Government of India has finally approved the pricing of RIL’s D6 gas at $ 4.2/bbl. This development is positive for the timelines of the project and allays any fear of delays in gas production on account of government approval delays on gas pricing. The approval also allays investor’s apprehension on market pricing of gas from any future finds and could set a precedent for the market based price discovery formula for gas.

But, even now the overhang of court cases remain over the final pricing and contractual obligations for D6 gas. In its interim judgement, the Bombay High Court has restricted RIL from selling D6 gas to any party other than the counterparties in the dispute and for RIL’s own captive usage. Thus, even after the government’s approval, RIL might have to wait for the final court verdict to enter into gas sales contracts.

HSBC lower their gas price assumption for D6 gas to $ 4.2/mmbtu from $ 5/mmbtu earlier. While they expected pricing for D6 gas to be at the higher end of the $ 4.5-5.0/mmbtu band, pricing has come in below the lower end. Also, the earnings and valuation estimates for RIL are now based on post-IPCL merger equity base of 1,454m shares (1,394m earlier), which includes treasury shares amounting to 198mn. While our FY08e net profit estimates for RIL have gone up on the IPCL merger, EPS is marginally lower on account of dilution. Net profit and EPS for FY09e are also revised downwards by 3% and 7% respectively on lower gas price assumption and merger impact. Our Sep’08 end target price (earlier Mar’08, INR2,215) for RIL stands at Rs 2,298 after adjusting for lower gas price and dilution (post-IPCL merger).

As per press reports, the pricing approved by the government would be valid for 5 years after which the government would re-look at it. Since the KG D6 block is under a production sharing contract wherein the governments share of oil/gas profit increases in step from a low of 10% to a high of 85% in 5-6 years time, we expect the pricing beyond 5 years period to have less impact on RIL’s D6 gas valuation.

HSBC estimates for RIL are based on post-IPCL merger equity base. They shift their target price to September ’08 (from March’ 08 earlier) raising it to Rs 2,298. Remain Overweight

Company plans to shut its Akurdi plant and shift production to Waluj to take advantage of tax concessions and reduce costs

If it sells the 200 acre Akurdi land, we estimate it could add INR100/share, a potential upside risk

We maintain our earnings forecast and Neutral rating with an unchanged target price at Rs 2,420

Akurdi land could add to value

Bajaj Auto plans to shut down its Akurdi plant from September 2007 and shift its production to its Waluj plant (both in Maharashtra). The company was manufacturing its Kristal scooter at the Akurdi plant, which was operating at 4% capacity utilisation. The company expects to save Rs 1,000 per bike due to sales tax benefit and other tax concessions, by shifting production to Waluj.

We have done a scenario analysis to estimate the net gain that may accrue to Bajaj Auto if it chooses to sell its 200 acre Akurdi land after reaching an agreement with workers. HSBC estimates the land rate at Akurdi to be about Rs 1,000-1500 per square foot, based on discussions with real estate agent. The average of this translates into Rs 107 per share of Bajaj Auto. The Akurdi plant currently employs 2,730 workers. Since this is the oldest plant of Bajaj Auto, we expect the average age of the worker to be 45 years. If we assume that the company and the employees agree to a voluntary retirement scheme of 5 years’ pay at the current rate, it could cost the company Rs 8/Bajaj Auto share. We believe the whole transaction could add Rs 100/share to Bajaj Auto’s valuation. Our sum-of-the-parts value of Rs 2,420 per share does not include the Akurdi land value, as the sale is not certain; this is a potential upside risk to our estimates.

Maintain Neutral with unchanged target price of Rs 2,420

We value Bajaj Auto using a sum-of-the-parts valuation methodology. Our DCF-based fair value estimate of the automobile business is Rs 1,200. In our DCF, we have assumed a cost of equity of 13.5%. We have used a three-stage DCF with the semi-explicit forecast period of 10 years starting FY11 in which we assumed NOPLAT CAGR of c11%. Our target price of Rs 2,420 comprises Rs 1,200 for the automobiles business, Rs 501 for the insurance business and Rs 717 for value of investments (rounded up) net of debt.

