Thursday, April 12, 2012

>DISH TV: Indian pay TV subscription story strong, led by increasing digitization; DTH at the forefront of digitization wave

 Re-initiating coverage with Neutral rating and TP of INR65: We re-initiate coverage on Dish TV (DITV), with a Neutral rating and target price of INR65. DITV is well positioned to benefit from the ongoing digitalization further boosted by government regulations to phase-out analogue broadcasting which should drive 22% revenue CAGR and 30% EBITDA CAGR over FY12-14E. However we are cautious due to 1) likely increase in competitive activity as six DTH operators and several MSOs might see digitalization as an opportunity to grab subscribers, 2) lower room to squeeze content cost percentage further down, and 3) already high consensus expectations. Our FY13/14 EBITDA estimates are 9/6% lower than consensus. Valuation at 9.3x FY14 EV/EBITDA (11.6x adjusting for lease rentals) and ~USD110/subscriber is not inexpensive.

■ Strong leadership position in DTH; high churn and potential increase in competitive intensity remain concerns: DTH technology is leading the digitization wave, with industry subscriber base of ~40m or one-third of the total cable and satellite base of ~120m. The DTH industry has been riding a tailwind of (1) weak competition from the fragmented cable industry, (2) preferred treatment from broadcasters (in the form of fixed-fee payment structures), who have been combating under-declaration by cable operators, (3) better execution capabilities, (4) strong balance sheet support, resulting in ability to withstand significant cash burn, and (5) the government's fresh deadline for sunset of analog broadcasting by December 2014. DITV enjoys a leadership position, with ~30% subscriber share in the fast-growing 6-player Indian DTH market. However, we expect subscriber churn to peak in FY12 and remain at elevated levels going forward (14-15% p.a. of net subs) as compared to FY09-11 levels (9-10%) due to increase in competition from DTH as well as cable operators.

■ Expect 19% subscriber CAGR, 6% ARPU CAGR over FY12-14: Subscriber additions
have weakened since 3QFY11 due to (1) one-off demand in the earlier period related to cricket World Cup and IPL, (2) general economic slowdown, and (3) increase in connection costs and tariffs by the DTH industry. We model gross subscriber addition of 2.7m in FY12 (v/s 3.5m in FY11), 3.5m in FY13 and 4m in FY14, which will drive ~19% CAGR in average net subscribers over FY12-14. We model 6% CAGR in DITV's ARPU over FY12-14, which will be driven by increase in renewal ARPU as well as lower proportion of subscribers on activation plans.

To read full report: DISH TV

>INDIA STRATEGY: 4QFY12 Earnings Preview: V are in a U

 V Market, U Earnings — India’s market recovery was fairly V shaped in the quarter (+12.6% in 4Q): but you should expect a more U shaped recovery in earnings: +7% yoy (Sensex-ex Oil), 7.5% (CIRA ex-energy), and largely in sync with the earnings performance over the first 3 quarters of the year. We do not believe there are big bottom up expectations for the quarter, but it should have greater skews, bigger surprises and an elevated focus on management guidances. We also believe you should expect only modest earnings revisions post the results, with FY13 earnings growth estimates remaining in the 14-15% level.

■ Margins over sales should continue — Sales should continue to moderate (17% yoy, CIRA ex-Reliance) while margins should continue their qoq rise (after reversing a falling trend in 1HFY12). This trend, we believe, is a reflection of slowing demand, and a combination of easing cost pressures/rising profit focus of corporates. This trend (profit over growth – almost alien to corporate India over the last decade) will need a catalyst – mix of lower rates, higher confidence in government and strong global markets, to reverse. This quarter’s results are unlikely to be that change/catalyst.

 Bigger sector and stock skews — Over 50% of CIRA coverage companies will report a +/- 20% growth in the quarter; there will be a high share of one-offs (in this qtr or in the base), and big sectors (Banks/Mining) and big stocks (SBI/Coal India/Reliance) will drive these swings. The Banks, Automobiles, Consumer and Pharma sectors should lead while Metals, Media, Telecom and Real Estate should lag.

