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Summary
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STOCK UPDATE
Mahindra & Mahindra
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs708
Current
market price: Rs561
Bigger in tractor
Key points
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Mahindra and Mahindra (M&M) has signed an
agreement to form a joint venture with a leading Chinese
tractor manufacturer, Jiangsu Yueda Yancheng Tractor
Manufacturing Company (Yancheng Tractor).
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Yancheng Tractor is a state-owned enterprise and
sells tractors under the brand name of Huanghai
Jinma. It is the third largest tractor brand in China
in terms of sales volumes of 2007. The company’s product
portfolio comprises tractors ranging from 16HP to 125HP in
capacity.
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M&M will invest about $26 million in the joint
venture in which it will hold a 51% stake through its
subsidiary, Mahindra Overseas Investment Company. The joint
venture will acquire Yancheng Tractor's tractor related
assets and current liabilities for $50 million.
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Yancheng Tractor manufactured approximately 27,000
tractors and earned revenues of US$120 million in 2007. It
is positive at the earnings before interest, tax,
depreciation and amortisation (EBITDA) level. Its product
range is complimentary to the Indian company’s Chinese
tractor offerings. This transaction will give M&M an
opportunity to gain access to the high-growth, high-capacity
segment along with a pan-China presence. Yancheng Tractor
has a strong distribution network covering over 25 provinces
in China. The company is also a leading exporter of tractors
from China to countries such as the USA, South America,
Russia, Europe and Africa.
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M&M already has presence in China through its
joint venture with Jiangling Motors, Mahindra China Tractor
Company. It holds an 80% stake in this joint venture.
M&M’s present Chinese operations have a product
portfolio that covers tractors of up to 35HP in capacity
with a strong presence in the 25HP tractor category. It is
present mainly in the north-eastern region of China. It sold
about 4,459 tractors in FY2008, that is a growth of 34% year
on year.
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The new joint venture will enable M&M to improve
its market share in the Chinese tractor market from
approximately 2% at present to 14%. It will also increase
the size and cost effectiveness of the company’s
manufacturing base in China. In the current scenario of
rising raw material prices, this joint venture seems to be a
good strategic fit for M&M. We maintain a Buy on M&M
with a sum-of-the-parts based price target of Rs708.
Balaji Telefilms
Cluster: Emerging
Star
Recommendation: Buy
Price target: Rs268
Current
market price: Rs169
Balaji and Star part ways
Key points
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Balaji Telefilms Ltd (BTL) and the Star group have
ended the four-year-long exclusivity contract under which
the Star group had the right of first refusal on content
produced by BTL and BTL could not air any other content on
the rival channels during the time when its shows were being
aired on Star Plus.
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We believe the exclusivity agreement with the Star
group had of late hampered the growth of BTL’s volumes,
especially in the prime time slots. With the end of the
exclusivity contract, BTL now has the leeway of offering new
shows during the prime time on the other Hindi general
entertainment channels (GECs). Therefore, the development is
a positive for BTL.
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With the termination of the agreement, the promoters
of BTL have gained the right to buy the Star group’s 25.99%
stake in BTL at Rs190 per share within the next 240 days. To
acquire this stake the promoters would require to mobilise
Rs322 crore. We believe that due to the size of the amount
involved the promoters may not be able to buy the entire
stake. In case the promoters fail to exercise the option
within the stipulated 240 days, the Star group could sell
the stake to a third party.
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We understand from the BTL management that the
acquisition of the additional stake by the promoters shall
not trigger an open offer, as the promoters would be picking
up the stake from a foreign collaborator (Star group) and
hence would be exempt from an open offer.
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Meanwhile, the two parties have decided to close one
of the two top earning shows for BTL—Kyunki Saas Bhi
Kabhi Bahu Thi and Kahaani Ghar Ghar Kii—by
November 2008. They have decided to replace one of these
shows with a new show. This has increased the downside risk
to the future earnings of BTL, as the new show may not do
equally well, thereby affecting the company’s performance at
the operating level.
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Our outlook on the television content business of BTL
remains positive as the company is a scaleable player in a
non-scaleable business. At the current market price of
Rs169.3, the BTL stock trades at 8.5x FY2010E earnings per
share (EPS) of Rs19.9. We maintain our Buy recommendation on
the stock with a price target of Rs268.
SECTOR UPDATE
Telecommunications
Unrestricted net telephony proposed
The
Telecom Regulatory Authority of India (TRAI) has issued
recommendations on “issues related to Internet telephony”.
Currently, only the access service providers are allowed to
provide Internet telephony services. Till now the national
long distance (NLD) and international long distance (ILD)
operators and Internet service providers (ISPs) were not
permitted to provide unrestricted Internet telephony even
though they possessed the Internet Protocol based
infrastructure. | | |