Risks

Valuation of life insurance business is dependent on the new business growth and margin assumption. Lower than expected growth and margin represents potential downside valuation risk.

We have assumed that Allianz would be able to raise its stake to 74% from existing 26% in life insurance business. Allianz’s inability to exercise a call option represents an upside risk.

Better than expected performance of its new bike is also a key potential upside valuation risk.

The possibility of the sale of land at the Akurdi plant represents and upside risk.

Exposure to airports, power and road and first-mover position provides profitable assets, but valuation has run up

Net profit CAGR of 43% over FY08-10e

Initiating coverage with an Underweight (V) rating and a target price of INR595, 20.5% downside from current level

Flying too high

GMR Infrastructure (GMR) is one of the first private infrastructure players to adopt a construction-neutral development strategy by offloading construction risk to third parties. A first-mover advantage has helped GMR build up a portfolio of profitable assets focused on airports, roads and power plants. The company has a risk mitigation strategy with a good mix of assets under operation and under development across different sectors and a diverse list of clients.

The airport business also benefits from real estate appreciation as GMR has c1,250 acres of land on a 60-year government lease ready to be developed commercially at the Delhi and Hyderabad airport projects. We estimate that this real estate contributes c41% of the company’s overall valuation. GMR has expanded outside India and has a 40% equity stake in a consortium that has won a contract to operate Sabiha Gokcen International Airport (SGA) in Istanbul. GMR is trying to turn around its power portfolio, changing strategy to focus on assured fuel supply. In the road sector, GMR has unlocked value through financial engineering and securitising receivables.

The company’s business fundamentals remain strong but its valuation has run ahead of its one-year earnings prospects. We have valued all of GMR’s projects using a DCF approach as most of the projects are for fixed durations. Based on this, we have valued the company at INR197.1bn, or a per-share value of INR595, 20.5% below the current share price. Even after the recent correction of 25% from its historic peak, we believe there is still some downside to the stock. We initiate coverage on GMR with an Underweight (V) rating. The key upside risks to our valuation are the contribution of the SGA Airport in Istanbul and a higher-than-expected valuation of airport real estate. Key business risks are uncertain interest rates and airport traffic, aviation fuel shortages, increased competition, and regulatory, finance and execution risks

Valuation

Most of GMR’s projects are conducted over fixed durations of 15-60 years. After the concession period, the assets are handed back to the government at no cost. We believe DCF is the most suitable approach to value the company. We have valued GMR’s entire current business at INR197.1billion, translating into INR595 per share. The two airports should be the key value drivers for the company; they contribute c77% of the total value, including the associated real estate businesses. The Delhi airport project contributes c23% of the overall valuation and Hyderabad airport c54%. Of the current airport valuation, real estate contributes 40%, with Delhi real estate contributing 33.7% to Delhi International Airport Limited (DIAL) valuation and Hyderabad real estate contributing about 73% to Hyderabad International Airport Limited (HIAL) valuation. We have valued Delhi airport assuming passenger CAGR of 12% over FY08-15e with passenger growth of 18.4% for FY08e. Aeronautical revenues are capped at 11.6% return on the fixed assets, so there is not much upside.

Nonaeronautical revenue, currently at USD3.9 per pax, should reach the international level of more than USD9 per pax by FY15, a 16% CAGR over the period. If we compare Delhi airport valuation on EV per pax, at our valuation it will be USD96 for FY09e vs average USD64 EV per pax for Asian airports under HSBC coverage. The Hyderabad airport should contribute c54% to overall valuation, with real estate contributing a major part of the revenue. As the Hyderabad airport is a green field project, the revenues are not regulated. We have assumed the current passenger growth rate of 40% to continue at 13% CAGR over FY08-15. We have factored in investment in capacity renovation after every 20 years of operation. According to our estimates, the Hyderabad airport will generate a high return on invested capital. The Hyderabad airport valuation on EV per pax works out to USD189 for FY09e vs average USD64 EV per pax for Asian airports under HSBC coverage. The real estate business contributes Rs 122 billion for 1,000 acres of land translating into Rs 122 million per acre. The valuation contribution of HIAL is higher than Delhi airport despite Delhi airport handling more capacity because there is no return cap on HIAL revenue charges, it has a lower revenue share of 4% (with a 10-year deferred payment schedule) vs the Delhi airport, which has 45.99%; and has a higher contribution from the real estate business. Based on our assumption, we have arrived at a DCF value of Rs 197 billion. However, GMR will continue to bid for new projects, so there is likely to be incremental value creation for shareholders.

