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STOCK UPDATE Zee Entertainment Enterprises
Recommendation: Buy
Price target: Rs300
Current market price: Rs256 Indo-SA series cut short, sport losses for FY2014 to be lower than expected Key points -
Indo-SA series officially curtailed from 12 matches to 5 matches: Recently, the Board for Control of Cricket in India and Cricket South Africa (CSA) announced that the bilateral series between India and South Africa (SA) scheduled to start from November 21 this year was shortened. The India-South Africa bilateral series was supposed to be played from November 21, 2013 to January 19, 2014. The series was curtailed due to the advancement of India's New Zealand tour, which will be played from January 19 to February 19, 2014. The India-New Zealand series was earlier planned to be staged from early February of 2014. The revised schedule for India's tour of South Africa was announced with some major changes to the original list of two T20I, seven One Day International (ODI) and three Test fixtures. As per the latest schedule, India will play three ODIs and 2 Tests, beginning with an ODI at Johannesburg on December 5, 2013. The series will be broadcast on Ten Cricket and Ten HD. -
Curtailed series will have a positive impact on overall margins, though revenues will also be lower: The shortened series will mean that there will be lower pay-out from Taj TV (Ten Sports) for the media rights to CSA. As per media reports, the pay-out will be lower by $20 million due to the decreases in the number of matches. Taj TV had its media rights agreement with CSA for a period of eight years till 2020. Taj TV had committed to pay $180 million for the media rights deal covering Asia and the Middle East. As per the agreement, India was to visit twice during the media rights cycle. The lower pay-out for the media rights will have a positive impact on Zee Entertainment Enterprises Ltd (ZEEL)'s margins, though the management expects the sports losses to be higher than that in FY2013 (Rs87.5 crore) on account of the long cricket season and the rupee's depreciation. However, the loss would be lower than expected on account of the shortened series. At the same time, there will also be lower revenue booking on the advertisement front on account of the lesser number of matches. In H1FY2014, the losses of the sports business stood at Rs28.6 crore as compared with Rs38 crore in H1FY2013. However, the loss will intensify on account of the long cricket season ahead in H2FY2014 (Pakistan vs South Africa, Sri Lanka vs New Zealand and India vs South Africa). ZEEL's margins stood at 29% in H1FY2014 and at 28% in Q2FY2014. -
Record-breaking premiere of "Chennai Express" propels ZEE TV to number one slot in week 43 with 505,442 GTVTs: The blockbuster premiere of Shah Rukh Khan starrer, "Chennai Express", on Zee TV on October 20, 2013 at 8pm garnered huge viewership with 19,541 TVT (Television Viewership in Thousands) as per the TAM Media Research, period: week 43. Incidentally, "Chennai Express" has become the most successful television premiere till date surpassing the earlier successful premiere of Salman Khan starrer, "Bodyguard", on Star Gold on November 12, 2011. In week 43, ZEE TV secured the number one slot among the general entertainment channels (GECs) with 505,442 GTVTs (Gross Television Viewership in Thousands), followed by Star Plus (492,849 GTVTs) and Colors Viacom18 (423,584 GTVTs). Though in the following week, ie week 44, Zee TV was back to its usual slot, garnering 434,987 GTVTs and Star Plus was again leading the chart with 486,066 GTVTs while Colors was at number two as the highest gainer with 463,778 GTVTs. In the movie channel genre, Zee Cinema continues to hold the number one slot with 210,728 GTVTs; Star Gold at number two with 175,245 GTVTs and Movies OK with 120,183 GTVTs. On the other hand, the newly launched movie channel of ZEEL, &Pictures, garnered 57,589 GTVTs and Zee Anmol registered 50,827 GTVTs. -
Valuation: After our last report (the Q2FY2014 result review dated October 21, 2013) the stock had hit a high of Rs282. However, owing to an overall correction in the market, it had fallen to Rs256 subsequently. We maintain our positive stance on ZEEL. The predictability of its growth, its strong balance sheet, high return ratios, pan-India market positioning and mix of channel offerings combined with the positive impact on the subscription revenues on account of digitisation (the trigger has not played out fully yet) will support the earnings predictability over the coming years. ZEEL is among our high conviction investment ideas and is also included in our Top Pick basket. We maintain our Buy rating on the stock with a price target of Rs300.
