Thursday, December 29, 2011

>INDIA CEMENTS LIMITED (ICL): International coal prices soften (Coal spot Richard Bays index)

Prices, volumes, costs better than expected
  • Cement volumes could impress due to a lower base
  • Prices unexpectedly stable down south despite rains
  • Revised FY12 EPS up by 12%, FY13 by 7%
  • Raised target price by 13% on rollover to FY13: Maintain Buy

Valuation: At its CMP,the stock offers strong value. On FY13 estimates, ICL trades at an attractive EV/tonne of US$63, a 45% discount to replacement cost. After rolling over valuations to FY13, at a conservative 30% discount to replacement cost, we up our target price by 13% to Rs 106 - a 51% upside from current levels. Reiterate BUY

To read the full report: ICL

>VOLTAS: cost overrun on Qatar project could surprise on negative side

We met the management of Voltas. The outlook for new orders continues to be weak. The cost overrun on Qatar project could surprise on negative side. UCP margin to be under pressure due to competitive pressure and low volumes. Maintain REDUCE.

 MEP segment pain to continue: The outlook on domestic orders continues to be grim as enquires levels have dropped since Q2 and the drop is across sector. The management does not expect the outlook to improve for the next 2 quarters as far as domestic MEP is concerned. On international front the order pipe line continues to be limited as few only few countries s like Abu Dhabi , Saudi and Qatar are the awarding leading to very high competitive intensity in those markets driving down the margin profile of orders to 3-4%.

The cost overrun in the Qatar project continues to be ahead of estimate due to change in scope of project and shirked timeline of the project. We believe cost over run on this project will continues to spring negative surprise and impact the earnings for the next 3 quarters as well. Apart from lack of advance due to weak
order flows ,the shirked timelines for the Qatar project have put sever stress on the balance sheet (NWC days increased to 45days in H1FY12 from 26days in H1Fy11)and the working capital cycle is likely to deteriorate further Qatar project gets closed over the next 3 quarters.

 UCP volumes continue to be weak: The company highlighted that volume continue to be weak even during Diwali season. The AC market has dropped -25- 28%YTD in FY12 resulting in inventory pile up in the industry. We believe inventory pile up will lead to discount by players, heightened competition (specially from Japanese players) and deprecating rupee will lead to pressure on margin over the next few quarter till volumes pick up.

To read the full report: VOLTAS

>CABLE & SATELLITE INDUSTRY: Dish TV, Hathway Cable & Datacom & Den Networks

India's C&;S market on the cusp of high growth phase
The Indian Cable & Satellite(C&S) industry, the third largest in the world, with 136mn C&S homes is all set for a revolution as the long-expected 'digitisation' becomes a reality. Currently there are 41mn DTH homes and 6mn Digital cable homes (35% penetration in C&S homes). Going forward digital subscriber base is expected to rise from 47mn to 83mn by 2015, increasing at 21%CAGR (2012E-2015E). An industry of Rs270bn will no longer operate under obsolete analog distribution business post digitisation. The long standing local cable operator (LCO) 'underreporting' issue will get resolved with the gradual roll out of digitisation as per the sunset clause. Aggressive marketing and promotional offers by DTH players adds to the growth factor of the industry.

Imminent Digitisation set to double digital subscriber base
C&S industry is set to expand to 166mn with 64mn DTH and 20mn digital cable gross subscribers by 2015E. Aggressive subscriber acquisitions by the well funded six DTH players have kept the digitisation momentum alive. Now with compulsory digitisation MSOs and LCOs are left with 'no choice' in the face of increasing threat from DTH. We believe with Government-mandated digitisation, the well funded national MSOs and DTH players are all set to capture the opportunity.

Industry on the threshold of profitability
Currently the C&S industry is largely run under the outdated analog mode of distribution which has resulted in a highly fragmented value chain and allowed last mile operator to corner ~80% of the subscription revenue. With compulsory digitisation, economic retention will be the crucial driver in value creation. Curbing of revenue leakages will be the main growth factor for C&S industry to register 10% CAGR over 2012E-15E. Out of which we expect 47% CAGR in digital cable revenue over 2012E-15E.Digital cable players will benefit with increased portion of retained gains of compulsory declaration, which would drive a 3x rise in revenues. DTH subscription revenue is estimated to show 22% CAGR during 2012E-15E. Digitisation is bound to reduce the incidence of under-reporting - the bane of the Indian C&S industry. High operating leverage business model will be the key driver for organised cable players and DTH operators in magnifying their operating margins. We see major players in DTH segment and organized MSOs to breakeven by 2013.

