Investor's Eye: Thematic Report - (Closure of switch call from RPower to CESC/NTPC with 42% returns); Viewpoint - Network 18 Media & Investments; MF - Sharekhan's top equity mutual fund picks, Sharekhan's top SIP fund picks

 

Investor's Eye [August 23, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Closure of switch call from RPower to CESC/NTPC with 42% returns Switch call from RPower to CESC results in 42% net return  The switch call to shift from troubled Reliance Power to CESC given in the Switch Idea report dated December 23, 2011 has delivered handsome returns of close to 42% in the past eight months. The benchmark index, Sensex, has appreciated by 13% whereas the BSE Power Index has risen by just 7% in these eight months.  In the same report, for the extremely risk-averse investors we had recommended switching from Reliance Power to NTPC for stable returns and less volatility. NTPC has appreciated by 8% since then. Though NTPC's returns have been lower than those given by Reliance Power in the same period, but the volatility in NTPC has also been also much lower in the past eight months. We are not accounting for the tax-free dividend of Rs3.5/share paid by NTPC during the above mentioned period (in February 2012). Rationale for closing the switch call CESC-time to take some money home after handsome returns, though we remain positive in medium term  The key short-term trigger for a tariff revision (a 13% upward revision) with a retrospective effect has played out in line with our expectations and the CESC stock has appreciated by 57% since the initiation of our call eight months back. Consequently, we prefer to close the switch call and take some profits off the table. However, we maintain a positive stance on the stock over the medium term and the longer term based on the triggers in the offing, such as the commissioning of two new power plants and the potential reduction of the cash burn in the retail business (an important long-term re-rating trigger for the stock).  Reliance Power-concern over surplus fuel issue (CAG report) is public now; future policy actions to guide stock price When we had initiated the call, Reliance Power was facing major ambiguity over fuel supply and policy issues related to surplus coal diversion from captive mines at some of its plants. Recently, the much awaited report of the Comptroller and Auditor General of India (CAG) on the subject was made public and the same has been a major overhang for the stock. The CAG report is public now and the government's future course of action on the matter will guide the stock price. At this point it's really difficult to take a call whether the future policy action would be favourable or unfavourable for Reliance Power. Nevertheless, given the domestic coal supply scenario, we cautiously expect more corrective measures from the government and less retrospective action. Hence, we prefer to close the call.    VIEWPOINT Network 18 Media & Investments       Focus on profitability Recently we met the management team of Network 18 Media and Investments (Network 18), Raghav Bahl, the group founder, and B Saikumar, the group CEO, to understand the company's business strategy and the road ahead. With the completion of the major diversification and expansion plans of the company over the past few years, the management sounded upbeat and optimistic about the business turning around with profitable margins and improved cash flows in the coming years. The highlights of our meeting are as follows.  Optimistic on turning TV18 profitable in H2FY2013: Network 18 reported a loss of Rs311.7 crore at the operating level and that of Rs392.7 crore at the net level for FY2012. At the group level, the losses have escalated mainly on account of the incremental investments made by the company in new channel launches, new businesses and a higher interest outgo. On the other hand, TV 18 Broadcast (TV18) reported a loss of Rs24 crore at the net level and a profit of Rs8 crore at the earnings before interest, tax, depreciation and amortisation (EBITDA) level.  