:

(1) strong earnings CAGR of 24% during FY10E-12E driven by faster growth in advertising spends in regional markets and strong growth in subscription revenues,

(2) Sun TV’s leadership position in the south Indian market, making it more resilient to an economic downturn versus peers and

(3) premium valuations are sustainable given higher margins and return ratios.

With Sun TV offering a bouquet of 20 channels and occupying the top slot in terms of market share in three - Tamil Nadu, Karnataka and Andhra Pradesh - of the four regions, it remains the prime choice for media planners. Given its leadership position and premium pricing, its revenue stream is more resilient to a downturn in the macro economy than peers. The stock is trading at a premium of 15% to peers such as ZEE, and is sustainable given superior margins and return ratios. We forecast strong 24% earnings CAGR during FY10-12E.

Stock views on Hindustan Dorr-Oliver, Titan Industries, Hexaware Technologies, ITC, Reliance Communications, Pantaloon Retail

Macquarie on Pantaloon Retail

Macquarie maintains its ‘Outperform’ rating on Pantaloon Retail, however, it has cut the earnings estimates and target price to reflect the expectations of slowing same-store sales growth and the credit crunch. Same-store sales (SSS) growth for Indian retailers turned negative for the first time in 4Q08. Slowing growth, the spectre of job losses and the high base effect (from the good old days of 2007) impacted sales. The problem was sharper in the high-end product segment versus items for daily consumption. Pantaloon saw its SSS growth improve from -3.6% and -14% in December 2008 to 4% and 12% in January 2009 for value retail and lifestyle retail respectively. Based on the estimates, Pantaloon’s operations can support growth of around 1-2 million sq feet per year with limited external funding. The supply-demand dynamics have led to a rise in retail rents in the last three years. Macquarie expects this to continue and average rents to fall at least another 25% over the next 12 months. We expect Pantaloon to be able to ride this tough period given its high exposure to value retail and planned capital raising by equity dilution or preferential share allotment.


CLSA on Reliance Communications


CLSA maintains the ‘Buy’ rating on Reliance Communications. There was a good response to GSM launch. In January RCom’s added 5 million users, bringing the total to 66 million subscribers. These additions include CDMA and GSM subscribers, accounting for 33-35% of total industry additions, though RCom is yet to release details, including circle-wise breakdowns to the GSM-industry body. RCom has rolled out GSM service across 14,000 towns, while targeting to up dual-network coverage to 24,000 towns and 600,000 villages. However, these schemes coupled with Idea Cellular’s latest offers in select circles may trigger the industry’s growing share of dual SIM and inactive subscribers. We estimate the company will be eligible for incremental 2G spectrum in 14 circles at 11 million new GSM subscribers. Recently, RCom cut its FY09 capex by 15% to $5.3 billion and guided FY10 at $3.2 billion. The firm has $1.7 billion in investments and a net debt-to-equity ratio of 0.64x. CLSA expects a boost to RCom’s valuation with confidence of a successful execution and improving market share in revenue.


HSBC on ITC

HSBC maintains its `Neutral’ rating on ITC with a price target of Rs. 172 per share. Considering the staggered price increase that ITC has been taking this year and that the budget has been delayed from February to June, questions are being raised whether there is one more price increase in the offing. While HSBC estimates a weighted average price increase, including mix effect, 14% has been implemented so far, and the probability of a further increase is small as ITC can manage decent growth in Q1FY10E without price increase, and ITC may not wish to jeopardise volume growth further when it is currently negative. If ITC decides to hike prices it could be implemented in the following order of priority:

• Goldflake Kings is likely to be the first option due to the price inelasticity in this segment.
• Bristol and Flake with price point of Rs 1.9 per stick; since loose buyers already pay Rs 2, trade margins can be cut;
• Goldflake regular though has had high price increases and has strong brand loyalty
• Scissors Regular is a less probable option since plains migration needs to take hold. HSBC derives a fair value of Rs 154 for the high tax and Rs 201 for the low tax scenario. At the target price, the stock will trade at 16.8x FY10E EPS.

Bank of America on Hexaware Technologies

Bank of America retains `Underperform’ rating on Hexaware Technologies. Though results were in line, Bank of America (BoA) was surprised by a very sharp revenue decline guided for 1Q at a negative 16% q-o-q with outlook being the weakest announced so far. This likely reflects high exposure to discretionary spends such as ERP (~29% revenue, -18% q-o-q). Estimates are cut by 5% to factor in a 17% cut in dollar revenues as reflected by weak 1Q revenue guidance and offset by higher margins due to falling rupee. Management highlighted that macro environment has worsened in 4Q; with clients across board rationalising IT spends. BoA expects margins to fall by at least 600 bps during 1Q. Also MTM losses in balance sheet increased to Rs 120 crore from Rs 100 crore q-o-q and are likely to impact CY09/10E profits if a weak rupee persists. Revenue grew 4% q-o-q to $64.4 million in constant currency terms in line with its guidance. Stock rose 40% before results on low valuations. BoA expects 1% earnings growth in CY09E and 8% CAGR over next two years. With 1Q results likely to disappoint and a poor revenue outlook, stock could correct.

