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Summary
of Contents
SHAREKHAN SPECIAL
Q4FY2007 Media earnings preview
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The fourth
quarter is the best quarter for the media industry as corporates
exhaust their remaining ad budgets in this quarter.
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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.
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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.
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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).
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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
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The Q4FY2007
results of Genus Overseas are ahead of our
expectations.
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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.
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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%.
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The interest
expense for the quarter rose by 34% while the depreciation cost
declined by 33% to Rs0.67 crore.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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