Network 18

Sharekhan is bullish on Network18 Finance and has maintained buy rating on the stock with target price of Rs 651.



Sharekhan Stock Broking firm research report on Network 18



Key points



After the transfer of Studio18.s business to Viacom18, Network18 has filed the amended draft offer document for its rights issue. The old draft document stated the earlier objects of the issue to raise a part of the funds for film projects under Studio18. We maintain our valuation of the right issue at Rs133.6 per share. Network18 proposes to use a part of the rights issue proceeds towards capex on television content production. We believe, the investment in content production business will cater to the content requirements of the forthcoming channels of Viacom18.



HomeShop18 is going great guns with business spreading over 2000, towns and cities across India, and with average sales of approximately 20 lakh per day just a few months after its launch. A full-fledged home shopping channel is in the offing. w Issue of preferential warrants in TV18 and GBN will lead to increase in Network18.s holding in TV18 to 53.3% and in GBN to 45.1%. We maintain our buy recommendation on the stock based on our sum-of-theparts price target of Rs651.



Transfer of Studio 18 to Viacom18



Network18 group announced its plan to enter the Indian general entertainment space through a 50:50 joint venture (JV) with global media conglomerate Viacom Inc. As a part of the arrangement, Network18 group transferred its motion pictures business housed in Studio18 to the venture, while Viacom transferred its three operational channels MTV, VH1 and Nickelodeon India to the JV. After the transfer of Studio18.s business to Viacom18, Network 18 was required to file an amended draft offer document for its proposed rights issue.



Rights issue of PCCPS



Network18 has announced a rights issue of partly convertible cumulative preference shares (PCCPS). As per the terms of the issue, every holder of five equity shares in the company will be entitled to 1 PCCPS. A shareholder entitled to a rights issue of PCCPS on paying Rs200 will be allotted: a) One PCCPS of Rs150, b) One equity share (pari passu to existing equity shares) for the remaining Rs50 and c) One detachable warrant which is convertible into one equity share within 24-48 months of allotment.



The detachable warrant will be convertible at a price determined at a 50% discount (of the average of the weekly high and low of the closing prices during the 90 days immediately preceding the week in which the board informs the exchanges about fixing the record date for warrant exercise period) to the then prevailing price of the warrant. The company is raising Rs205.7 crore through the rights issue for the objects mentioned below. We have evaluated the rights issue at Rs133.6 per share of Network18 (for details refer our stock idea note on Network18 dated June 20, 2007) and thereby believe that it will add value for an existing investor.



Change in objects of rights Issue



Network18 had filed a draft offer document with the Securities and Exchange Board of India for a rights issue of PCCPS to raise ~Rs200 crore. While the terms of the issue remain unchanged, the objects have undergone a change with transfer of the company.s Hindi movie production, acquisition and distribution business to Viacom18.



Valuation and recommendation



Network18 group is on the verge of becoming a media and entertainment conglomerate with presence across verticals. While its business news channels CNBC and Awaaz continue to dominate business news space, the relatively new channels CNN-IBN and IBN-7 continue to maintain a significant market share in the highly competitive general news genre. We expect value unlocking for TV18 shareholders (and in turn Network18 investors) from the proposed listing of Web18 and from value creation from Viacom18.s launch of Hindi general entertainment and other channels.



We believe that while most of Network 18 group.s businesses are in investment mode, the promise a tremendous growth in the fast growing Indian media and entertainment industry and the new media. We maintain our price target of Rs651 for the stock.

Colgate Palmolive

Colgate an outperformer, target Rs 497: Anand Rathi

Anand Rathi is bullish on Colgate Pamolive and has maintained outperformer rating on the stock with target price of Rs 497.

Anand Rathi research report on Colgate Pamolive India

Investment Positives

HUL’s shifting focus away from oral care to help Colgate: HUL's shift of focus from oral care is expected to help Colgate reduce adspend -- from 18% to 11%. The latter would gain market share as no other major competitor in gels and family toothpastes exists. Less competition renders it easy for Colgate to raise selling prices. And concentrate on low-priced toothpastes and toothpowders. Steady revenue growth: Low penetration and per capita consumption of oral care products offer strong medium to long-term growth opportunities. If India achieves half the recommended usage of oral care products in the next ten years, it could result in a 15% volume CAGR. Uptrading of products and the rise in the number of people brushing their teeth twice a day would also help Colgate grow rapidly.

