• Well positioned to deliver growth; key markets are India, Brazil and CIS
• Expect 36% growth in FY2008 net profit; on the back of 18% revenue growth
• Maintain IL, with revised price target of Rs260. Recommend buying on dips.

We recently met the Torrent management. Outlook continues to be robust, with strong revenue growth and margin expansion. For FY2008, we have modeled revenue growth of 18%, 130bps margin expansion (10.8% EBITDA) and 36% growth in net profit. We estimate an EPS of Rs15 and Rs17.4 for FY2008 and FY2009 (versus Rs13.2 and Rs16.1 earlier). Amongst key markets, India, Brazil and CIS are doing very well, a trend, which is likely to continue. Company expects sharp margin expansion in the Brazil market, which will equal investments/loss in Mexico (for product filings). Investment/losses in the US market will continue this year too (for product filings), as revenues are expected to begin from next year. Germany continues to be a dark spot (Rs230 mn loss in FY2007). We have rolled over our DCF to March 2009 and our revised price target is Rs260 (Rs200 earlier), or 15x FY2009 earnings. Key risks include inability to improve profitability of international operations, mainly Germany.

For domestic formulations, we have modeled 20% growth for FY2008. For FY2007, domestic formulations business grew by 25% to Rs5.6 bn (43% of total sales). This growth rate was largely due to buoyant performance of the Diabetology, Neuro-Psychiatry and Pain management portfolios, impact of field force expansion done in previous years, improved doctor coverage and new introductions made during the year. We expect the trend to continue.

We have modeled 19% growth in international sales for FY2008. For FY2007, international sales grew by 43% to Rs6.15 bn (48% of total sales). This includes Rs2.8 bn from Heumann (Germany), Rs1.7 bn from Brazil and Rs590 mn from Russia/CIS. The company has done a good job in Brazil, creating a large business in 5 years. We expect the growth momentum to continue. Under the same country head, and a similar branded strategy, the company is expanding into Mexico.

During the previous year, the Company received an approval status from the US FDA for its API and formulation manufacturing facilities. This should help start the US business; however we have little expectation in the short to medium term.

We have modeled EBITDA margin of 10.8% for FY2008, up from 9.5% in FY2007. Margin expansion will likely be driven by scale benefits. Excise duty dropped to 2.2% in FY2007 (6.9% in FY2006). The year had the benefit of a new tax-free plant at Baddi. This resulted in lower excise and income tax. R&D cost is likely to remain at 6% of sales.


Tata Tea reported 14.7% growth in revenues at Rs2.51 bn (we expected 12.2% growth) and 34% increase in EBITDA to Rs150 mn (we estimated Rs243 mn) during 4QFY07.

While domestic branded tea sales continue to do well (9% volumes growth and 12% value growth for branded tea in domestic portfolio), higher wage expenses (wage increases and new accounting standards) resulted in lower EBITDA. Tetley continues to post marketshare gains in key markets. However, stagnant black tea market in UK remains a concern. Tata Tea has agreed for conditional sale of its stake in Energy Brands Inc (EBI) to Coca Cola. Tata group had earlier acquired 30% stake in EBI (25% held by Tata Tea and 5% by Tata Sons) for US$677 mn, in a bid to add a high growth beverage portfolio in the world's largest beverage market. With the sale of 30% stake to Coca Cola for US$1.2 bn, Tata Tea will need to redraw its plans for improving its growth profile. Tata Tea has reiterated its thrust on three verticals—Tea, Coffee and Water, and has announced the acquisition of a controlling stake in Mount Everest Mineral Water Limited (MEMW). We believe that given the robust macro environment in rural as well as urban India, domestic tea business will continue to do well. However, we have concerns on the Tetley business and need to watch out for Tata Tea's strategy to drive growth. We retain In Line rating on the company. Our revised target price of Rs992/share includes Rs91/share from
investments in group companies (valued at 50% discount to market price).
Our target price implies a P/E of 21.5X and 16.9X on FY2008E and FY2009E respectively.

Avoid expensive war for water. Tata Tea has agreed for a conditional sale of its stake in EBI for a consideration of US$1.2 bn (for 30% stake—of which 5% is held by Tata Sons) to Coca Cola Company as against an acquisition price of US$677 mn, resulting in a gain of 77% in less than a year. The sale results in a pre-tax saving of US$436 mn (or Rs296/ share) for Tata Tea. Enhanced and flavored water market is the fastest growing beverage segment in US. Coca Cola lagged its archrival Pepsico in this segment and worried with the slow growth in carbonated drinks market had approached the shareholders of EBI for a possible takeover. We note that the Tata group was a minority shareholder in EBI with 30% stake and gaining control over EBI would have required it to enter into a possible expensive war with Coca Cola. The sale is likely to be completed by November 2007.

