Life is about to come full circle for Zee Entertainment (ZEEL). Firmly ensconced as the number two player in GEC space, it is lunging for the top slot to displace Star. ZEEL is consistently moving up the rating charts (occupies 40% of the Top 50 rated content). In a business where increasing TRPs drive advertising rates as indeed distribution revenues, we expect 29% CAGR in ZEEL’s revenues and 49% CAGR in net profit over FY07-09. However, a twist in the tale awaits ZEEL. An impending clutter in GEC space makes viewership fragmentation, as also higher content and management costs a near-term reality. The onslaught of emerging media giants such as TV18 group, NDTV, INX and UTV in GEC space poses the biggest risk to ZEEL. Our take is that ZEEL could get de-rated in the wake of cut-throat competition. We recommend a switch from ZEEL (USD 3.3 billion market cap) to a basket of NDTV, GBN, UTV and INX Media (private) with GECs cumulatively valued at USD 1 billion).

ZEEL gunning for top slot:

ZEEL’s regained aggression in the past one year is reflected in its improving TRPs (23 shows among top 50) and a seat closer to Star. As ZEEL converts better ratings into higher advertising rack rates, we expect it to clock 28% CAGR in advertising revenues over FY07-09, supported by a 56% CAGR in domestic pay revenues. We estimate 49% CAGR in ZEEL’s earnings over FY07-09.

but market headed for fragmentation:

With well-capitalized and integrated players like NDTV, TV18 group, INX Media and UTV lining up GEC launches in the next 6- 8 months, the Indian broadcast space is set for a clutter. Escalating competition would, in its wake, lead to fragmented viewership, stretched ad rates, and steeper content and management costs. All this is bound to put pressure on incumbents, more so on leaders.

Valuations build in upsides; exposed to competitive intensity:

Trading at 28x FY09E earnings, we believe ZEEL builds in all the upsides of a strong content, and thereby distribution revenues. From hereon, our take is that ZEEL could get de-rated on the back of increased competitive risk. We, therefore, recommend a switch from ZEEL (market capital of USD 3.3 billion) to a basket of NDTV, GBN, UTV and INX Media (private) valued at a cumulative USD 1 billion.

Investment Argument:

A changing distribution landscape and improving economics are drawing many a player to the broadcasting business, particularly the GEC genre. And unlike in the past, the new entrants – GBN (Viacom18), NDTV (headed by Sameer Nair), INX Media (headed by Peter Mukherjea) and UTV (along with Astro Broadcast) – are well equipped for a long haul with adequate funding, strong management and lucrative media properties. Upon entry into this genre, we expect these players to redefine the competitive scenario in the GEC space with maximum risk to incumbents like ZEEL and Star. Therefore, we see merit in investors opting for a basket of incubated ventures, cumulatively valued at USD1 billion, rather than invest in the number two player valued at USD 3.3 billion and facing high competitive risk.

Welspun Gujarat (WGSR) reported a spectacular 163.5% yoy rise in net profit for Q1FY08—while revenues were in-line with our estimates, a sharp expansion in margins led to profits significantly better than our estimates. Operating margins for the quarter expanded to 16.6% (USD 237/tonne) representing a 370bps expansion in operating margins on a sequential basis. The jump in operating margins was primarily due to profitable orders from the likes of Kinder Morgan and Exxon Mobil and appears to be sustainable atleast over the next 2 quarters. WGSR has added orders worth USD 634 million during the quarter, taking the total outstanding order book position to USD 1.1 billion (1.6x FY07 revenues). Management confirmed that the plate mill project is on track with likely commissioning in Dec’07. We have upgraded our EPS estimates for FY08 and FY09 by 18% and 37% respectively, to factor in higher margins. Maintain Outperformer.

Profit jumps 164% to Rs 693 million; operating margins surprises

WGSR reported a 50%yoy growth in revenues primarily led by execution of its order book position in SAW pipe business. LSAW pipes contributed 46% of sales volumes, followed by 42% and 12% for spiral and ERW pipes respectively. Revenues continued to be largely led by exports with a contribution of 90%. Average realization for the quarter at USD 1424/tonne—registered a sharp 23% growth. Operating margins for the quarter expanded to 16.6% (USD 237/tonne)—highest ever for the company, representing a 370bps expansion in operating margins on a sequential basis. The jump in operating margins was primarily due to profitable orders from the likes of Kinder Morgan and Exxon Mobil and appears to be sustainable atleast over the next 2 quarters. Lead by sharp expansion in operating margins, net profit for the company was much higher than our estimates at Rs 693 million.

