>PVR LIMITED: Marquee locations provide lucrative advertisement income

■ To add 50-60 screens across India – In the past, PVR has opened multiplexes at key locations by tying up with strong developers. It will continue this strategy and add over 50 screens across India in cities like Pune, Bengaluru, Cochin, Nagpur, Nanded and Vijaywada.


■ Industry growth should help maintain margins – We expect the movie industry to continue its growth which will lead to occupancy levels of 30% or higher. Rising ticket prices and food & beverage (F&B) sales will boost margins in the long run.


■ Marquee locations provide lucrative advertisement income – PVR is earning advertisement revenues which amount to 20% of net ticket sales due to its location strategy. This strategy is boosting margins and providing a kicker to the bottom line.


■ Bowling alley business to grow manifold - The number of bowling lanes should grow from 50 to 134 in the next couple of years. This business has a payback period of 2.5 years and ROCE of 29%. It will help the company become a one stop shop for retail entertainment and a leading anchor tenant for mall developers.


■ Implementation of GST would be a positive trigger as there will be a fall in the entertainment tax (e-tax) rate. Currently the company pays an average e-tax of over 18%. GST implementation will lead to a 1-2% fall in tax rate which can be retained by PVR.


To read report in detail: PVR LTD
RISH TRADER

>UNITED SPIRITS LIMITED: Downgrade due to Kingfisher Airlines hangover

■  Downgrade from Buy to Neutral
We downgrade United Spirits (USL) to Neutral due to uncertainty surrounding Kingfisher Airlines (KFA). USL’s share price is down 51% since 1 January 2011, and we expect it to remain under pressure until the KFA issue is resolved. We also cut our FY12-14 EPS estimates by 18-19% to take into account its higher debt as of December 2011.


■  A raw material cost reduction is possible
USL has been investing in primary distillation capacity, which should help lower its raw material costs. However, we will only incorporate these into our forecasts once the benefits kick in fully. USL is facing high raw material costs, with high energy prices boosting its system costs.


■  Business is intact; underlying debt and governance are concerns
Our underlying view on USL remains resilient growth in branded spirits. We think: 1) USL should remain a beneficiary of India’s growing, young population and rising discretionary spending; and 2) USL has one of the widest and most dominant distribution networks in India, which aids its 34 ‘millionaire brands’ (brands that sells more than 1m cases annually) in the segment; and 3) USL will benefit from investments made in primary distillation capacity.


■  Valuation: lower our price target from Rs850.00 to Rs780.00
We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of 11.4%. We lower our FY12/13/14 EPS estimates from Rs34.47/43.90/54.85 to Rs28.25/35.22/44.31.


To read report in detail: USL
RISH TRADER

>BANKING SECTOR: All eyes on restructuring (Q4FY12 Results Preview)

Incremental restructuring and pipeline will dominate the attention of investors even as other asset quality matrices are likely to remain largely stable. Pre-provisioning profit growth for PSBs estimated to be strong (25% YoY for PSBs ex-SBI), despite sequential pressure on NIMs and material moderation in credit growth, led by distorted base (pension provisioning and –ve one-offs for SBI). However, relatively higher provisioning cost for PSBs led by slippages and incremental restructuring should lead to continuation of the divergent earnings performance trend among private banks and PSBs. HDFC Bank and ICICI Bank should lead private banks while SBI should fare relatively better among PSBs.


■ All eyes on incremental restructuring and pipeline: In the light of moderating economic activity, we expect asset quality trends to remain the key focus area for the next few earnings seasons. Incremental restructuring is expected to increase as banks try to avoid slippages into NPA. Trends in cases referred to CDR corroborate our long held concern of material increase in restructured assets. This also implies that deterioration in other matrices (GNPA, slippage etc) will be avoided for now. We look forward to clarity on incremental restructuring pipeline as well as status of SEB restructuring from management of banks.


■ Some pressure on NIMs likely: Not withstanding the strong pricing power aided by tight liquidity, we expect NIMs to witness marginal pressure (5-10bps) on a sequential basis, especially for PSBs. The firm wholesale rates, fuller impact of deregulation of NRE deposit rates, some impact of priority sector lending and selective downward tweaking of lending rates could collectively force the NIMs downwards, albeit marginally. Sequential pressure on NIMs and dramatic slowdown in loan growth should keep NII growth in higher single digits for PSBs ex-SBI compared with ~17% YoY growth estimated for private peers.


■ Base distortions: The distorted base effect (pension provisioning and –ve one-offs for SBI) will help PSBs report strong growth in pre-provisioning profit (33% for PSBs vs 20% for private peers). However at bottom-line level, we estimate private peers to report 24% YoY growth on aggregate basis compared with 9% YoY growth for PSBs ex-SBI. Among the banks under our coverage, we expect HDFC Bank and ICICI Bank to report stronger performance while Bank of India and SBI should lead from bottom-line growth perspective among PSBs.

RISH TRADER

>Metals – Ferrous & Mining: Q4FY12 Result Preview

Sequential improvement on lower costs and higher volumes


Higher volumes on account of seasonal improvement in demand, improved realizations on a sequential basis and lower raw material costs (particularly for steel producers) are expected to result in a sequential improvement in profitability for metal companies in our universe during Q4FY12. We see the earnings improvement in Q4FY12 to be more seasonal in nature rather than structural and still remain concerned on the low demand-high supply dynamics in the global metals space. We maintain our cautious stance on the ferrous space but remain positive on the mining space on account of attractive valuations and low costs.


■ Sales volume to improve sequentially: We expect volumes to show sequential improvement on the back of higher seasonal demand. Steel players are expected to show volume growth with SAIL and JSW steel showing sequentially higher sales. Among base metal players, HZL will see increase in lead and silver volumes.


■ Realizations remain firm: Global base metal and steel prices improved during the quarter and with rupee remaining weak, we expect domestic realizations to remain firm on a sequential basis and result in sequential revenue growth. Mining players are expected to suffer a drop in realizations on a QoQ basis due to drop in global prices.


■ Margins to remain weak despite sequential improvement: Margins are expected to improve by 100-300 bps QoQ for metal players in our universe but still remain weak on an overall basis and lower YoY as the recovery in demand remains slow.


■ Profits to remain subdued: We expect pressure on PAT due to higher interest costs and expect only marginal recovery in MTM forex losses of previous quarters as rupee has remained
weak overall. We expect sequential improvement in PAT from all companies under our universe except NMDC which has suffered due to lower volumes in Q4FY12E.


■ Maintain cautious view on the ferrous space: We remain Cautious on the domestic ferrous space amidst tough operational environment and subdued global steel prices going ahead due to higher supplies. We also expect raw material prices to spike yet again going ahead. We maintain buy on mining stocks like NMDC and HZL on attractive valuations and volume growth. We remain neutral on Sterlite Industries due to concern over the proposed merger with Sesa Goa. We maintain sell on Tata Steel and SAIL.


RISH TRADER