Q1FY2008 Media earnings preview
Key points
- The first quarter of the financial year is seasonally weaker for majority of the media companies in the absence of any major events in the April-June period (unlike the festive season in Q3 and the annual budget in Q4).
- Media and entertainment majors have sensed the opportunity provided by increasing consumerism and improving regulatory environment. The increasing ability of the consumer to pay for quality entertainment has resulted in a new wave of multiplexes and production of more and better movies. During Q1FY2008 the Television Eighteen (TV18) group and UTV raised funds overseas to expand their presence in the Indian movies business.
- A major event during the quarter was Global Broadcast News' tie-up with Viacom to form Viacom-18 to launch a Hindi general entertainment channel (GEC). This amounts to a big leap for the TV18 group, as it would transform the group from a news broadcaster to a complete media and entertainment giant in the years to come.
- This was the second quarter after the implementation of the conditional access system (CAS) in select areas of Mumbai, Delhi and Kolkata. While there is still some time to go before CAS can completely penetrate these areas, the government is contemplating its extension to another 55 cities. Though we believe this may not happen soon but the same comes as good news to broadcasters and multi-system operators as it indicates the intent of the regulator.
- We expect the Q1 results of media companies to be a mixed bag with companies that have part of their businesses in investment mode showing lower overall profits and the others reporting a good growth in revenues and profits.
STOCK UPDATE
Bajaj Auto
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,271
Current market price: Rs2,195
Results below expectations
Result highlights
- Bajaj Auto Ltd's (BAL) Q1FY2008 results are lower than our expectations, mainly on account of a higher than expected decline in the company's operating profit margin (OPM). The OPM decreased due to a fall in the sales volumes and cut-throat competition in the motorcycle segment.
- The net sales declined by 4.2% to Rs2,109.1 crore, as the volumes for the quarter dropped by 12% and the realisations grew by 8.5%.
- The OPM took a hit during the quarter owing to higher raw material and staff costs as well as intense competition in the market. As the company was unable to raise the prices of its products, its OPM for the quarter declined by 330 basis points to 13.1%, leading to a 23.9% drop in the operating profit to Rs275.4 crore.
- A higher other income, and stable interest cost and tax outgo led to an 18.4% drop in the company's net profit to Rs226.5 crore.
- BAL plans to launch its all non-100cc 4-stroke motorcycle in the first week of September. The volume growth in the motorcycle segment is expected to improve from then onwards along with the commencement of the festive season. The interest rates have more or less peaked and chances of any further rate hikes are very slim. The credit availability should improve from September onwards, considering that many banks have recently raised money and inflation too has come under control.
- Though the profit margins seem to have bottomed out, the improvement in the profit margins will depend on the improvement in the volume growth. Considering the lower than expected profit margins in Q1FY2008, we are downgrading our estimates for FY2008 by 4% from Rs116 to Rs112 and for FY2009 by 1% from Rs129.5 to Rs128.1.
- At the current market price of Rs2,195, the stock discounts its FY2009E earnings by 17.1x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 10.4x. We maintain our Hold recommendation on the stock with a sum-of-parts price target of Rs2,271.
MUTUAL FUNDS: WHAT'S IN—WHAT'S OUT
Fund Analysis: July 2007
An analysis has been undertaken on equity and mid-cap funds' portfolios, indicating the favourite picks of fund managers for the month of June 2007. Equity funds comprise all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 18 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Midcap Fund etc.
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