Order book swells to Rs 45 billion

WGSR’ book position as on June, 2007 stands at robust Rs 45 billion to be executed over next four quarters with Spiral & LSAW contributing 55% and 40% respectively. Robust order book at Rs 45 billion (1.6x FY07 revenues) provides clear visibility for potential future stream of cash inflows. WGSR has now emerged as one of the key suppliers to global O&G majors like British Gas, Exxon Mobil, Shell. More importantly, we believe WGSR has managed to gain a strong foothold in USA (60% of its order book position), the most stringent market, which speaks volumes about its quality standards and cost competitiveness. A strong client base in the US would also help the company in scaling up its upcoming manufacturing unit in US.

Plate mill nearing completion – to provide strong margin kicker

WGSR’s 1.5m tonne plate mill project for backward integration is on schedule for commissioning in Dec’2007. To put things into perspective, WGSR currently imports more than three-fourth of its raw material from Europe and the CIS countries. There is an acute shortage of pipe grade plates and hence availability of raw material is a key risk. To offset this, WSGR is in the process of setting up a plate-cum-coil mill in Anjar, Gujarat (near its SAW pipe facilities). The project, at an estimated cost outlay of Rs 18 billion, is scheduled to be operational by December 2007. We expect a very sharp expansion in operating margins with the commissioning of the plate mill project on the back of resultant savings in raw material and freight costs. We also expect significant reduction in working capital for the company once the backward integration project is commissioned. Our numbers for the plate mill however, currently assume a conservative conversion margin (slab to plate) of only USD 100/tonne—against current margin trend in excess of USD 230/tonne. We believe that there can be significant upside risk to our numbers if current conversion margins were to sustain at current levels.

US manufacturing unit

WGSR had earlier announced 60:40 joint venture with Lone Star Technologies, Inc for a HSAW pipes project in the US. The project plan was a capture a pie of the fast growing US market for large diameter HSAW pipes. The project planned a 300,000 tonnes capacity with an investment of USD 100 million. However, Lone Star Techologies recently was taken over by US Steel Inc, which opted out of the JV. WGSR consequently bought over the 40% stake now held by US Steel for a consideration of USD 2 million and has already commissioned construction work on the site. Management guided that the facility would be ready for production by Sept’08 and is likely to be funded through a mix of debt and equity (80:20).

Maintain Out performer

A strong expansion in margins for WGSR lends credence to our macro call - in terms of strong demand for pipes on the back of infrastructure spending and increasing acceptance of domestic vendors in the international market. Increasing vendor approvals, strong order book position and continued strength in crude oil prices we believe would help in sustaining a strong demand momentum. With strong client approvals, we believe WGSR is extremely well positioned to tap a burgeoning opportunity—a strong order book position (USD 1.1 billion) offers growth visibility. Commissioning of the plate project is likely to be another key trigger for the stock price. We maintain our OUTPERFORMER rating on the stock with a price target of Rs 285 per share—based on our adjusted DCF methodology.

Welspun Gujarat (WGSR) reported a spectacular 163.5% yoy rise in net profit for Q1FY08—while revenues were in-line with our estimates, a sharp expansion in margins led to profits significantly better than our estimates. Operating margins for the quarter expanded to 16.6% (USD 237/tonne) representing a 370bps expansion in operating margins on a sequential basis. The jump in operating margins was primarily due to profitable orders from the likes of Kinder Morgan and Exxon Mobil and appears to be sustainable atleast over the next 2 quarters. WGSR has added orders worth USD 634 million during the quarter, taking the total outstanding order book position to USD 1.1 billion (1.6x FY07 revenues). Management confirmed that the plate mill project is on track with likely commissioning in Dec’07. We have upgraded our EPS estimates for FY08 and FY09 by 18% and 37% respectively, to factor in higher margins. Maintain Outperformer.

Profit jumps 164% to Rs 693 million; operating margins surprises

WGSR reported a 50%yoy growth in revenues primarily led by execution of its order book position in SAW pipe business. LSAW pipes contributed 46% of sales volumes, followed by 42% and 12% for spiral and ERW pipes respectively. Revenues continued to be largely led by exports with a contribution of 90%. Average realization for the quarter at USD 1424/tonne—registered a sharp 23% growth. Operating margins for the quarter expanded to 16.6% (USD 237/tonne)—highest ever for the company, representing a 370bps expansion in operating margins on a sequential basis. The jump in operating margins was primarily due to profitable orders from the likes of Kinder Morgan and Exxon Mobil and appears to be sustainable atleast over the next 2 quarters. Lead by sharp expansion in operating margins, net profit for the company was much higher than our estimates at Rs 693 million.