VIEWPOINT Ranbaxy Laboratories Looking beyond challenges Key points -
Worst case seems factored in current prices; time to look at key growth elements: Ranbaxy Laboratories (Ranbaxy) has witnessed a series of challenges in the recent past due to the actions of the US Food and Drug Administration (USFDA) on three of its India-based facilities which has affected the valuations of its stock. Despite the odds, we see multiple growth triggers for the company, such as: (1) an improvement in the base earnings before interest, tax, depreciation and amortisation (EBIDTA) margin (due to lower expenses on remedial measures, as indicated by the management); (2) an uptick in its Indian and African businesses; (3) branded products in the USA like Absorica gaining further market share; (4) the performance of the newly launched anti-malarial drug Synriam, the new chemical entity (NCE), gaining better traction in India; and (5) an early resolution of the issues related to the facilities in India at Dewas, Paonta Sahib and Mohali. -
Progress on FTF opportunity; court verdict establishes exclusivity rights on Diovan: While hearing a litigation initiated by Mylan, a US court gave a favourable verdict for Ranbaxy establishing the exclusivity rights on Diovan despite its inability to get the final approval for the abbreviated new drug application (ANDA) from the USFDA within the prescribed time frame. This verdict inculcates hopes of Ranbaxy monetising Diovan and other products having exclusivity rights even if the final approvals are delayed by the USFDA. The company has a few first-to-file (FTF) opportunities in the USA including Diovan, Valcyte and Nexium, which have the potential to change the course of the business for the company. The management is hopeful of capitalising the exclusivity on all three products even though three of the India-based facilities remain shut for remedial measures. -
Key risks: Apart from the delay in remedial measures at the India-based facilities, the key risks for Ranbaxy include: (1) patent challenges on Absorica, (2) volatility in the currency (it has $740 million outstanding contracts), and (3) delay in approvals from the US-based Ohm facilities. -
Valuation: The stock is currently trading 12.8x earnings from the base business in FY2014E (considering a 12-month period) which is at a significant discount to Lupin (-32%) and Sun Pharmaceutical Industries (-46%). We have a positive bias on the stock, though we don't have active coverage on it.
SHAREKHAN SPECIAL Q2FY2014 Capital Goods & Engineering earnings review
Difficult operating environment; remain selective Key points -
Flat sales growth; BHEL continues to underperform: During Q2FY2014, our coverage universe of capital goods and engineering companies showed a flat sales growth at Rs28,856 crore. However, excluding Bharat Heavy Electricals Ltd (BHEL) our coverage universe showed a growth of 9% in Q2FY2014. Two heavyweights in our coverage, Larsen and Toubro (L&T) and BHEL, delivered a mixed performance on the sales front; while L&T grew by 10%, BHEL declined by 15% and continues to struggle due to customer-specific issues and an overall unfavourable business environment. Among the mid-cap stocks, Kalpataru Power & Transmission Ltd (KPTL) surprised positively with a strong sales growth of 35% whereas the growth unexpectedly slowed down in case of V-Guard Industries (V-Guard; especially in its electronic product segment). -
Difficult operating environment but cost-control measures reflecting in margin performance: During Q2FY2014 the cumulative operating profit margin (OPM) of our coverage universe stood at 7%, which declined by 516 basis points year on year (YoY) but was contained sequentially (down by merely 3 basis points). While the operating environment remained difficult across the board, cost-control attempts were visible in many companies as the variable cost was well managed by most of the companies. L&T, KPTL and Thermax managed to sustain their margins at 9-10%. On the other hand, BHEL disappointed on the profitability front. Excluding BHEL, the OPM improved sequentially by 90 basis points and was down by just 73 basis points YoY to 8.9% in Q2FY2014. -
Below operating line performance looks better backed by other income: During Q2FY2014, the below operational performance was well supported by an improved other income, which grew by 70% YoY and elevated to 4% of the net sales compared with 2.4% in the same quarter of the last year. The considerable increase in the other income largely compensated for the increase in the interest and depreciation expenses; however, the adjusted aggregate profit after tax (PAT) declined by 33% during the quarter. Excluding BHEL, the PAT of our capital goods universe grew by 15% in Q2FY2014. -
Order inflow strong but lopsided; book-to-bill ratio remains low: The cumulative order inflow of our coverage companies was Rs34,844 crore during Q2FY2014, showing a growth of 22% YoY and 6% sequentially. However, it was lopsided as L&T continued to exhibit strong inflow traction with a growth of 27% YoY and contributed two-third of the total order inflow. The sturdy order inflow from the infrastructure segment contributed to the order inflow traction in L&T. In case of KPTL, though the stand-alone order inflow grew by 3.3% YoY, on a consolidated basis it reported a growth of 72% YoY due to significant order inflow from JMC Projects during the quarter. In contrast, Thermax showed a 27% decline in order inflow YoY while Crompton Greaves Ltd (CGL) reported a 13% Y-o-Y decline in the order inflow. CGL is choosy in picking orders in the power system business, given the high utilisation of its current facilities and the tough environment with pricing pressure. The order inflow for BHEL continued to be depressing with just Rs4,470 crore worth of orders flowing in during Q2FY2014. At the end of Q2FY2014, the order backlog of all our coverage companies stood at Rs300,907 crore, 2.4x the book-to-bill ratio, which is still lower than its historical level. -
Outlook remains challenging; prefer L&T: We believe the overall macro environment remains challenging for the capital goods sector, as the investment cycle has yet to kick in. Therefore, we advise investors to prefer L&T within our large-cap coverage due to its business and geographical diversification, and sustained order winning record. Moreover, the company aims to improve its return ratios in the next three years.
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