 Quarters' question, Stock Selection — Will the quarter meaningfully alter market direction? We think not (the Credit policy with rising rate cut expectations probably more decisive, and will have a bearing on management commentary). We maintain our 18,400 Sensex Target for December 2012. We see potential upside surprises for SBI, Bharti and HCL Tech, and downside ones for Coal India, TCS and Grasim.

To read full report: INDIA STRATEGY

>TORRENT CABLES: TCL continues to replace major plant & machinery with the latest equipment

■ Q3FY12 & FY11 Results
During FY11, sales advanced by 45.4% to `245.3 crore but net profit fell by 34.5% to `6.9 crore due to 235% higher provision for depreciation. OP and NP margin stood at 6.9% and 2.8% against 7.0% and 6.3% respectively in the corresponding period last year.

EPS for FY11 stood at `8.0.The DER as at FY11 stood at 0.08:1 whereas the value of the gross block at `112.0 crore.

During Q3FY12, sales rose 13.2% to `64.7 crore and net profit by 621.8% to `6.5 crore. (YoY). OPM and NPM stood at 16.3% and 10.0% compared to 5.8% and 1.5% respectively in Q3FY11. EPS for Q3FY12 stands at `7.6.

■ Clients
TCL’s clients include Alfa Laval India, Bajaj Auto, Alstom, BHEL, Bharat Forge, Cummins India, Engineers India, Infoysys Technologies, Idea Cellular, IVRCL, Jyoti Structures, L &T, Mecon, NCCL, Shapporji & Pallonji, Tata Motors, Thermax, Siemens, Suzlon Energy and Uhde India. It also supplies its products to almost all SEBs.

■ Expansion & Modernisation
In order to capitalize on the growing HT/EHV cable demand, TCL had embarked on a `64 crore expansion program in the HT cable segment with product capability ranging upto 132 KV cables. The new line was partially commissioned in FY09-10.

Currently, TCL has arranged for Suppliers’ Line of Credit to the extent of `20 crore for the imported equipment in respect of expansion undertaken at Nadiad plant.

Along with expansion, TCL continues to replace major plant & machinery with the latest equipment.

■ Prospects
HT power cable segment has witnessed a lot of capacity addition, due to a major emphasis on the electrification programs and 'Power on demand by 2012' program. Based on the predicted growth of HT power cables, capacity additions are being planned.

As the Indian economy prepares for sustained growth of 7 – 9%, the importance of power sector should continue to increase. The power sector demand is expected to grow at 7.5% - 8% CAGR till 2017. The Government’s focus on attaining “power for all” has accelerated capacity addition in the country. For the next few years there is the possibility for huge investment in the power sector. The above suggests that power related business will have good prospects.

The power cable industry is expected to grow steadily over the coming years. Several market segments are expected to generate this demand. Industries will play a vital role in the surge in demand for cables. Since industries have planned substantial investments, either to add capacities or to setup green-field projects, their power requirement is expected to increase. A significant rise in the number of captive power plants and substations will also add to the demand.

Investment in infrastructure is positive and is expected in various segments ranging from manufacturing to service industry. The service industry is one of the fastest growing sectors in India. Demand for cables will be originating from the development of new industrial parks and office complexes. Power sector is expected to become the second largest consumer of power cables.

■ Outlook
The new HT XLPE line was fully operational during FY11. The major refurbishing and renovating the old HT XLPE line in FY11-12 should help to maintain the production level. TCL planned investments in the range of `5 to 8 crore to overcome the imbalances and thereby increase the output of the new HT XLPE line by nearly 15%.

This was expected to be operational in Q4FY12. TCL will continue to focus on operational efficiency in all facets of manufacturing.