Order book swells to Rs 45 billion

WGSR’ book position as on June, 2007 stands at robust Rs 45 billion to be executed over next four quarters with Spiral & LSAW contributing 55% and 40% respectively. Robust order book at Rs 45 billion (1.6x FY07 revenues) provides clear visibility for potential future stream of cash inflows. WGSR has now emerged as one of the key suppliers to global O&G majors like British Gas, Exxon Mobil, Shell. More importantly, we believe WGSR has managed to gain a strong foothold in USA (60% of its order book position), the most stringent market, which speaks volumes about its quality standards and cost competitiveness. A strong client base in the US would also help the company in scaling up its upcoming manufacturing unit in US.

Plate mill nearing completion – to provide strong margin kicker

WGSR’s 1.5m tonne plate mill project for backward integration is on schedule for commissioning in Dec’2007. To put things into perspective, WGSR currently imports more than three-fourth of its raw material from Europe and the CIS countries. There is an acute shortage of pipe grade plates and hence availability of raw material is a key risk. To offset this, WSGR is in the process of setting up a plate-cum-coil mill in Anjar, Gujarat (near its SAW pipe facilities). The project, at an estimated cost outlay of Rs 18 billion, is scheduled to be operational by December 2007. We expect a very sharp expansion in operating margins with the commissioning of the plate mill project on the back of resultant savings in raw material and freight costs. We also expect significant reduction in working capital for the company once the backward integration project is commissioned. Our numbers for the plate mill however, currently assume a conservative conversion margin (slab to plate) of only USD 100/tonne—against current margin trend in excess of USD 230/tonne. We believe that there can be significant upside risk to our numbers if current conversion margins were to sustain at current levels.

US manufacturing unit

WGSR had earlier announced 60:40 joint venture with Lone Star Technologies, Inc for a HSAW pipes project in the US. The project plan was a capture a pie of the fast growing US market for large diameter HSAW pipes. The project planned a 300,000 tonnes capacity with an investment of USD 100 million. However, Lone Star Techologies recently was taken over by US Steel Inc, which opted out of the JV. WGSR consequently bought over the 40% stake now held by US Steel for a consideration of USD 2 million and has already commissioned construction work on the site. Management guided that the facility would be ready for production by Sept’08 and is likely to be funded through a mix of debt and equity (80:20).

Maintain Out performer

A strong expansion in margins for WGSR lends credence to our macro call - in terms of strong demand for pipes on the back of infrastructure spending and increasing acceptance of domestic vendors in the international market. Increasing vendor approvals, strong order book position and continued strength in crude oil prices we believe would help in sustaining a strong demand momentum. With strong client approvals, we believe WGSR is extremely well positioned to tap a burgeoning opportunity—a strong order book position (USD 1.1 billion) offers growth visibility. Commissioning of the plate project is likely to be another key trigger for the stock price. We maintain our OUTPERFORMER rating on the stock with a price target of Rs 285 per share—based on our adjusted DCF methodology.

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"Titan Industries' (Titan) has registered a sharp revenue growth of 45% to Rs 20.9 billion in FY07, driven by 64% growth in jewelry business and 20% in the watches business. As the revenue mix moved in favour of relatively lower margin jewelry operations, EBITDA margins dipped by 120bp to 9.5%. PAT (pre contingencies of Rs 240 million) has grown by 18%. Contingencies include write off of design rights (Rs 76 million), interest cost adjustment (Rs 45 million) and valuation adjustments of overseas subsidiaries (Rs 130 million)."

"Product innovation (in watches & jewelry), rapid scale up of retail operations and addition of new avenues like eye-care and precision engineering, will continue to aid top-line growth. We expect the watch business to grow at 15% and the jewelry business to grow at 25% as consumers move towards organized shopping and Titan scales up its retail operations (240 World of Titan showrooms, 98 Tanishq and 25 Gold Plus stores by end of FY08). Titan has also forayed into prescription eyewear market (Rs 25-30 billion business) through its brand - Titan Eye+ and has plans to reach 15 stores by end of FY08. Titan's precision engineering business is expected to grow at 80% CAGR over the next three years. While growth will be driven by multiple avenues, margins will expand on the back of favourable product mix - Titan over Sonata, studded jewelry over pure gold jewelry and growth of high margin precision engineering and eyewear retailing businesses. Titan currently trades at valuations of 19.8x FY09E earnings, 13.0x EV/EBITDA, 1.4x EV/Sales. Maintain Outperformer with a price target of Rs1,100."

Zee Entertainment (ZEEL) has reported revenue growth of 31% in FY07 at Rs14.4bn. EBITDA margins are stable at 22% and PAT growth is at 12%. ZEEL’s continued journey up the rating chart and acquisition of Ten Sports has helped advertising growth at 32% and subscription revenue growth at 27%. Advertising growth in Q4FY07 has been subdued at 8% on account of shift in viewership towards KBC on Star and Cricket World Cup 2007. High content investments and losses on Zee Sports have restricted the EBITDA margins at FY06 levels of 22%.

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