Investor's Eye
[October 23, 2013] | | |
| Summary of Contents
STOCK UPDATE Eros International
Recommendation: Buy
Price target: Rs165
Current market price: Rs146 Ahead of expectations, outperformance on net income led by lower tax rate Result highlights Beats expectations, company focus on high-content right budget movies paying off: For Q2FY14 Eros International Media Ltd (EIML) has reported a much better performance as compared with that of Q1FY2014, which was a relatively soft quarter. The company has exceeded our estimate on the top line by 6%, margin by 384 basis points and net income by 34%. The company's strategy of targeting high-content right budget movies has paid off yet again in this quarter with the super success of Grand Masti with a box office collection over Rs100+ crore (in Q1FY2014 Raanjhanaa was a big success). For the seasonally strong December quarter, EIML has five big budgets movies lined up (a) Krrish 3 (November 1, overseas); (b) Ram-Leela (November 15); (c) Singh Saab the Great (November 22); d) R... Rajkumar (December 6); and (e) Kochadaiyaan (December 12). We expect EIML to report a strong Q3FY2014 driven by a strong movie slate and monetising of the satellite right deals. -
Revenues ahead of expectations: For the quarter, the revenues of EIML declined by 12.3% year on year (YoY) to Rs201 crore, which is ahead of our expectation of Rs190 crore. The revenue outperformance was largely on account of a better than expected performance of Grand Masti, which crossed the Rs100+ crore box office collections, for which EIML was the sole distributor. Along with that the company also had revenues coming in from the overseas rights of movies like Phata Poster Nikla Hero for the quarter and monetisation of catalogue (satellite rights). During the quarter, EIML released 14 films, which includes four Hindi, and 10 Tamil and other regional language movies. In Q1FY2013, the company had released 12 films, which included seven Hindi, and five Tamil and other regional movies. In Q2FY2013, the company released 19 movies, which included high-grossing movies like Cocktail, Vicky Donor and Housefull 2. -
Margin beats estimate; net income outperformance led by lower tax rate: The company reported the EBITDA margin at 25.4% for the quarter, which was almost 4 percentage points higher than our estimate of 21.6% and higher by 175 basis points YoY. The outperformance on the margin front was attributed to the higher monetisation of the relatively low-budget movie Grand Masti and also on account of a large drop of 68% YoY in the other expenses (on account of lower foreign exchange [forex] losses). The net income for the quarter was up by 42% at Rs37 crore, which was much higher than our estimate of Rs28 crore. The outperformance on the net income front was primarily led by a lower than expected tax rate, which was at 19% against our expectation of 32%. The lower effective tax rate was on account of a change in the company's accounting policy, as the company has started routing the monetisation revenues through its subsidiary Copsale based in British Virgin Islands, thus the tax incidence is lower. -
Valuation: The performance of the company for Q2FY2014 indicates that the revenue momentum is back with Q3FY2013 looking very solid in terms of movie slate (the management expects revenues of around Rs1,200 crore for FY2014). The company has taken few more steps towards strengthening its strategic initiatives like HBO (extended offering to Hathway and Gujarat Telelink Pvt. Ltd [GTPL] platforms) and Eros Now Online platforms (acquired movie titles from UTV and Viacom 18), which we believe will have long-term benefits. Additionally, the parent company's impending listing on the New York Stock Exchange (NYSE) remains a medium-term trigger for the re-rating of the stock (the company is expected to receive advances of close to Rs1,200 crore). We have tweaked our earnings estimates to incorporate the lower tax rate for FY2014E and FY2015E. We maintain our Buy rating on the stock with a price target of Rs165. V-Guard Industries
Recommendation: Hold
Price target: Rs520
Current market price: Rs496 Price target revised to Rs520; Hold retained Result highlights -
Disappointing sales of electronics division dent quarterly performance: During Q2FY2014, V-Guard Industries (V-Guard) reported net sales 16% below our estimate as the electronics segment reported weak sales (declined by 18% year on year [YoY] and 48% quarter on quarter [QoQ]). The fall in the electronics segment (contributes 25% of the sales) was mainly due to the depressing performance in the digital uninterruptible power supply (DUPS; down 48% YoY) and uninterruptible power supply (UPS; down 27% YoY) respectively. The net sales grew by 7% YoY but declined by 18% QoQ to Rs334 crore. The operating profit declined by 10% YoY and 13% QoQ to Rs27 crore in Q2FY2014 on account of the lower sales. The profit after tax (PAT) of V-Guard declined by 19% YoY and 18% QoQ to Rs14.5 crore, which was also 20% lower than our estimate. Till H1FY2014, the net profit declined by 17% YoY to Rs10.8 crore on a sales growth of 17% and the operating profit margin (OPM) contraction of 235 basis points YoY. -