To read full report: TORRENT CABLES

>STERLITE INDUSTRIES INDIA LIMITED: Lead and silver smelters at Hindustan Zinc commissioned

We expect a stable quarter – not much to look forward to
We expect Sterlite Industries to have a modest quarter with not much expectations of change from last quarter apart from better lead and silver volumes. With prices remaining stable and aluminium and power businesses continuing to see high costs, we don’t expect quarterly results to have a significant impact on stock outlook.

We expect consolidated EBITDA of INR 25.2bn, up from INR 23.2bn in Q3FY12 largely on account of improvement in Hindustan Zinc results (HZ IN, Neutral). We expect Hindustan Zinc (HZ IN, Neutral) to see EBITDA of INR 15.8bn, up from INR 14bn in Q3FY12.

We expect net profit of INR 13.6bn for Sterlite (up from INR 9.1bn in Q3FY12) and INR 14.5bn for HZ (up from INR 12.7bn in Q3FY12). Lead and silver volumes ramp up during the quarter

Lead and silver smelters at Hindustan Zinc commissioned during the last quarter have started to ramp up and reported production of 37,000 tonnes and 2.8mn ounces respectively during the quarter, up from 28,000 tonnes and 1.8mn ounces respectively in Q3FY12. Please note
that lead volume growth is despite the closure of its smelter at Vizag (which produced 28,000 tonnes in FY12).

Apart from this, most other volumes are largely flat. Sterlite Energy (not listed) continues to operate at a PLF of less than 50% on limited coal availability.

Supported by stable metal prices…
Along with volume expansion, metal prices have remained stable up 3- 5% QoQ and should support earnings. With INR/USD rate also remaining at close to 50, the company should see strong realizations.

Aluminium and power operations remain a drag Sterlite continues to see stress in aluminium and power operations. While the external purchase of bauxite should keep the cost of
production high, we believe the company should see marginal improvement at Vedanta Aluminium (not listed) as operations normalize (last two quarters were affected by pot outage). We still expect Sterlite’s share of losses at VAL at INR 1.5bn (down from 2.6bn in Q3FY12).

At the same time the power business continues to operate at a PLF (plant load factor) of close to 45% (on a capacity of 1800MW). However, in March 2012, PLF has seen a jump to 58%; we need to watch whether the company can maintain these high levels over a longer period.

To read full report: STERLITE INDUSTRIES

>EDUCATION SECTOR: Q4FY12 Results Preview

Growth momentum intact

Education companies are likely to deliver strong results in Q4. However, we expect the companies under active coverage to register 6% growth during Q4FY12 due to unique one-off reasons. While Q4 is seasonly a weak quarter for Navneet, NIIT’s single digit growth stems from the sale of Element K business in Q3 that would lead to lower revenue in Q4. We believe the growth in topline would be largely driven by multimedia solutions to private schools, vocational courses and IT training segments. Within the space, we like Navneet Publication
and NIIT considering attractive valuations, strong topline growth and better prospects of improving their margin profiles in FY13E.

 Topline growth to continue: We expect the growth momentum to continue for companies given the opportunity in the space and also because Q4 is seasonally a better quarter. Segments including multimedia solutions to private schools and IT training business would be key drivers. In case of Navneet, Q4 is seasonally a weak quarter. NIIT (excluding corporate learning solution) is likely to register 12% YoY growth.

 Operating margin to decline on one-offs: NIIT would witness subdued margin as the individual learning segment is in the process of integration. We believe that NIIT would see margin expansion in FY13E on the back of better sales mix in favour of individual learning solutions and school learning solutions.

 Prefer Navneet Publication and NIIT in the space: We prefer NIIT in the space considering attractive valuations and prospects of margin expansion in FY13E. Within the Publication space, we like Navneet Publciation given its strong growth momentum for FY13E/14E and margin expansion and improvement in return ratios.

To read full report: EDUCATION SECTOR