EMKAY on Titan Industries

Titan Industries (TIL) is likely to face challenging times ahead on weakening macro economic indicators affecting its watch business, rising gold slowing its jewellery market share gains and its new business initiatives straining cash flows. TIL’s watch business is to report a 1.6% and 5.7% fall in revenues and EBIDTA , espectively in FY10E, and a revival thereafter. Emkay believes that it will be difficult for TIL’s jewellery division to garner market share at a similar pace as in the past, owing to rising gold and falling demand (3.6% in FY11E against 2.9% in FY08). The new business initiatives (precision engineering and eyewear) are still in investment phase, thereby denting TIL’s cash flows and EBITDA. Emkay expects moderation in growth with net revenue, EBITDA and adjusted net profit of TIL to grow at a CAGR of 16.0%, 12.8% & 7.7%, respectively during FY08-11E and an intermediate decline in FY10E. The above valuations are rich especially in the wake of moderation of growth and declining return ratios. We recommend a `Sell’ with a price target of Rs 671.

IL&FS Investsmart on Hindustan Dorr-Oliver

IL&FS Investsmart initiates coverage on Hindustan Dorr-Oliver with a ‘Buy’ rating, with a 15-month price target of Rs 55, providing an upside of 104%. HDO has made rapid strides in its core EPC business, engineering a ~5.4x growth in less then four years with significant contribution from the mineral beneficiation and environmental infrastructure business. However, the best is yet to come for HDO as the company is well positioned and has expertise to get into the bigger league with higher ticket contracts. The current order backlog of Rs 700 crore is 2.3xFY08 billings. Based on the pipeline bids, enquiries, and the capex cycle, order accretion is to gain momentum in the next few quarters and grow at 17% CAGR for the next two years. Traction is expected in the award of big ticket contracts in the next few quarters. IL&FS expects higher demand for its proprietary industrial products which is likely to prop the blended margin going forward with ~14% revenue contribution by FY10. HDO has all the characteristics to graduate to the next league and therefore the concerns reflected in the stock price are unwarranted; hence there is a good investment opportunity.

Stock views on HDFC, Bharti Airtel, Hero Honda

BANK OF AMERICA / MERRILL LYNCH on HDFC

Bank of America cuts HDFC’s target price to Rs 1,980 from Rs 2,450 owing to lower sum of parts value and factoring in moderation in growth. However, the stock can still trade at 2.5-3.0x FY10E given the comfort in asset quality; earnings growth of 16-17% through FY10-11E and ROE (return on equity) of 29% on its core business. HDFC’s 3QFY09 earnings were down 2% y-o-y and 4-5% lower than market estimates. This was primarily due to the absence of Rs 100 crore of high investment gains and extraordinary income and Rs 50 crore of exchange losses booked by HDFC in its convertible bond. Adjusting for these factors, both topline and pre-tax earnings grew by about 19% y-o-y. The other disconcerting feature was the 8% contraction in approvals - which appears to be a more conscious decision, as HDFC had been reluctant to lend in October-November ‘08 as conditions worsened. Bank of America has cut the FY09-10 reported earnings by 6-11% to capture the lower investment gains.

HSBC on BHARTI AIRTEL

HSBC reiterates `Overweight’ rating on Bharti Airtel. The 15% fall in Bharti’s share price since the launch of RCOM’s GSM service in December is an overreaction. Instead, investors should focus on Bharti’s market leadership strengths and RCOM’s longer-term structural limitations of operations in 1,800 MHz which require additional base stations. HSBC believes the combination of low revenue yields and bloated cost structure will reduce the scope for disruptive pricing and competitive intensity will become more rational. HSBC estimates FY10E traffic growth of 32% against the historical average of about 70% and cuts FY10-11E EPS by 7% and 4% respectively to factor in increasing competition and the slowing economy. The core business is valued at Rs 645 on 13.7x FY10E core earnings based on a 15% premium to HSBC’s Sensex target of 11.9x. The tower business is valued at Rs 141, which reflects a 36% discount to recent transaction multiples. Risks are early implementation of MNP (mobile number portability), rollout of flat rate plans, higher than estimated slowdown in usage, higher than estimated decline in margins on the back of rural penetration, lower termination charges and higher spectrum charges.

MORGAN STANLEY on HERO HONDA MOTORS

Hero Honda posted a decent set of 3Q09 numbers with net income 7% higher than the expected and in line with Street expectations. Despite a volume decline of 5%, an 11% y-o-y improvement in realisations helped the company to report revenue of Rs 2,880 crore (up 5% y-o-y). Margin came in at 14.5%, 50 bps above last year, primarily due to softening raw material commodity prices. This was on the back of an 11% y-o-y realisation improvement, improving product mix, and ramp up of capacity at the excise duty-exempt Haridwar facility. Net income of Rs 300 crore, improved 9% y-o-y, and came in 7% above estimate on the back of an improvement at the operating level and a lower tax rate as the company increased production in tax-free zones such as Haridwar. Hero Honda is on course to achieve 2009 growth estimate of 9% given its year to-date volume growth of 10.4%, and an improvement in market share of 5.5% to 58.5% in the fiscal year to date in the domestic motorcycle category.