Lower income taxes due to greater production at Baddi: Colgate has expanded capacity at Baddi, to 40,000 tons. So its entire production of toothpastes is expected at Baddi, resulting in lower income tax and savings in excise duty. We expect the effective income tax rate to be around 20% (compared to 26% in earlier years).

Strong FCF generation and generous dividend policy: Capex at Baddi and the VRS at Sewri are almost over. This is expected to result in strong free-cash generation. The company has rewarded shareholders by generous dividends over the years. Declaration of share capital reduction of Rs 9 showed the intention of the management to reward shareholders by returning excess cash. We expect Colgate to maintain such high dividend payouts following strong free-cash generation. At the CMP of Rs 405 and expected dividend for FY09, the stock trades at a dividend yield of 3%. Investment Concerns 􀂾 Rising royalties: With rising in-house production of toothpaste, Colgate is required to pay royalties to its parent company. We expect royalties to rise.

Competition:

Though the threat of competition is low, we do not rule it out. The aggressive launch of variants by Dabur, of Crest by P & G or one last attempt by HUL to gain market share can turn out to be big concerns for Colgate.

Investment Concerns

Reduced investment in oral care may lower growth rates As Colgate and HUL reduce advertising, awareness of oral care products would slow down. Reduced investment in educating people about dental hygiene might hinder industry growth rates.

On the other hand, Colgate, being the market leader, the onus lies on it to expand the category. This might compel it to bear the entire cost of category promotion. Competition Though we do not see competition as a major threat, we do not rule it out. In order to gain market share, Dabur and others (such as Anchor and Ajanta) may introduce products in gels or the family segment. Although not easy, it is possible that Crest would be launched sooner or later. This may create hurdles for Colgate. Also, we do not rule out one last blip by HUL to gain market share.

A business with high growth and a high RoE will attract competition, raising the threat of fresh players in toothpastes. Increase in royalties Colgate is required to pay 5% of net sales as royalty to its parent. However, it is required to pay royalty only on the in-house production. As the in-house production goes up at the Baddi plant royalties are expected to rise. We expect royalties to climb -- from 2.6% of net sales in FY07 to 3% by FY10. As the company still does not manufacture personal-care products, toothpowders and toothbrushes completely, it will not be required to pay royalties on them. In addition, Colgate will not be required to pay royalties on sales of Cibaca, an acquired brand.

Valuation

At the current market price of Rs 405 and FY09 estimates, the stock trades at a P/E and EV/ EBITDA of 17.5x and 12.7x, respectively. As major competitor HUL is expected to shift focus from the oral care segment, Colgate would be helped in a big way. The normalized earnings of Colgate can be much higher than its historical earnings. We expect the growth rates to be more buoyant than historical ones due to supportive macro-economic factors. According to the DCF valuation of Rs 497 and FY09 estimates, the stock trades at a P/E of 21.4x. We initiate coverage on Colgate Palmolive (India), with an OUTPERFORMER rating and a 12-month price target of Rs 497.

Transport Corporation of India

Buy Transport Corporation of India, tgt Rs 145: Kotak
Kotak PCR is bullish on Transport Corporation of India and has maintained buy rating on the stock with target price of Rs 145.

Kotak research report on Transport Corporation of India

Key investment rationale

Growing Logistics market.

India, with a GDP of around USD 827 billion spends 13% of its GDP on logistics. As against this, the global average for logistics spend is approximately 8-10% of GDP. This is primarily due to inefficiencies in transportation. Going forward, there will be the introduction of VAT and GST throughout the country and increased penetration of organized retail and outsourcing of logistics services. These are expected to be key growth drivers of the logistics industry in India.

Excellent infrastructure to cash in on logistics boom.

Currently, the TCI group moves goods valued at more than 1.5% of India's GDP. The company has a strong network of 1100 company owned branches across the county. TCI moves approximately 7000 trucks daily, 15% of which are company owned. The company has 6.5-million sq. ft of prime warehouse space across the country. This is expected to go up to 10 million sq ft by March 2010. TCI has over 3000 vendor and franchisee associates, employs more than 5700 professionally trained people and has a strong customer base of over 200,000.

Market leadership in transport segment.

TCI is the leader in the transport segment with 15% share of the organized market. The company has the maximum reach and network. TCI provides various services like full truck load, less than truck load and has formed a dedicated wing for the over dimensional cargo, which typically offers higher margins. The company also has advanced technology in terms of a vehicle tracking system that helps it to consolidate cargo at various places and thereby achieve optimum truckloads, which leads to higher efficiency and better operating margins. Going forward we expect the revenues of the transport segment to grow at CAGR of 18.7% over FY07 - FY09E.

