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Brokerage Recommendations

Friday, May 07, 2010

Ambit Capital Calls A Buy On DB Corp

CMP: Rs 245 Target Rs 295

We remain positive on the growth prospects of the Indian print media sector. Growth of the print sector is correlated to GDP growth. At present, the ad spend is on a rising trajectory. Going forward, strong growth in GDP is expected to result in higher ad spend by corporates leading to increased ad revenue for media companies. According to Pitch-Madison, the ad revenue of Indian print industry is expected to grow by 9% during CY10. The growth in ad revenue of regional print media is expected to be higher than the national average. This coupled with growing per capita income in tier II and tier III cities and the increasing literacy rate is expected to fuel print media penetration in the country.

DB Corp. Ltd. is one of the leading print media companies in India, publishing 7 newspapers, 48 newspaper editions and 128 sub-editions across 11 states. We expect DBCL's ad revenue to grow at a faster pace than the industry average due to: (1) diversified revenue stream; (2) market leadership in states like MP Chhatisgarh, Haryana and Chandigarh and key cities of Gujarat, Rajasthan and Punjab; (3) higher dependence on local advertisement; (4) growing proportion of colour advertisement (70%); and (5) sustainable ad rate hike. The lower growth in newsprint prices will help maintain margins at current levels.

Based on this, we expect DBCL's earnings to grow at a CAGR of 19%. At its CMP of Rs 243 the stock is trading at 16.4x FY12E earnings. We value DB Corp at 20x FY12E EPS and arrive at a target price of Rs 295, an upside of 21%. We initiate coverage on DB Corp with a BUY rating.

IDFC Securities Calls A Buy On Mahindra Holidays

CMP: Rs 472 Target Rs 600

Luxuries yesterday are necessities of today. While necessities are getting costlier, luxuries are getting cheaper! Maslow’s theory aptly captures the spirit of consumerism prevalent in the Indian context. India is evidently high on lifestyle spending (annual sales of 1.6m LCD TVs and 1.5m cars). In this backdrop, Mahindra Holidays Resorts India (MHRIL), with its monopoly in India’s Vacation Ownership (VO) industry, is a unique mix of scalability and sustainability. With merely 4% penetration (0.25m members in a potential 6.5m HH market), MHRIL has survived the test of credibility and execution on the back of a business model built on ‘annuity’ and virtually ‘zero capital’. We believe the VO industry is at an inflexion point (analogue to the US in 1990s when the industry grew 10x) and with MHRIL commanding supply dynamics, ‘value creation’ seems implicit. While MHRIL is open to risk of receivables owing to the financing schemes provided (availed of by >90% members), we draw comfort with the default risk being muted at <5% for the last decade. We expect MHRIL to garner a 25% CAGR in memberships and 30% CAGR in net profit over the next five years.

Initiating coverage with Outperformer and a 12-month DCF- based price target of Rs 600.

ICICIdirect Calls A Buy On HEG

CMP: Rs 333 Target Rs 423

HEG reported lower-than-expected results for Q4FY10 with EBITDA and net profits registering QoQ decline of 20% and 14%, respectively, due to moderation in the graphite electrode price (down 7-10% QoQ) and increase in raw material costs. Net profit for FY10 stood at Rs 171 crore, up 60% YoY on the back of higher realisations (up 7% YoY) and lower power costs. EBITDA margins for FY10 came in at a healthy 30.7%, showing growth of 560 bps YoY but remained subdued in Q4FY10 due to product price fall.

Though price moderation remains a short-term concern we maintain our positive stance on the company on the back of i) largest single location advantage resulting in operational cost benefits ii) 100% captive power availability with surplus 25 MW merchant sales iii) brownfield expansion activities to 80,000 tonne getting triggered at an opportune time and iv) increase in capacity utilisation on the back of a smart recovery in the global steel industry.

At the CMP of Rs 345, the stock is trading at FY12E P/E of 8.4x and FY12E, EV/EBITDA of 6x (~15% discount to global average). We expect the company to operate at above 85% capacity utilisation levels on the back of robust demand and value the stock at 6.5x FY12E EV/EBITDA (10% discount to global average). We have arrived at a revised target price of Rs 423 and assign a STRONG BUY rating to the stock.


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