Hathway Cable & Datacom- all set to ride the digitisation wave
Hathway, the MSO with largest paying subscriber base of 1.8mn, is all set to be the major beneficiary from compulsory digitisation. We expect a turnaround in the business with strong traction in its profitability post Phase I and Phase II of the sunset clause of mandatory digitisation. We believe changing business strategy, strong execution capabilities and market leadership in the metros would enable the company to monetise the digitisation opportunity.

We believe Hathway is the best placed MSOs to benefit from the digitisation opportunity. At CMP, the stock is trading at 7.5x EV/EBIDTA FY13E and 5.8x FY14E. With digitisation a reality, sustained leadership in its key markets, improved business dynamics of cable and broadband businesses and clarity in profitability makes Hathway a very attractive play in digitisation space. We initiate coverage on the Company with a ‘BUY’ recommendation on the stock with a target price of Rs151(7.5x EV/EBITDA FY14E). We have valued the stock on average of DCF, EV/Subscribers and EV/EBITDA(taking Comcast and Time Warner as peers).

Dish TV’s dominance to continue...
Dish TV, the pioneer in the DTH industry, continues to maintain its leadership with ~30% market share reaching more than 12mn subscribers led by competitive pricing, strong marketing push and wide distribution network making it the most commendable player in the DTH Industry.

We believe Dish TV is best placed amongst all DTH players to tap the low penetrated DTH opportunity. At CMP, the stock is trading at 9x FY13E EV/EBIDTA FY13E and 6.8x FY14E EV/EBIDTA. With digitisation a reality, sustained leadership in its key markets and clarity in profitability makes Dish TV a very attractive play in the digitisation space. We initiate coverage on the stock with a ‘BUY’ recommendation and a target price of Rs77 (8.4x FY14 EV/EBITDA).We have value the stock on average of DCF, EV/Subscribers and EV/EBITDA (taking Direct TV and Dish Network as peers).

Den Networks- leading cable operator
Den Networks, the only profitable MSO in India, has the largest reach with 11mn subscribers including ~1.4mn paying subscribers, acquired mainly through aggressive secondary point acquisitions. Its strategic acquisitions helped it in garnering better carriage revenue through improved subscriber base. Star-Den, a syndication venture with Star, added to the scale and stability of the business. Den's strong execution capabilities, market leadership in key markets and profitable business model makes it a strong contender to benefit from the digitisation wave.

At CMP, the stock is trading at 5.3x EV/EBIDTA FY13E and 3.7x EV/EBITDA FY14E. We\ initiate coverage on the stock with a ‘BUY’ recommendation and a target price of Rs64 (4.6x EV/EBITDA FY13E).We have valued the stock on average of DCF, EV/Subscribers and EV/EBITDA (taking Comcast and Time Warner as peers).

Cable Distribution Industry

Changing Dimensions

The Rs270bn Indian cable sector is the third largest in the world after China and US. The number of TV homes in India grew from 120mn in 2007 to ~148mn TV homes currently. C&S homes have witnessed a strong 12% growth in 2011 adding more than 12mn subscribers to reach 136mn (92% penetration of TV homes). Cable reaches 94mn homes with 88mn analog and 6mn digital cable households. DTH has 41mn subscribers reaching 30% of C&S homes. The TV viewing experience has changed a great deal over the last few years with the upcoming broadcasters producing differentiated and niche content like reality shows, food channels and more. The number of channels available has more than doubled to 600 plus channels, offering viewers more choice than they could ask for. Digital technology is fast catching up and gaining wider acceptance amongst viewers who are quality conscious and wish to have a better TV viewing experience.

Profound growth opportunity..
Currently 65% of C&S homes are Analog cable, forming a major chunk of the C&S base, 30% are DTH subscribers and 4% subscribe to Digital cable. Though up to now the growth in Digital cable penetration has been slow, the off take of the mandatory digitisation bill will provide an
opportunity for cable operators to convert the 88mn analog base into digital cable and DTH.
DTH penetrated into urban and rural markets registering a robust 83% CAGR over 2007-2011 to reach 41mn gross subscribers in November, 2011, from a mere 2mn subscribers in 2007.
Latest offerings such as High Definition(HD), Set Top Boxes(STBs) with recording facility,
Movies on demand, interactive learning, gaming and mobile TV are other innovations which
provides digital viewing an edge over analog and has led to an evolution in the TV and broadcasting industry. The 12mn non cable TV homes and 90mn non TV homes highlight the potential for further cable penetration and ample growth opportunity.