Retain focus on water business—as the third vertical. Tata Tea has reiterated that water would remain a critical growth avenue for the company along with tea and coffee. Tata Tea has announced the acquisition of a controlling stake in Mount Everest Mineral Water Limited (MEMW), owners of Himalayan brand of bottled water. Tata Tea is purchasing 10.7% of equity from the promoters and subscribing to a preferential issue of 15% of equity at Rs140/share. A successful open offer for additional 20% stake will increase Tata Tea's stake to about 44%. Factoring in the cash with the company, the acquisition price puts the EV of MEMW at Rs3.97 bn. MEMW achieved sales of Rs229 mn and EBITDA of Rs23.1 mn during the 12 months ending December 31, 2006, implying a 12-month trailing EV/EBITDA of 171X and EV/Sales of 17.3X.

While the acquisitions appears expensive on valuations, Tata Tea claims that the aquifer (of mineral water) is currently being tapped for only 1% of its potential and expect string growth going forward. The bottled water market in India is estimated at Rs11 bn growingat a healthy rate of 25%. Tata Tea will also likely use MEMW's alliance with US-based Marsh Supermarkets Inc. for distributing Tetley products in US. Marsh Supermarkets has 67 supermarkets, 31 LoBill Foods Stores, 6 O'Malia's Food Markets, 148 Village pantry convenience stores and a chain of pharmacies.

Dish TV : It's time to sit back (or out) and relax after a good flight
• Downgraded stock to IL from OP; stock trading above TP after strong outperformance
• Limited room for error in execution at current stock price levels; pricing strategy of new entrants next trigger
• Any correction in fancy valuations of Indian media stocks will hurt Dish TV stock also

We have downgraded Dish TV to IL from OP noting the fact that the stock is trading above our 12-month DCF-based target price of Rs125 and the stock's strong outperformance over the past few weeks. We continue to like Dish TV as a good play on India's emerging distribution opportunity. Indeed, we are most favorably disposed to the distribution portion of the media chain versus broadcasting and content given distribution's ownership of the last-mile, its more loyal audience and hence more predictable cash flows. We would wait for more visibility on the pace of adoption of DTH service in India, Dish's execution versus others and pricing strategy of new entrants. However, we model rapid uptake of DTH service in India given problems with the cable industry. Thus, Dish's current valuations leave limited scope for execution and macro-environment-related disappointments. We retain our earnings estimates.

Not much margin for error at current stock price levels. We believe Dish TV’s strong outperformance of the Indian market over the past few weeks leaves limited scope for disappointments related to slower-than-expected uptake of DTH service in India or Dish’s execution in its quest for new subscribers and market share. Exhibit 1 gives our forecasts for the Indian DTH market and Dish’s market share for the next few years. We model Dish to add 1.1 mn subscribers each in FY2008E and FY2009E. Also, we would watch for the pricing strategy of new entrants and note large risks to Dish’s cash flows if new entrants (Sun Direct, Reliance Bluemagic and Bharti Airtel) offer more competitive packages—lower monthly fees, higher subsidies on consumer premise equipment [CPE] and more number of months of free service. We note that Dish’s valuation is highly leveraged to pricing (ARPU and subsidy on CPE) assumptions. We model a competitive pricing environment but not a disastrously competitive one. We assume new entrants will offer similar packages compared to the current ones in terms of pricing, subsidies on CPE and number of months of free service.

Dish TV could also be vulnerable to any correction in the valuations of the Indian media sector. We expect valuations of the Indian media sector to correct at some point in the future; we cannot say when in the current liquidity-driven market. However, any correction would impact Dish TV stock also since it does not have the support of earnings and/or dividends currently. Indeed, we believe the stock’s outperformance may be due to the general strong re-rating of the sector and not due to any great foresight in stock picking by us and others. In our view, valuations of most Indian media stocks are incredibly high and reflect a lot of expected positive developments in the future; thus scope of earnings disappointments and concurrent multiple de-rating (where earnings exist) is high.

We find the valuations impossible to justify despite our reasonably positive view of the fundamentals of the sector.

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