Investor's Eye
[March 22, 2013] | | |
| Summary of Contents
STOCK UPDATE ITC
Recommendation: Buy
Price target: Rs340
Current market price: Rs305 Cigarette sales may dip in FY2014 Key points -
VAT rate on cigarettes increases in key states: Taxing tobacco and tobacco products has always been considered a way of generating revenues by the central and state governments especially in times of sustained inflationary pressures and uncertain macro-economic environment. After the significant increase in the excise duty (of about 18%) announced on cigarettes in the Union Budget 2013-14, almost every state increased the value added tax (VAT) on cigarettes in its state budget. The states such as Maharashtra, West Bengal and Kerala (which together account for close to 30% of ITC's cigarette sales volume) have increased the VAT rate on cigarettes by 5% each in their respective budgets (please refer the table below). On the other hand, Delhi, Tamil Nadu and Andhra Pradesh had kept the VAT rate unchanged for FY2014. -
Likely price hike of about 16%: We believe ITC has to implement a price increase of around 15-16% in its portfolio to mitigate the impact of the central excise duty and VAT rate hikes (in most states) on the margin of the cigarettes business. This will be the second consecutive year of above 15% price increase for ITC. Though the company has not officially increased the prices, the retailers in most of the markets in India are selling ITC's 84mm cigarette brands at a price of Rs7 per stick (which is ~20% higher than the packed price). This hike was in anticipation of a significant price increase by ITC in its cigarette portfolio in the coming months. -
Cigarette sales volume to remain under pressure: The second consecutive price increase of above 15% (if implemented) will definitely have an impact on the cigarette sales volume of ITC. We expect the sales volume to remain flat in FY2013 but slightly decline by 1.0-1.5% in FY2014. We believe ITC would strongly promote the recently launched cigarette in the 65mm category and launch some of its prominent brands under this category. The national launch under this category is likely to take place in the next three to four months. Hence we are expecting a marginal decline in the sales volume in FY2014. -
Outlook and valuation: We broadly maintain our earnings estimates for FY2014 and FY2015. Though the cigarette sales volume is price inelastic, a price increase of above 15% for two consecutive years would put pressure on ITC's cigarette sales volume in FY2014. However, the price hike in the portfolio would help in maintaining the profitability. Overall, we expect ITC's top line and bottom line to grow at compounded annual growth rate of 17.1% and 20.0% respectively over FY2012-15.
At the current market price the stock trades at 31.9x, 26.5x and 22.4x FY2013E, FY2014E and FY2015E earnings respectively. We maintain our Buy recommendation on the stock with a price target of Rs340. Zee Entertainment Enterprises
Recommendation: Buy
Price target: Rs280
Current market price: Rs206 Margin pressure ahead We recently interacted with the management of Zee Entertainment Enterprises Ltd (ZEEL) to discuss the current state of business and the future outlook. The management indicated that the losses from the sports business would increase in FY2014 as compared with the losses in FY2013 (estimated at Rs90 crore) and that investments in newer channels and the launch of new channels would increase the overall loss in FY2014 to around Rs250-300 crore (overall loss estimated at close to Rs150 crore in FY2013). On the subscription front, the management expects the domestic subscriptions to grow by 17-18% in FY2014 (at a rate lower than the FY2013 rate). On the advertisement front, the management expects the growth to taper off in FY2014, after growing sharply in FY2013 (ex sports the business is expected to grow at a rate higher than the industry average of 8-9% in FY2014). On the margin front, the management indicated that margin would contract in FY2014 led by higher losses in the sports business and investments in new initiatives. -
Margins to decline in FY2014, led by higher losses in sports business and investments in newer initiatives: The sports business' losses in FY2014 are expected to be higher than that in FY2013 (estimated at Rs90 crore; a loss of Rs46.6 crore already incurred in the nine months ended FY2013, another Rs45 crore of loss expected in Q4FY2013) led by three India series in FY2013-14. Further, investments in the new bouquets of channels (Ten Golf, HD channels, Ditto TV, Zee Alwan, Zee Bangla and Zee Q) and the potential launch of two new channels would increase the losses to Rs250-300 crore in FY2014 (currently the accumulated losses stand at Rs150 crore). On the back of these losses , the management expects the EBITDA margin to decline in FY2014 as compared to that in FY2013 (exit margin for Q4FY2013 will be closer to 21% and that for FY2013 will be around 25%). -
Domestic subscription revenues could see upside surprise from digitisation, international subscription to remain soft in FY2014: The overall subscription revenues are expected to grow to 21% in FY2013, whereas overall subscription revenues for FY2014 would be lower than that achieved in FY2013. The domestic subscription revenues are expected to grow by 17-18% in FY2014 (by 23.5% in FY2013) whereas the international subscription revenues are expected to remain soft, led by lower currency benefits. The domestic subscriptions have yet to get the full benefits of the phase I of the digitisation exercise, as the multi-system operators (MSOs) are delaying furnishing the total subscribers' data. Even the implementation of the phase II, for which 60% seeding is already done, will be slightly delayed. Thus, with the upside still to reflect in the subscriber numbers, the management expects there to be room for upside in the domestic subscription revenues led by the incremental monetisation of the first and second phases of the digitisation process. -
Ex sports, advertisement revenue growth to taper off in FY2014 but it would be higher than the industry average: After a strong growth of 27% in the advertisement revenues in the nine months ended FY2013, the management indicated that the growth would slow down in Q4FY2013. For FY2014, the management expects the growth to taper off to 16-17% (from 24% in FY2013). Ex the sports advertisement revenues the overall growth would be higher than the industry's average growth. -
Pessimism priced in: In the last one and a half months ZEEL has corrected by close to 15%, led by the concerns over the margin decline and lower revenue growth in FY2014. Though the concerns seem to be factual but the recent correction in the stock price has priced in most of the concerns. Moreover, with the cash level on the balance sheet comfortable at around Rs800-900 crore and with the cash level expected to increase to around Rs2,000 crore by FY2015, we expect ZEEL to reward its shareholders with a higher dividend pay-out and share buy-back programme which could lead to further upside in the stock. -
Valuation: We maintain our earnings estimates for FY2013, FY2014 and FY2015. However, based on the recent developments our estimates for FY2014 and FY2015 could be downgraded (we will review the estimates after the announcement of the Q4FY2014 results). At the current market price of Rs206, the stock trades at 22x and 18x based on the current earnings estimates and at 15x and 12x EV/EBITDA at the FY2014 and FY2015 estimates respectively. We maintain our Buy rating on the stock with a price target of Rs280.
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