Outlook for the Industry
With a strong distribution networks spread across the country, cable and satellite has penetrated to 92% of TV homes to reach 136mn homes in 2011 at 16%CAGR (2007-2011). Total C&S homes are expected to reach 166mn by 2015. Analog cable penetration of C&S homes is expected to decrease from 65% currently to 50% by 2015E. Much of the growth will come from Digital cable which is expected to increase its penetration from 4% in 2011 to 12% by 2015E reaching ~20mn subscribers. Mandatory digitisation will provide a thrust to digital cable to increase its reach. The deep penetrated analog reach will help digital cable operators capture this opportunity much faster. Digital cable subscriber base should witness 31%CAGR over 2012-2015. DTH has been growing fast as the 6 players (excluding DD Direct) are strongly competing to gain market share. Aggressive advertising and attractive promotional offers have led to the DTH industry penetrate 30% into C&S homes. The DTH subscriber base is expected to grow from 41mn in 2011 to 64mn by 2015 at 15% CAGR(2012-15). With digital cable we will also see a ramp up in broadband subscription reaching 3mnsubscribers by 2015E. Broadband subscriber base will grow considerably led by bundledoffering of digital cable with broadband.


>HAWKINS COOKER LIMITED: Peer Group Comparison - Varun Industries, TTK Prestige & La Opala RG

■ Q2 FY12 Results Update
Hawkins Cookers Ltd disclosed results for the quarter ended Sep 2011. Net sales for the quarter increased by 15% to Rs.985.40 million as compared to Rs.854.34 million during the corresponding quarter last year. During the quarter, the company has reported Net Profit increased to Rs.93.27million from Rs.80.39 million in previous year same quarter. The Basic EPS of the company stood at Rs.17.64 for the quarter ended Sep 2011.

■ Break up of Expenditure
Expenditure for the quarter stood at Rs.843.97mn, which is around 15% higher than the corresponding period of the previous year. Consumption of Raw Material cost of the company for the quarter accounts for 34% of the sales of the company and stood at Rs.335.15mn from Rs.278.81mn of the corresponding period of the previous year. Purchase of Traded Goods cost increased 83%YoY to Rs.102.85mn from Rs.56.13mn and accounts for 10% of the revenue of the company for the quarter.

 Board recommends Dividend
Hawkins Cookers Ltd has recommended a dividend of Rs. 40 per equity share of paid-up and face value of Rs. 10 each, which if approved, shall amount to Rs.2115.1 lakhs.


>HINDUSTAN UNILEVER LIMITED: Premiumisation in urban and rural penetration are two biggest opportunities

 Strong Portfolio of Brands covering the entire consumer pyramid: HUL is well placed to maximize on the opportunity in a growing market like india with the help of its sustained brand power. The company has increased sharp focus on the needs of its consumers and has build a solid distribution network to support it.

 Premiumisation in urban and rural penetration are two biggest opportunities in india that will propel HUL’s future sales growth. While 60% of the market is still at the bottom-of-the-pyramid, premiumisation is the most prominent trend across categories of foods and personal care.

■ Expansion of Outlets with improved visibility and availablity of its products. HUL increased its direct retail coverage by adding 600000 outlets and improved the visibility of its products through opening up of ‘Perfect Stores’. Increasing Innovation in the product line is the ‘mantra’ for growth in HUL

■ Almost 35% of its turnover in FY11 has come though innovation. HUL focuses on consumer insight and use of breakthrough technology to deliver better and bigger innovations to the consumers. For Eg. Dove shampoo in superior packaging, Brooke Bond Sehatmand delivering vitamins in tea , Project Shakti &; Shaktiman etc.

At the CMP of INR419, the stock is currently trading at a P/E of 39.7x. It discounts its FY12E EPS of Rs.11.64 by 36x and its FY13E EPS of Rs 13.9 by 30x. We value the stock at a target P/E multiple of 36x based on its FY13E EPS to arrive at the Target price of INR500.