Analysts' corner

RESEARCH CALLS
S I Team / Mumbai August 25, 2008, 3:07 IST

Balaji Telefilms
Reco price: Rs 173
Current market price: Rs 157.45
Target price: Rs 220
Upside: 39.7%
Brokerage: Kotak Securities

Balaji Telefilms (BT) and the Star group have ended the four-year long exclusivity contract under which the Star group had the right of first refusal, on content produced by BT and BT could not air any other content on the rival channels during the time when its shows were being aired on Star Plus.

Content exclusivity relaxation will prove to be a positive for BT, in the longer term. The entry of a slew of new channels in the general entertainment channel space- Colors, 9X and NDTV Imagine are a source of opportunity for popular content players like BT. The company’s ability to capitalise on the same and ramp up volumes profitably will be the key issue to watch out for.

The company is expected to counter multiple headwinds of lower realisations from a key client-STAR, waning popularity of its content and expenses towards new show launches.

BT is now hoping to address them through different programming formats, expected releases in the near term, outcome of which will be critical for renewed financial performance. At Rs 173, the stock trades at a reasonable 13.1x FY09E earnings. Maintain Buy with a price target of Rs 220 (Rs 225 earlier).

Lloyd Electric & Engineering
Reco price: Rs 90
Current market price: Rs 83.70
Target price: Rs 142
Upside: 69.7%
Brokerage: Emkay Global Financial Services

One of India's largest air conditioner coil manufacturer, Lloyd Electric & Engineering (LEE) witnessed muted growth of 6 per cent year-on-year (y-o-y) in topline to Rs 187.1 crore during Q1 FY09.

This was primarily on account of demand for air conditioner in North India getting impacted due to the early monsoon arrival this year. High depreciation and interest expenses impacted the net profit, which declined by 11.3 per cent y-o-y to Rs 14.6 crore during Q1 FY09.

The company recently acquired a Prague-based Czech company called Luvata Czech, a leading manufacturer of customised finned-pack heat exchanger coils in the world. LEE would be introducing refrigeration coil as a new product line, with technology transfer from Luvata Czech, which will help the company diversify its product portfolio.

Labour arbitrage and an opportunity to increase market share in Europe and Russia are the other benefits that would arise out of the acquisition. LEE will be investing Rs 20 crore in Luvata Czech in FY09 for brownfield expansion, which in turn will result into higher economies of scale. The stock currently trades at a P/E of 4x FY09E and 3x FY10E earnings.

Crompton Greaves
Reco price: Rs 253
Current market price: Rs 250.70
Target price: Rs 367
Upside: 46.4%
Brokerage: Sharekhan

During FY08, the overseas power system business of Crompton Greaves (CG) reported a 28 per cent y-o-y growth in revenues to Rs 2,959.7 crore (43.3 per cent of total revenue), aided by strong performance of its key subsidiaries Pauwels and Ganz. The power business continues to be the revenue driver for the company.

However, the revenue growth in the domestic power business was sedate, as the company faced manufacturing road blocks during the two quarters of FY08 (fire in a transformer plant in Q2 FY08 and logistical issues in Q3 FY08). Aided by steady revenue growth and improved operating performance, the net profit of the company grew by 43.7 per cent y-o-y to Rs 405 crore during the year.

The company’s order book stands at Rs 4,653 crore, up 14.4 per cent y-o-y. The company has increased the manufacturing capacity of the power division by 38 per cent.

The company has also installed nine assembly and test pads for power circuit breakers, which aided a 40 per cent increase in the production.

CG, now capable of providing a wide array of products and services, is well placed to exploit the opportunity arising out of the huge investments flows witnessed by the power transmission and distribution space. At Rs 253, the stock is quoting at a P/E of 15.9x its FY09E earnings.

Bharti Airtel
Reco price: Rs 792
Current market price: Rs 799.2
Target price: Rs 973
Upside: 21.7%
Brokerage: Prabhudas Lilladher

Bharti Airtel (Bharti) maintained its strong outlook on wireless subscriber net additions till 2010 and expects the overall wireless base to reach 500 million, implying a compounded annual growth rate (CAGR) of 15 per cent over the period. It has re-iterated its stance of sustaining a 25 per cent market share.

The company foresees competition to intensify further with the entry of new operators and renewed interest of global telecom operators to set-up operating footprint in one of the fastest growing telecom markets in the world.

But given the under-penetration in the market and the size and scale that Bharti has built over the years in terms of network coverage, wide distribution and innovative product offerings, the company is confident of taking full advantage of the market opportunity over the next 6-9 months.

However, mobile number portability can be a serious threat to Bharti, due to the inherent high churn in the GSM segment (about 5 per cent of overall subscriber every month). Faster access to 3G spectrum shall be the key trigger for the company in the foreseeable future. At Rs 792, the stock trades at a P/E of 15.5x and at an EV/EBITDA of 9x FY10E earnings.

Bharat Bijlee
Reco price: Rs 1,396
Current market price: Rs 1,400
Target price: Rs 1,603
Upside: 14.5%
Brokerage: India Infoline

Bharat Bijlee (BB) earns 70 per cent of its revenue from the transformer division and the rest from sale of motors. To tap the huge growth opportunity in transformers on the back of investments in the power sector, BB plans to expand its transformer capacity by 38 per cent, to 11,000 MVA by the end of Q2 FY09.

The company expanded its motors capacity to 1m horsepower (HP) in FY07 and plans to further expand it to 1.7m HP over the next two years. In addition to the capacity expansion, BB plans to reorganise its operations and has initiated major restructuring of its business portfolio.

BB is expected to register revenue and earnings CAGR of 17 per cent and 10 per cent respectively over FY08-10E on the back of increase in transformer volumes and new product launches.

The company earns an EBITDA margin of about 20 per cent, which is expected to reduce by 320 bps through FY08-FY10E, given escalating competition. The stock has corrected by 66 per cent from its peak on concerns of earnings remaining flat. These concerns are adequately priced in at the stock’s current P/E of 7.6x on FY10E earnings, adjusted for investment book.

(Current market price as on August 21, 2008.