Opportunity to buy

The weakness in Indian stock market was reflected in Jyoti Structures’ stock performance as well. The stock corrected 10% in last week’s trading. We believe that this fall should be taken as an opportunity to buy the stock. We are positive on the stock, because of the following reasons.

Strong order backlog of Rs 23 billionn which is 2.3x of FY07 sales

Based on current order backlog and buoyancy in the power transmission line sector we expect sales CAGR of 30% for the period of FY07-FY10e

We expect EBITDA margin to improve on improved execution and expect EPS CAGR of 35% for the period

Q1 FY08 results confirms our forecast with sales growth of 34% and EPS growth of 49% y-o-y due to improvement in EBITDA margins

Upgrade to Overweight (V) with a new target price of Rs 254

We have used a combination of a DCF approach and PE multiple approach to determine our target price. Our new target price – Rs 254 – is the mid-point of our DCF fair value Rs 201 and PE multiple based fair value of Rs 307. This target price is higher than our earlier target price of Rs 220 as we roll over our valuation from Mar-08e to June-08e for the 12-month target price. The stock has a potential upside of 37.1%; we therefore upgrade the rating from Neutral (V) to Overweight (V).

Valuation

We have used a combination of a DCF approach and PE multiple approach to determine our target price.

DCF approach

We have used three-stage DCF to value Jyoti Structures. We have assumed Cost of Capital to be 12.3%. We have an explicit period starting from FY08e until FY10e. We use a semi-explicit period of 10 years starting from FY11e. We have assumed fade period to start in FY19e and to last for 10 years. During the fade period we assume RoIC will converge with Cost of Capital. Our DCF based fair value for June-08e is Rs 201. The increased fair value is higher than our earlier fair value of Rs 180 as we move to June-08e.

PE valuation

We have arrived at target PE of 23x based on an analysis of the stock’s historical trading pattern. Over the last two years, Jyoti Structures has traded in the range of 15-25x its one year rolling forward PE multiple. There was a spike in this period, followed by a correction in the Indian stock market. Compared to the CNX Midcap Index, Jyoti Structures largely traded at a premium. During the last few months it has been trading in the band of 20-25x. We believe that Jyoti Structures at its current stage of growth should trade at a PE multiple of 23x, which provides us with a PE based fair value of Rs 307 based on our June-08e EPS estimate which is higher than our earlier PE based fair value of Rs 260.

Upgrade to Overweight (V) with target price of Rs 254

Our new target price – Rs 254 – is the mid-point of our DCF fair value Rs 201 and PE multiple based fair value of Rs 307. This target price is higher than our earlier target price of Rs 220 as we roll over our valuation from Mar-08e to June-08e for 12-month target price.

Jyoti Structures is classified as a volatile stock in our rating system, meaning that if the returns are higher than 21.3% it would be classified as Overweight. It has potential upside of 37.1%; we therefore upgrade rating from Neutral (V) to Overweight (V).

A regional player with national ambitions

Idea is a well managed regional operator in the fastest growing cellular market in the world, generating a 2007-09e EPS CAGR of 52%

The company has a 2-4 year growth runway before spectrum and financial constraints and a move to nationwide pricing create opportunities to scale up or merge with a larger player

We initiate coverage with an Overweight (V) rating and a fundamental DCF based target price of Rs 168, with 31% potential upside and possibility of further FDI