Gaining strength in the express cargo services.

TCI operates in express distribution through its brand XPS, which is the fastest growing brand in that business. Brand XPS boasts of excellent quality service and integrated solutions to provide efficient key customer management. The company has created super hubs in the north and is in the process of establishing them in the south. TCI focuses on high value-added and high yield air and express services. Going forward we expect the revenues of the XPS segment to grow at CAGR of 27.5% over FY07 - FY09E.

Supply Chain solutions to be major growth driver.

TCI provides the entire gamut of supply chain solutions like distribution, clearing and forwarding, warehousing, cold chain logistics and other value-added services consultancy. Strong growth is expected from this segment due to larger volumes from existing clients. New clients are being added in a variety of verticals that include retail and cold chain solutions. Going forward we expect the revenues of the supply chain solutions segment to grow at CAGR of 44.9% over FY07 - FY09E.

Expanding operations in coastal shipping.

Currently, TCI has a fleet size of five vessels with a total capacity of 16444 DWT. The company also has plans to buy one ship every year for the next three years. All of them would be second-hand ships. This is expected to lead to strong growth in terms of revenues form the coastal shipping business. Going forward we expect the revenues of the coastal shipping segment to grow at CAGR of 32.3% over FY07 - FY09E.

Focus on high margin businesses by hiving off fuel stations.

The management has hived/sold off eight out of nine fuel stations, which generated less than 1% operating margins. The company is going to focus on the valued-added logistics segments with high margins like express distribution, cold chain and supply chain solutions. As a result of this, EBIDTA margins are likely to improve from 6.5% in FY07 to 7.4% in FY08E and further rise to 7.9% in FY09E. q

Property development - bonus to valuations.

TCI has over 220 properties across the country with a book value of Rs.930 million. Some of the properties are in prime locations and the company wants to relocate these warehouses and free of the land for property development. The company has identified four properties that would be developed in the next three to four years. As and when the company announces more properties for development it could unlock substantial value for TCI shareholders in the years to come.

Robust growth in sales & profits.

The net sales of the company have grown at a CAGR of 15.7% from Rs.5.2 billion in FY02 to Rs.10.9 billion in FY07. However, more importantly, net profits of the company have grown at a CAGR of 43.3% from Rs.51 million in FY02 to Rs.306 million in FY07. Going forward, we expect the revenues to grow at CAGR of 19.9%. More importantly, the net profits are slated to grow at a CAGR of 28.9% over FY07 - FY09E.

Attractive valuation.

At the current price of Rs.121, the stock is trading at 17.3x earnings, 9.9x EV/EBIDTA and 0.8x EV/sales multiple based on FY09E estimates. We feel the valuations are attractive due to the strong past track record, good future potential of the logistics industry and potential value unlocking in the property development business.

Key Risks

Any economic slowdown would impact the logistics industry as a whole. Thus, it would also impact TCI's growth. q TCI faces competition from the unorganized market in the transport business, which is more than 50% of the total revenues as of FY07. Any move to distort the market with irrational pricing would impact the profitability of the company. q Higher fuel costs that sometimes cannot be passed on to the customers can impact the operating margins of the company.

Any delay in scheduled capex could lead to flat to marginal growth for TCI. The company may go for another round of equity funding in FY09E. This would lead to equity dilution and revision in our earnings estimates.

Torrent Pharma

Buy Torrent Pharma, target Rs 283: Kotak PCR
Kotak PCR is bullish on Torrent Pharma and has maintained buy rating on the stock with target price of Rs 283.

Kotak PCR research report on Torrent Pharma

German operation to break even in FY09.

We expect German business to break-even by FY09 led by shift in manufacturing to India (site transfer), launch of new products and new supply contracts. At present, Torrent is sourcing part of the products from Heumann PCS GmbH (a manufacturing arm of Heumann owned by Pfizer Inc.), as part of the agreement, and partly from third party manufacturers. The sourcing agreement with Pfizer is terminating in December 2007 and the company will source its requirement from its US FDA approved plant at Chatral, India.

We expect margin expansion of ~6-9% over the next one-year, volume growth of around 20-22% and value growth of 7-8%. Torrent has planned to launch six new products in the German markets over the next 12 months, which will include two day-one introduction. Further, the company is focusing on building relationship with high potential doctors, related pharmacist and entering into contract with insurance companies.

US markets to contribute to revenues by FY09.

