Friday, June 18, 2010

>Some scenarios that are not worth considering

The financial markets sometimes bring up extremely unlikely scenarios,
which are normally not worth discussing.

We can mention here:
- certain countries leaving the euro (in the short term);
- the acceptance of a sovereign default in the euro zone;
- inflation;
- the collapse of growth in China.

Yet, these scenarios are mentioned every day.

To read the full report: MARKET SCENARIOS

>NETWORK 18: Q4FY10 Results, Conference Call Transcript

To read the full report: NETWORK 18

>JUBILANT FOODWORKS: 'Pizza mania overdone'

We initiate coverage on Jubilant FoodWorks (JFW) with a Sell rating and a target price of Rs230 (implied P/E of 27.3x FY12E), indicating downside potential of 18.4% from current levels. Though we are confident regarding the company’s ability to cash in on the growing affluence and changing lifestyle of the Indian consumer, we consider the current valuations overstretched due to unrealistic market expectations of higher growth.

􀂁 Current valuations expensive: DCF valuation method suggests fair value of Rs230 (implied P/E of 35.2x FY11E and 27.3x FY12E). At CMP, the stock trades at a PE of 43.1x FY11E and 33.5x FY12E, which we believe is a huge premium primarily ascribed for higher-thanexpected
growth from the company’s existing operations and over-enthusiasm in anticipation of
earnings growth accretive tie-up. Our analysis suggests such run-up in prices is unwarranted and unsustainable and would result downward re-rating in stock prices.

Competition to intensify: Though we are positive on the company’s strategy to extend its reach in Tier 2 and Tier 3 cities, we remain a bit cautious on the competitive landscape that would emerge after another two to three years, since we expect a large number of organized
players to realize and tap this opportunity and compete for this market.

Market expectations of higher IRR from a possible QSR tie-up may be unrealistic. Our analysis suggests a tie-up with coffee (generating store IRR of 15.4%) and burger (IRR 25%) chains would be IRR decretive for the company, whereas a tie-up with a sandwich chain (IRR
of 33.2%--higher than JFW’s 29.9%) is the only option that would be IRR accretive.

Absence of free cash flow deployment to be ROE decretive: Free cash flows generated and not deployed would result in 1,516bps decline in ROE to 31.6% over FY10-12E.

Profitable and scalable business model: We believe the dual strategy of increased penetration in Tier 2 and Tier 3 cities and multiple price points (cheapest pizza at Rs39) would enable the company to clock 27.9% CAGR sales and achieve same-store-sales growth (SSSG) in the
higher single digits over FY10-12E.

Key risks: Upward: New tie-ups, if value accretive, would result in upward earnings revision.

To read the full report: JUBILANT FOODWORKS

>TATA MOTORS: May'10 JLR unit sales growth (+73% yoy) momentum sustains - ALERT

• Jaguar Land Rover sales growth momentum sustains: Land Rover sales at 13,933 units (+93% yoy) have sustained the YTD growth trend (+91% YTD). Jaguar sales grew for the first time in several months at 5,120 units (+34% yoy).

• Land Rover sales continue to benefit from strong demand in its key UK market, besides healthy industry growth in USA and China.

• Jaguar sales growth aided by the dispatch of the new ‘XJ’: Jaguar has commenced dispatches of its recently launched luxury sedan. Management has highlighted that there is a healthy order book for the new model.

• Global luxury car sales growth is healthy: The growth trend in luxury car sales continued with Mercedes (+18% y/y) & BMW (+12% y/y) reporting healthy sales growth, driven by strong sales in the US and China. Strong US luxury car sales (+35% y/y) offset the weak sales in Western Europe.

• We expect the sales growth at JLR to likely remain encouraging over the near term given a low base: While there are concerns of a potential slowdown in Europe, data indicates that sentiment is currently holding with private demand remaining steady.

To read the full report: TATA MOTORS


Four years of operation, more than 500 deployments across 148 countries and only 6.5mn subscribers, is not a very good situation to be in for the global WiMAX industry. Despite this, in India the demand for WiMAX spectrum is equally fierce as was in the case of 3G spectrum. At the end of day 12, pan India WiMAX spectrum auction amount reached Rs106bn, 6x the base price of Rs17.5bn. At the current prices, the government is likely to mobilise Rs320bn from this auction.

Why operators need WiMAX?
Despite years of operations, the broadband penetration in the country is still languishing at 8.75mn subscribers as of end-Mar 2010. The number of subscribers accessing data on mobile is much higher at 150mn subscribers. The higher cost of laying fixed line network coupled with absence of unbundling of local loop has resulted in lower competition in the broadband space from private players, thereby restricting the growth of broadband. Therefore, it is evident that the broadband penetration in the country would take off only on the wireless platform. The 802.16d (fixed WiMAX) is a proven technology with more than 500 deployments globally. The cost of deployment is also much lower than the fixed line penetration. Hence, it will help operators to provide broadband services at much lower prices.

WiMAX allows faster data downloads at a speed of 40Mbps, which is much higher than the download speed available on 3G spectrum. Also, operators who have failed to get 3G spectrum in specific circles, would want to get WiMAX spectrum. Both LTE and IEEE 802.16m aim at meeting the IMT Advanced requirements which is to achieve 100Mbps for mobile application and 1Gbps for fixed-nomadic
application. Given the uncertainty about predicting technologies as well as uncertainty about spectrum availability, we expect serious operators to opt for WiMAX spectrum.

What goes against WiMAX?
Given that 802.16m is still being developed as a future of WiMAX, we believe that WiMAX in India would be used to provide retail broadband and enterprise leased line services on 802.16e platform. These services are already being provided on other platforms such as DSL, local cable and CDMA data cards, which restricts the revenue earning potential from this spectrum on an immediate basis. Globally, operators have already made huge investments in HSDPA networks and hence the natural progression would be towards LTE. For WiMAX, however operators need to make fresh investments. Also, to provide coverage on a WiMAX network in metro areas (Mumbai/ Delhi) the no. of sites required would be much higher, leading to higher capex. However, some industry participants believe that 3G and WiMAX are not competing but complimentory technologies and both can co-exist, where 3G would be used for voice and WiMAX for data.

Our View
Though securing spectrum may be a good bet from a long term perspective, we remain concerned about operators’ ability to generate significant revenue compared to the cost of spectrum acquisition. We believe that this investment will generate back-ended payoffs only if WiMAX succeeds as a superior technology platform over LTE. Given the domestic deployment challenges facing WiMAX, we remain cautious on this. In the short term, we anticipate higher debt burden for telecom companies. Hence, we maintain our negative stance on the sector.

To read the full report: TELECOM