Scaling the growth mountain

Idea Cellular (Idea) is the strongest of the emerging regional players in the Indian wireless market and is positioning itself to play with the “big boys”, Bharti, RCOM, and VOD on the national stage. India has a fragmented wireless market structure, with licences and spectrum awarded on a circle by circle basis and little inter-circle roaming-traffic flows. Idea has a presence in 13 circles or operating regions of the 23 telecom regions in India, eight circles with mature operations, three circles that have been recently launched, and two in the pre-launch phase. In this context, Idea has the spectrum and financial resources to compete head-to-head with the national players in its existing circles, with an average market share of 18% and a 20% share of net additions. We estimate a 52% EPS CAGR FY07-09e based on its existing 13 circles and have not factored in potential consolidation. On a longer-term view, we believe India will follow the global trend of wireless consolidation into 4-6 national players and Idea is likely to participate in this process. The global experience suggests consolidation will be driven by a combination of spectrum constraints, heavy network upgrade costs to 3G, a shift to nationwide pricing, and financing constraints. We believe Idea faces scale disadvantages in the form of higher operating and financing costs. Idea’s management acknowledges that M&A is a possibility but suggests the company is likely to be a buyer rather then a seller and that the strategic shareholders, the Birla family, have a long-term commitment to the Indian telco space. However, Vodafone’s landmark purchase of Hutch India for USD18 billion and a relaxation of regulatory restrictions on M&A suggest consolidation will remain a key theme. We initiate with an Overweight weighting and a DCF-based target price of Rs168; the key downside risk is spectrum and the key upside risk is M&A catalysts.

Well managed regional operator

Idea is a well managed regional operator in the fastest growing cellular market in the world. We are structural bulls on the Indian wireless space due to a combination of significant pent up demand, low capex-opex, low revenue per minute, expanding EBITDA margins and high returns on capital. Indian wireless licences are issued on a circle by circle basis, leading to a geographically fragmented market. The competitive dynamics and competitive profile vary from circle to circle and national trends can be misleading. The company has a presence in 13 circles out of the total 23 telecom regions in India, eight circles with mature operations, three that have been recently launched, and two in the pre-launch phase. Despite its regional presence and pan India market share of 8.5%, Idea is well placed and commands a market share of 18% in its eight established circles. We think Idea will see robust subscriber growth as it is present in the GSM segment which accounts for 75-80% of net additions.

Near term looks solid

We are upbeat on Idea’s near term growth as we expect it to gain market share as it launches in five new circles. The Indian market continues to grow rapidly with 6-7 million subscriber net additions per month and Idea is well placed on account of its strong brand and execution skills to benefit from the overall India growth story. We expect the Indian market (subscribers) to expand at a CAGR of 38% over the next two years and estimate Idea’s subscriber base to increase at a CAGR of 49% during the same period. Further, we expect Idea to benefit from the delay in the expansion plans of public sector rival BSNL, a leading pan India GSM based operator.

Medium term: Spectrum and balance sheet limit growth

Idea faces significant challenges in moving up from 13 circles to 23 circles in the medium term. The company’s licences in 10 circles are pending with the Department of Telecom (DoT) on account of the spectrum queue. Given the spectrum constraints, Idea may get left behind as a regional player if it cannot achieve scale and critical mass. Wireless is a scale intensive business and smaller operators tend to have higher operating costs and lower EBITDA margins. Smaller operators also terminate a larger percentage of their outbound traffic on other networks leading to higher interconnect interconnect costs. Scale benefits also stem from a variety of sources, including lower employee costs and a more efficiently used network. Further, Idea’s limited balance sheet flexibility will also make it more difficult for it to become a national operator in the medium term even if spectrum is made available on a gradual basis.

Medium to long term: Consolidation catalyst kicks in

Indian wireless telecoms is highly competitive, with nine operators (four national and five regional/quasi national operators) fighting for market share. We do not believe the status quo can last and think consolidation is inevitable; in our view a market with 4-5 operators will work best.

