| STOCK UPDATE Bajaj Auto
Recommendation: Hold
Price target: Rs2,195
Current market price: Rs2,081 Yet to "Discover" growth, downgraded to Hold Key points - Bajaj Auto (Bajaj) already facing the heat of competition in the domestic motorcycle market posted a disappointing operating performance for Q1FY2015. The OPM contracted by 150BPS YoY to 18.9%. The results were further affected by a higher deprecation charge on account of a change in the Companies Act, 2013 and an increase in the effective tax rate due to a hike in the tax rate on the treasury income. Adjusted for a forex loss, the net profit declined by 2.2% YoY to Rs787 crore, which was below estimate.
- Bajaj's market share in the domestic motorcycle segment reached a five-year low of 17.7% during the quarter. The company is focusing efforts on the recently launched Discover 125 and the soon to be launched Discover 150 to regain market share. Fortunately, the other parts of Bajaj's business model, namely the domestic sales of premium brand Pulsar and three-wheelers, as well as exports, continue to perform well. However, the volume growth for the company hinges on the success of the Discover brand.
- We have revised our earnings estimates lower by about 6% to account for the lower OPM, higher depreciation charge and increased effective tax rate. Our revised price target of Rs2,195 (vs Rs2,162 earlier) is based on 15.5x FY2016E earnings and values Bajaj's 47.9% stake in the premium motorcycle manufacturer, KTM AG, at Rs97 per share (a 30% discount to the current market price). However, given the pressure in the domestic motorcycle business and a limited upside to the stock price from the current level, we downgrade the stock to a Hold.
Zee Entertainment Enterprises
Recommendation: Buy
Price target: Rs367
Current market price: Rs295 Margin surprise continues, retain Buy Key points - The revenues of ZEEL rose by 11.6% YoY to Rs1,085.7 crore in Q1FY2015 driven by a 17.4% Y-o-Y growth in the advertising revenues to Rs622.1 crore. A change in the accounting treatment of the subscription revenues to comply with a TRAI regulation after the discontinuation of MediaPro JV with Star affected the reported numbers. Thus, the domestic subscriptions grew by 2.2% YoY (on a like-to-like basis the same grew in high single digits) and the overall subscription revenues grew by 4.4% YoY. The revenues from the other sales and services rose by 9% YoY while the sports revenues declined by 16% YoY (as there was no big sporting event during the quarter).
- Despite the launch of a new GEC, "Zindagi", ZEEL managed to maintain a healthy margin of 28.5% (higher than estimated) for the quarter, down 147BPS YoY. The content cost on a reported basis rose by 5.7% YoY and fell by 20.3% QoQ on account of a change in the accounting treatment after the discontinuation of MediaPro JV. Ex sports, the EBITDA margin for the quarter was at 31.2%. The net income for the quarter was down by 6.3% YoY to Rs210.6 crore.
- We have tweaked our earnings estimates to incorporate a higher depreciation cost on account of a change in the useful life of assets as per the new Companies Act 2013 and the impact of the discontinuation of the Mediapro JV. ZEEL, which continues to beat the industry in advertisement revenue growth and has a strong bouquet of channels, will be among the prime beneficiaries of the overall recovery in the macro environment and acceleration of the digitisation process. We maintain our Buy rating on the stock with a price target of Rs367.
- Risk: A significant increase in investments in new channels and a major delay in the implementation of the digitisation regime would be the key risks to our earnings estimates.
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