PVR: Just a thriller

PVR should see good growth after its expansion but the issue is not cheap

PVR Limited, the country's largest multiplex operator, is expanding aggressively and will have commissioned 76 screens by the end of FY06 and another 36 by FY07. That would give it scale and a good geographical presence.

Given India's favourable demographics and changing aspirations and lifestyles, occupancies at multiplexes, which are currently around 50 per cent, should sustain at these levels.

PVR had 4.2 million admissions in H1FY06 compared with 4.8 million in FY05. Multiplexes have the advantage of low fixed operating costs, which allow them to break even at as low as 30 per cent occupancies.

Also, a significant portion of revenues are realised from food and beverages. So the business risks lie primarily in the timely execution of the projects and overcrowding. Several other players are also drawing up expansion plans and everyone is angling for the best locations.

However, EBITDA margins of PVR currently at around 20 per cent so there is some cushion even if ticket prices (currently averaging Rs 120) need to be brought down.

The issue, however, does not come cheap. Even assuming a 100 per cent profit growth in FY07 on the back of the expansion, the issue is priced at a multiple of 29-35 times on the post-issue equity, based on the Rs 200-240 band.

It's the FY08 multiple that looks more reasonable at 15-18 times, once again assuming 100 per cent growth. So, while the business undoubtedly offers good prospects, investors might have to wait a while to see returns on the stock.

Slowdown in cement

The top four cement players have reported a mere 2.12 per cent y-o-y growth in their November despatch figures at 47.2 lakh tonne. This growth is much lower than in September quarter as well as October 2005.

In October despatches grew 5.2 per cent y-o-y, while in the last quarter despatches were up 2.96 per cent. Analysts highlight that cement companies had been grappling with heavy rains across several parts of south in November 2005.

As a result, players such as the Aditya Birla group have seen a 2 per cent y-o-y dip in November despatches.

This lacklustre growth resulted in a broad market selloff "" Gujarat Ambuja fell about 2.6 per cent to Rs 81.45 on Monday, while Grasim fell 1.95 per cent to Rs 1399.

Prior to this fall, cement stocks had outperformed the Sensex over the past month on expectations of a demand pick-up in the post-monsoon season "" Grasim had gained about 26.75 per cent compared with a 12.8 per cent gain in the broader market. Gujarat Ambuja, too, had gained about 19.75 per cent in this period.

Meanwhile analysts say that cement prices have shown signs of improvement; prices in Mumbai are currently hovering at Rs 180 a bag, a 7.5 per cent gain over November 2004.

Another cushion for cement companies' operating margins would be provided by imported coal showing signs of cooling off in the last few weeks.

The market, however, seems to have factored in this reduction in input costs with Gujarat Ambuja trading at almost 18.5 times estimated June 2006 earnings, while ACC trades at almost 19.2 times estimated FY06 earnings.

Suzlon: Scaling the Great Wall of China

Suzlon Energy has made an entry in the Chinese and South Korean wind power sector. Though the orders are small, it is a good start for Suzlon's Chinese operations. Despite falling markets on Monday, Suzlon gained 0.85 per cent to Rs 844.

Analysts expect exports to account for over 40 per cent of revenues in the next few years as renewable energy is becoming an important source of power generation owing to higher fuel prices and environmental issues.

The Chinese market for wind energy is still small at about 400 mw annually, but is expected to have a cumulative installed capacity of 3,119 mw by 2009, according to BTM Consult ApS, an energy consulting firm. With the Chinese government aiming to generate as much as 20,000 mw of wind power by 2020, it is important for Suzlon to make its presence felt.

Though Suzlon is the market leader in India and the sixth largest player globally, it had only a 3.8 per cent global market share in 2004.

In a market which is expected to grow at 15-20 per cent in the next few years, new players will come in, which will put some pressure on profitability.

Analysts expect Suzlon's technology and cost advantage to help in withstanding competition. Since its IPO two months ago, the scrip has gained 65 per cent and trades at a stiff P/E of 20 times FY07 EPS.

With contributions from Shobhana Subramanian and Amriteshwar Mathur