Earnings outlook

On the basis that Idea is rolling out five new circles over the next 12-18 months we estimate a FY07-09e EPS CAGR at 52%. The positives built into our estimates should start to be reflected over the next 9-12 months. Our earnings estimates for Idea are high compared to Bharti and RCOM. Idea is evolving as it builds from eight circles to 13. Its 21% share of net additions in its eight established markets shows the company has a strong management and execution system in place. We believe it can continue this performance in the five new circles. However, we see a large gap on ROIC, with Idea’s FY07 ROIC at 15% compared to Bharti’s 25%. We forecast an improvement in ROIC for both Idea and Bharti but expect this gap to widen over the medium to long term from the current 9% because operations in only 13 circles will prevent Idea from earning an attractive return on capital. We believe lack of scale is an issue for Idea in the medium to long term and as a result Idea’s margins are expected to trail Bharti’s by c4-5%. We are on the higher end of consensus on sales and EBITDA as we are excited about the strong execution, overall growth and spectrum/regulatory reforms. We have factored one time write-offs for operations in new circles and hence are marginally lower than consensus on the earnings numbers.

Valuation and risks

We initiate coverage on Idea stock with an Overweight rating and a target price of Rs 168 based on DCF (WACC 8.75%, C0E 11.3%, RFR 4.8%, MRP 6.5%, Cost of debt 8%, D/(D+E) 0.43). Our target price is based on company fundamentals alone and does not factor in any premium on the back of the M&A catalyst. We expect Idea to benefit from overall mobile growth, its five new circles and delays at BSNL. The downside risks are an extended delay in release of spectrum, a rapid drop in revenue per minute, a regulation capping the number of service providers and a sharp de-rating of the Indian equities market. Based on the Vodafone/Hutch Essar and STC/Maxis deals, we believe there is a strong demand for well managed regional assets. In the event of consolidation, regional players like Idea may warrant a valuation premium to regional peers and we view this as an upside risk. Idea is trading at a premium on EV/EBITDA to its peers but we are not concerned as Idea is not comparable to the big players. Idea will take another couple of years to attain maturity and we prefer to use the EV/subscriber multiple to compare Idea with peers. On Wireless EV/Wireless subscriber, Idea is trading at USD 629, a discount of 29% to Bharti and 13% to Reliance Communication.

Emkay - HEG, Tata Elxsi, ENAM - Securities Nicholas, HSBC Securities - CIPLA


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HSBC HCL Technologies 18 Apr
ICICI IndiaUpdate 20 APR

Newspaper industry to achieve vertical growth
In its report dated 30th March, 2007 HSBC securities and capital Markets (HSBC) upgrades HT Media Ltd. (HT) to "Overweight" at its CMP of Rs.178 with target price of Rs.230.

HSBC mentions that the profile of HT Media is transforming from a print company to a comprehensive media offering with the addition of radio and internet businesses. HSBC believes that the media channel and geographical diversification will increase exposure to fast growing radio and on-line segments, and also insulate earnings from shifts in spend by medium and advertising category.

HSBC expects the traditional print business to keep on growing ad revenues by over 20% pa and also anticipates that new ventures in radio and the internet will provide an additional leg of growth. HSBC expects a 28.7% in top line CAGR FY06-08e as the group''s strategy of bundling ad space accelerates HT Media''s ability to garner revenues from geographical expansion and new media formats.

HSBC highlights that HT''s new business newspaper, Mint produced in association with the Wall Street Journal has been successfully launched with an initial print order of 80,000 copies achieving a No.2 position in Delhi and Mumbai market combined. The group also plans expansion into other cities making Mint an important weapon in HT media''s arsenal.

HSBC mentions that HT''s new internet venture plans to leverage on its newspaper business to achieve verticals in matrimonial, real estate and recruitment. HSBC estimates on-line revenues of INR 25 cr in FY08E and growing to INR 130 cr by FY11E.

HSBC points out that HT Media''s "Fever 104 FM" gives the company exposure to FM radio, one of the fastest growing media markets in India and estimates revenue generation of INR 40 cr in FY08E and EBIT break even by FY10E.

HSBC anticipates that HT''s high operating leverage will ensure that profit grows much faster than revenues, driving 126% EPS growth FY07-FY09E. HT media''s FY08E PE multiple of 24.0x is lower than Indian TV stocks'' average PE of 30.8x, but the stock offers superior EPS growth of 62.4%, compared to the 30.4% average in the TV sector. HSBC mentions 12-month PE multiple/DCF price target emerges at INR 230, implying 29.7% absolute upside and upgrades rating to Overweight

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