Investor's Eye: Stock Idea - Bajaj Finance (Quality play, reasonable valuation); Update - Zee Entertainment Enterprises, Punj Lloyd

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Investor's Eye [May 21, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA   Bajaj Finance Recommendation: Buy Price target: Rs2,315 Current market price: Rs1,780   Quality play, reasonable valuation   Key points Strong focus on consumer, SME segments to sustain growth: Bajaj Finance Ltd (BFL) has made deep inroads into the consumer finance segment on the back of its strong brand image and unmatched expertise in consumer financing (consumer electronics, two-wheelers). It has gained a significant market share in most consumer categories as well as SME and mortgage businesses, and has a well diversified loan book. Though the consumer sector is witnessing some moderation (especially two-wheelers), its SME loans are growing at a robust pace (53% YoY in FY2014). We expect the loan growth to remain strong (+25% over FY2014-16) and any revival in the consumer segment will boost growth. Moderation in interest rates, credit cost to cushion profitability: Since BFL has shifted focus to low yielding mortgage assets (to reduce risk in the portfolio), the margins could decline in the near term. However, the impact of the same on the RoA will be marginal as a lower proportion of consumer loans will lead to a decline in the credit cost and hence partly offset the impact on the net interest margin. Further, the company has a diversified funding mix and will be a key beneficiary of any moderation in the wholesale borrowing rates. Asset quality to remain healthy: Despite having a higher proportion of consumer loans (~40% of AUMs), the company has been able to maintain healthy asset quality. On a proactive basis it has already migrated 95% of its book to 90-day past due basis for NPA recognition (as suggested by an RBI committee). We expect the asset quality to sustain at healthy levels due to a diversified loan book, strong collection system and conservative provisioning policy. Earnings growth, return ratios to remain strong; initiate coverage with price target of Rs2,315: BFL is among the best managed NBFCs having a sustainable and scaleable business model with a highly experienced management team. Considering its strong return ratios (RoA of +3% and RoE of +20%) and robust asset quality, the valuation of 1.6x FY2016 BV seems reasonable. The stock is trading at a 15-30% discount to its peers despite the company's strong performance which leaves room for more upside. We, therefore, value BFL at 2x FY2016E BV which results in a price target of Rs2,315. We initiate coverage on the stock with a Buy rating.  Key risks: rising inflation could trigger rate hikes and therefore affect BFL's margins while a delayed revival in the economy could also affect its growth. STOCK UPDATE     Zee Entertainment Enterprises Recommendation: Buy Price target: Rs367 Current market price: Rs294   Margin surprises positively, maintain Buy with revised price target of Rs367    Result highlights For Q4FY2014, Zee Entertainment Enterprises Ltd (ZEEL) has delivered a 20% Y-o-Y growth in the revenues at Rs1,158.8 crore. The advertising revenues were up by 21.5% YoY and the subscriptions revenues up by 2% YoY, whereas the revenues from the other sales and services reported an almost four-fold jump YoY to Rs112.9 crore, driven by strong syndication sales from the sports business (the sports channel revenues were up by 82.7% YoY to Rs195.9 crore).  The EBITDA margins improved by 176BPS YoY and 243BPS QoQ to 26.9%. The sports business' margins have turned positive at 17.9% against a negative 37.8% margins in Q4FY2013. The margin, ex sport business, stood at 28.9%, down 410BPS YoY. The net profit was up by 21% YoY to Rs217.6 crore.  ZEEL is well placed to benefit from the ongoing digitalisation theme and the overall recovery in the macro economy. Also, additionally phase-wise rate hikes in the channel rates would augur well for the subscription revenues. We have tweaked our estimates to incorporate potential tax benefits from a merger of DMCL in FY2016 and increase our estimate for FY2016 by 11%. We maintain our Buy rating on the stock with a price target of Rs367.  Risks: A significant increase in the investment in the new channels and a major delay in the implementation of the digitalisation regime would be key risks to our earnings estimate.      Punj Lloyd Recommendation: Reduce Price target: Rs30 Current market price: Rs40   Uncertainties to keep up the volatility; maintain Reduce   Result highlights Punj Lloyd posted another weak quarter led by a lower execution in the overseas business (Middle East) and cost inflation (additional expenses of $65 million in the Indonesian and Middle East subsidiaries) aided by a higher debt burden (a gross debt of Rs6,248 crore) leading to a consolidated net loss of Rs382 crore in Q4FY2014. The uncertainty of the Libyan order execution, prevailing cost over-runs and write-offs in the overseas subsidiaries are providing a limited earnings visibility going ahead. The working capital cycle still remains stretched at 152 days with the debt peaking each quarter has been weakening the balance sheet. The plans of asset sale, claims management and reimbursement from projects have been taking longer than expected. Punj Lloyd is in a difficult situation where the management is restructuring the business with the stretched working capital cycle and high debt-equity ratio. Thus, the immediate outlook remains uncertain with the expectations of a weak financial performance. Consequently, we maintain our Reduce rating with a price target of Rs30.   Click here to read report: Investor's Eye       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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