During the previous year, Torrent received USFDA approval for its API and formulation manufacturing facilities. This should help to start the US business. So far, the company has invested Rs.750 million in the US market. It expects further investments of USD3-4 million in product development. The company has filed seven ANDAs and five DMFs. Torrent has received approval for three ANDAs, namely, Metformin, Sertraline and Citalopram. The company expects to file 14 ANDAs and nine DMFs in FY08. Investment/ losses in the US market will continue this year too (for product filings), as revenues are expected to begin from next year. We expect USD10 million sales in FY09 from the US market.

Brazilian markets to continue to do well; Mexico to follow.

The company has done exceedingly well in Brazil, creating a large business in five years. We expect the growth momentum to continue. This will be led by improved sales force productivity and new product launches. Torrent has completed the investment in setting up its marketing and distribution network and field force rationalization. The company has a strong product development pipeline. Torrent is planning to launch four new products in FY08. These molecules are growing at 20-22%. The company expects to grow at 1.5 times the molecule growth rate. We believe Torrent's product pipeline for the Brazilian market will help the company to maintain 30% and 25% growth in FY08 and FY09, respectively. Under the same country head, and a similar branded strategy, the company is expanding into Mexico. The company expects to launch four products in Mexico in FY09.

Domestic formulations likely to grow at 20% in FY08.

For FY07, the domestic formulations business grew 25.2% to Rs.5.6 billion accounting for 43% of total sales. This growth rate was largely due to the 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 at least for the next couple of years. We expect 20% growth in FY08 and 15% growth in FY09.

Contract manufacturing business to provide constant cash flow.

Torrent has entered into a long-term contract manufacturing agreement with the Indian subsidiary of Denmark based Novo Nordisk. According to the agreement, the company will supply insulin to Novo Nordisk. In FY07, revenues from the contract manufacturing segment were Rs.1.19 billion or 9.4% of net sales. Torrent is facing capacity constraints. The company is planning to increase insulin capacities at an investment of Rs.420 million in FY08. The management has guided that this business will grow stably at single digit growth rate, providing the company constant cash flow.

Valuation & recommendation

We believe Torrent will perform steadily on its base business, going forward. The company's growth engines of domestic formulations and branded formulations from Brazil and Russia are performing according to expectations. As the manufacturing of more products is transferred to India, we believe Torrent's margins would expand to 14% in FY08. We expect net profit of Rs.1.24 billion in FY08 and Rs.1.58 billion in FY09. This implies an EPS of Rs.14.6 and Rs.18.7, respectively. At the current market price of Rs.184, the stock is trading at 12.6x FY08 and 9.9x FY09 earnings estimates, and 7.1x FY09 EV/ EBITDA. We recommend a buy on the stock with a target price of Rs.283, based on DCF methodology. At the target price, the stock will be valued at 15.2x FY09 earnings.

Key risks & concerns

Inability to improve profitability of international operations, mainly in Germany q International generic pricing pressure and/or loss of market share. Delay in ANDA filing and/or approval followed by delay in new product launch. Further rupee appreciation against the dollar

Aban Offshore

Citigroup is bullish on Aban Offshore and has maintaiend buy rating on the stock with target price of Rs 3830 rising it from 3530.

Aban III, IV, V contracts repriced

Aban has announced the extension of contracts with ONGC for three of its flagship assets – jackups Aban III, IV, and V – for a period of 3 years at an operating day rate of USD 156,600.

Day rate achieved higher than expected

The day rate announced has come in higher than our earlier estimate of USD 150,000. While this does not, on its own, meaningfully impact our estimates, it remains a fairly positive development nonetheless, as (1) it signals that the tightness in the offshore services market continues unabated and (2) the duration of the contract improves earnings visibility, a crucial element given Aban's high gearing.

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Shivan

Shiv-Vani Oil & Gas Exploration Services Ltd provides seismic data acquisition and exploration services to upstream oil and gas sector. The company was incorporated in 1989 and started operations with shot-hole drilling services for ONGC. Since then the company has evolved to emerge as a large player in the hydrocarbon upstream sector. It services include shot hole drilling, seismic surveying, directional drilling, well development, down-hole operations, engineering and logistics. The company specializes in every area of onshore and offshore operations as well as in natural gas compression and allied services. Shiv-Vani is the only integrated coal bed methane (CBM) services provider in India and has successfully pioneered horizontal and directional drilling in the India to enhance CBM procurement. It owns the largest fleet of on-shore rigs in India and has successfully diversified into other crucial activity areas such as seismic surveying, gas compression services and offshore drilling & logistics.



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Sharekhan

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