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Brokerage Recommendations

Thursday, December 23, 2010

K R Choksey calls a ‘Buy’ on PVR
CMP: Rs 140   Target Rs 236

During Q2FY11, revenues increased sequentially in line with our expectations on the back of increase in occupancy rate to 30%, higher footfalls and incremental revenues from 28 screens added in first-half of FY11. PVR is expected to 25-30 more screens this fiscal year. EBITDA margins contracted sequentially due to higher expenditure at production and marketing front. We believe growth in ATP backed by increasing per capita consumption in tier-2 and tier-3 cities will continue to support margin expansion going forward.

Strong revenue performance: The strong top line growth is attributable to higher footfalls (due to good movie content during Q2FY11) and better ATP. PVR operates 33 properties with 142 screens in 18 cities across the country has added 28 screens or 7500 seats in H1FY11 and is expected to add another 25-30 screens this fiscal year. Occupancy level has witnessed a growth sequentially wherein South India continues to do better in term of occupancy with Chennai reporting over 70% occupancy rate. At movie business front the company is expected to cash in the benefits on the back of big releases such as Action Replay (PVR co-production) and Khelein Hum Jee Jaan Se (distribution rights) slotted for this quarter of festival season. Mad Madder Maddest (PVR co-production) is expected to release in January 2011. PVR’s last quarter release Aayesha was profitable and PVR is expected to collect around Rs 25 crore of net proceeds.

Higher expenditure led to margin contraction: EBITDA margin fell on the back of higher operating expenditure such as employee cost, film distributors share and other marketing related expenditure completely offsetting higher ATP. Net margins improved on the back of higher other income and lower interest expenses.

Our View: PVR enjoys synergies of having integrated production and exhibition business model format. Going forward, we believe PVR’s strong movie pipe line and screen expansion initiatives will drive long term growth. We continue to maintain our top line estimates for FY11 and FY12 on the back of strong growth in Exhibition and Movie production business. Furthermore the company’s ATP is expected to increase with increasing per capita consumption and increasing spending habit in tier -2 and tier- 3 cities. PVR with having a good presence in non-metro cities is expected to largely benefit from the same.

Moreover with better scope for success of its upcoming three movies in FY11 is expected to support growth potential. We expect other media formats which have decreased its dependency on box-office success to drive revenue potential. Thus, we maintain “BUY” rating on the stock with 12 target month price of Rs 236 based on DCF methodology, which represents a potential upside of 37%. At the CMP of Rs 138, stock is trading at FY11E and FY12E P/E of 15x and 9.3x.

Pinc calls a ‘Buy’ on JSW Steel
CMP: Rs 1203   Target Rs 1362

Ispat acquisition: To accelerate volume growth JSW Steel has proposed to acquire, subject to approvals, 41.3% stake (post full dilution) in Ispat Industries, led by Pramod and Vinod Mittal, by equity infusion of Rs 21.6bn (preferential allotment of 1.09 bn equity shares at Rs 19.85). Mandatory open offer to minority shareholders would follow. With this acquisition, JSW's capacity in India would increase to 11.1mntpa, and is set to reach 14.3mn tpa by FY11-end as 3.2mn tpa brownfield expansion in Karnataka gets commissioned.

Key highlights: Valuation attractive: Replacement cost of ~USD720/t vs. capex of USD 800-USD 1,200/t to set up new capacity, while reducing "go to market" time by 3-4 yrs.

Product profile: Ispat has integrated steel capacity of 3.3mn tpa in Maharashtra, with 10% share of value-added products.

Financial concerns to ease: Equity infusion would help in bringing down net D/E from ~20x pre-deal to 1.8x post-deal. We believe that this will help in reducing Ispat's cost of debt (~15% compared to ~7.5% for JSW).

Scope for margin expansion: FY10 EBITDA/t for Ispat at USD109 is low (USD162 for JSW, USD143 for SAIL and USD265 for Tata Steel India) owing to low capacity utilisation (80%), high iron ore and energy cost. We believe that margin expansion is possible through improved capacity utilisation and cost reduction. Accumulated losses in Ispat to provide tax-benefit going forward, when the company turns around and become profitable.

Outlook And Recommendation: We believe that Ispat acquisition is attractive on replacement cost basis and is in line with JSW's strategy of volume-led growth. Further, we opine that margin expansion in Ispat led by better utilisation, rationalisation of iron ore, power cost and reduction in financial burden (both quantum and cost of debt to reduce) would help in Ispat’s turnaround. Pending open offer and further details, we have valued JSW's 41.3% stake in Ispat at Rs 25.2bn using equity method. Maintain 'BUY' on JSW Steel with a revised target price of Rs 1,362 (JSW steel @ 6x EV/EBITDA, Ispat Inds @ 5x EV/EBITDA).

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