Out of investment mode after massive expansion across segments: Network 18 has been in investment mode since 2006 and has grown from a one-channel (CNBC-TV18) media company to a 27-channel (after the acquisition of Eenadu TV [ETV]) media conglomerate with presence across the media & entertainment space except radio. The company will have presence in different genres of television except sports. Along with television the company is present in the print medium (the Forbes magazine), the digital space (eg: www.moneycontrol.com), the film production and distribution business, the event management segment and the e-commerce (HomeShop 18, Yatra, bookmyshow etc) business. This has stressed the profitability and balance sheet of the company.  Monetisation of assets to bring additional cash: Over the years, Network 18 has nurtured many media ventures under its fold with investments in www.bookmyshow.com, Yatra, Den Networks, and NewsWire 18 among others. The monetisation could happen by way of a stake sale in its ancillary businesses, like the digital businesses (www.bookmyshow.com), Yatra (a 13.26% stake), Den Networks (a 2.49% stake), NewsWire 18 (a 77.5% stake) and the investments made through Capital 18 Fincap (its venture capital arm). The company expects to cash out about Rs500 crore through the monetisation of assets in the coming year.  Rights issue to repay debt and fund ETV acquisition: The company is planning a rights issue of Rs2,700 crore each in Network 18 and TV18. Effectively, the company would be raising Rs4,000 crore with Network 18 holding a 51.23% stake in TV18. The funds raised by TV18 would be utilised for the ETV acquisition, which would cost Rs1,925 crore. The funds raised in Network 18 would be utilised to repay the debt. The repayment of the debt would enable the company to deleverage its balance sheet. View: Over the years, Network 18 has gradually evolved as a media conglomerate with presence across genres. However, nurturing new businesses and incremental investments in the existing businesses have taken their toll on its profitability and cash flows. Going forward, the management is committed to turning the company profitable at the group level by FY2014. However, we remain circumspect on the turnaround timeline, given the uncertainties attached to the media industry. Going forward, positive news flow on the monetisation of media assets and the successful retirement of debt post-rights issues coupled with an improvement in the quarterly performance will act positive triggers for the company. Currently, we do not have active rating on the stock. MUTUAL GAINS Sharekhan's top equity mutual fund picks Large-cap funds Mid-cap funds Multi-cap funds ICICI Prudential Focused Bluechip Equity Fund - Ret SBI Magnum Sector Funds Umbrella - Emerg Buss Fund Reliance Equity Opportunities Fund UTI Wealth Builder Fund - Series II HDFC Mid-Cap Opportunities Fund SBI Magnum Global Fund 94 Tata Pure Equity Fund IDFC Premier Equity Fund - Plan A Birla Sun Life Dividend Yield Plus Franklin India Bluechip Sundaram Select Midcap ICICI Prudential Dynamic Plan Principal Large Cap Fund Principal Emerging Bluechip Fund AIG India Equity Fund - Reg Indices BSE Sensex BSE MID CAP BSE 500 Tax saving funds Thematic funds Balanced funds ICICI Prudential Taxplan Birla Sun Life India GenNext Fund HDFC Balanced Fund Reliance Tax Saver (ELSS) Fund UTI India Lifestyle Fund HDFC Prudence Fund Franklin India Taxshield Fidelity India Special Situations Fund Tata Balanced Fund Fidelity Tax Advantage Fund Sundaram Rural India Fund ICICI Prudential Balanced Religare Tax Plan DSP BlackRock Natural Resources & New Energy Fund - Ret Reliance RSF - Balanced Indices CNX500 S&P Nifty Crisil Balanced Fund Index Fund focus Fidelity India Special Situations Fund Sharekhan's top SIP fund picks Large-cap funds Multi-cap funds Tata Pure Equity Fund Reliance Equity Opportunities Fund Franklin India Bluechip SBI Magnum Global Fund 94 Reliance Top 200 Fund - Retail Birla Sun Life Dividend Yield Plus Birla Sun Life Frontline Equity Fund-Plan A ING Dividend Yield Fund Principal Large Cap Fund AIG India Equity Fund - Reg BSE Sensex BSE 500 Mid-cap funds Tax saving funds HDFC Mid-Cap Opportunities Fund Reliance Tax Saver (ELSS) Fund IDFC Premier Equity Fund - Plan A ICICI Prudential Taxplan Sundaram Select Midcap Religare Tax Plan Kotak Midcap Fund Fidelity Tax Advantage Fund Franklin India Prima Fund HDFC Long Term  Advantage Fund BSE Midcap S&P Nifty Fund focus Reliance Top 200 fund   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

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