Earnings estimates revised downward: The weak sales trend and inventory build up indicate considerable moderation in the growth in the electronics segment. Moreover, we believe that the general trend of lower load shedding in the run up to the upcoming elections would keep the demand for inverters muted in the second half of the fiscal. Taking this into consideration, we have revised down our revenue and margin assumptions that have resulted in a 6-7% downward revision in the earnings estimates for FY2014 and FY2015. -
Hold rating retained with revised price target of Rs520: In line with the revision in earnings estimates, we have revised down our price target to Rs520. We see limited upside from the current level but one should look at accumulating the stock on decline as the company would manage a healthy compounded annual growth rate (CAGR) of close to 20% in the tough business environment with the return on equity of over 25% despite the expected unfavourable shift in the revenue mix (driven by the lower sales of inverter and other electronics products).
VIEWPOINT Hero MotoCorp Demand recovery in sight Q2FY2014 Results highlights -
Hero MotoCorp Ltd (HMCL)'s Q2FY2014 results were ahead of our as well as the Street's estimates. -
The realisation per vehicle at Rs40,431 was 2.6% above our estimate on account of a better product mix and price the hikes taken. The contribution per vehicle at Rs11,514 was 9% above estimate due to a better mix and the subdued commodity prices during the quarter. -
HMCL reported an operating profit margin (OPM) of 14.5%, which is 90 basis points higher than our estimate. -
The lower depreciation further boosted the profit. HMCL reported a profit of Rs481.4 crores, which is higher than our estimate of Rs414.1 crore. Valuation
We maintain our volume assumptions for HMCL given the recovery in the festive season. However, we have increased the margin assumption on account of an outperformance in Q2FY2014 and continued cost control initiatives by the company. We have assumed margin of 14.5% and 15% for FY2014 and FY2015 respectively. HMCL is likely to witness increased tax rate on account of a reduction in the tax benefit from its Uttarakhand plant and an increase in the surcharge in the Union Budget. We expect earnings per share (EPS) estimates of Rs108.7/share and Rs143.6/share for FY2014 and FY2015 respectively. The stock is currently trading at close to its average historical one year forward P/E band, and largely factors in the demand recovery. We have a Neutral view on the stock.
MUTUAL GAINS | Debt Mutual Fund Picks Bond / Debt market round up - Bond yields rose in September, a month in which the first monetary policy review by the new Central Bank Governor and the U.S. Federal Reserve's (Fed) decision to continue with its bond-purchase program for the time being hit the headlines. In the first half of the month, bond yields fell sharply after market participants welcomed the RBI's move to partially roll back its liquidity-tightening measures. Bond yields got further support on the back of a sharp rally in the domestic currency and a drop in global crude oil prices. However, yields started rising after the Central Bank announced a surprise hike in benchmark repo rate at its Mid-Quarter Monetary Policy Review on September 20. Bond yields got some support in the last week of the month after the RBI announced Open Market Operations (OMOs) to ease liquidity condition in the market ahead of the festive season.
- The 10-year benchmark bond ended up 17 bps to close at 8.77%, compared to its previous month's close of 8.60%, after touching a low of 8.19% on September 19.
Bond / Debt Outlook - Bond prices are likely to remain range bound in the coming month. It is expected that main triggers for the markets will be any development related to the Fed's bond-buyback program, movement in the domestic currency and updates on economic indicators. Investors will track upcoming debt ceiling discussions in the U.S. The RBI will conduct the auction of Government Securities and Treasury Bills for an aggregate amount of Rs45,000 crore and Rs60,000 crore, respectively during the next month.
| | | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | |
Regards,
The Sharekhan Research Team | |
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