Blue Dart: Buying cheap

Blue Dart buyout offer fails to meet premium expectations

Since the announcement that DHL Singapore was planning to take Blue Dart private, the stock had rallied over 25 per cent.

Obviously, shareholders were expecting a higher price compared with last Friday's close of Rs 474. With DHL's price of Rs 550 has disappointed shareholders, the Blue Dart share, which had crossed Rs 600 in early trades slid to Rs 565 on Thursday.

DHL's offer is at a 10 per cent premium to the floor price, calculated as the 26-week average price, and at 16 per cent premium to last Friday's close.

However, analysts are not enthused by the premium and say that offers to take a company private have been at higher premium in the past. For example, Citibank's offer for e-serve was at a 54 per cent to its last traded price before the news of the delisting.

At Rs 550, shareholders will get about 22 times its annualised consolidated FY05 earnings, which falls short of expectations.

The stock has traded at higher multiples in the past. Between December and May 2006, Blue Dart was trading above the Rs 550 level, and it is only in the recent stock market decline that the stock fell as low as Rs 315.

Blue Dart's revenues and operating profit have grown around 18 per cent in the past four years, and analysts expect the growth rate to be 20-25 per cent for the next few years.

Given that the logistics business is likely to boom going forward and Blue Dart's past valuations, investors can expect a better compensation as the company will go out of the market.

Pantaloon Retail: Seasonal gains

The end-of-season sale of its fashion products across the country helped Pantaloon improve the turnover of its lifestyle segment in July 2006.

Same-store lifestyle segment sales expand 30.79 per cent y-o-y, while the value retailing segment grew 24.78 per cent y-o-y.

In contrast, in its year ended June 2006, Pantaloon saw its value segment grow 23.41 per cent y-o-y compared with 18.61 per cent growth in the lifestyle segment.

Retailer Trent had seen its operating profit margin dip by 170 basis points y-o-y to 7.7 per cent in the June 2006 quarter, owing to rising input costs such as staff, advertisement and selling costs.

Clearly, with new players such as Reliance Industries entering the retail sector, the pressure on margins for existing players is expected to intensify.

Also, higher land prices in most metros are expected to be another obstacle for the breakneck expansion plans for retailers.

In such a scenario, Pantaloon would need to maintain the tempo of growth in its lifestyle segment, which brings higher margins, vis-a-vis the value segment, in the coming quarters, in order to justify its hefty discounting of 38 times estimated June 2006 earnings.

NDTV: Evergreen quarter

An eventful June quarter of sports and elections have sent NDTV's revenues surging 57 per cent to Rs 63.7 crore. Higher subscription income and contribution from NDTV Profit have also helped boost revenues.

Thus, despite operational costs climbing 50 per cent with higher spends on carriage, content and technology, the operating profit margin expanded 420 basis points y-o-y to 12.2 per cent.

However, seen sequentially, margins have shrunk by over 1200 basis points. Costs, which were a cause for concern, appear to be stabilising with the sequential increase at 6 per cent.

With a strong news broadcast franchise in place, NDTV is now exploring new revenue streams in global distribution, media process outsourcing, Internet, global media consulting, region-centric broadcasting and radio. Most of these businesses have a high operating leverage, and thus the income would flow almost entirely to the bottom line. For instance, the distribution tie-up with BSkyB in the UK and DirecTV in the US and ATN in Canada for NDTV 24x7, could, on a conservative estimate, earn it around Rs 26 crore annually. With a view to catering for the regional markets without launching a new channel, NDTV has introduced Opt Out telecast technology in the the South.

More of these city-centric and regional editions are on the cards and while the move may take time to pay off, the incremental costs involved are not too high. NDTV's media process outsourcing with Genpact too should be a profitable venture over time given the addressable opportunity: one per cent of the global media business is about $15 billion.

For its Internet properties, NDTV is looking to earn both advertising and transaction-based income and has added shopping, travel and film portals.

The stock has been an underperformer since the beginning of 2006 and at the current price of Rs 180, the stock trades at 33 times estimated FY07 earnings and 24 times FY08 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur