Valuations expensive, Downgrade to Sell
* TP maintained at Rs50, earnings forecast unchanged: We
downgrade Balaji Telefilms to Sell from Hold to reflect the expensive
valuations of 15.1x FY11E earnings, which is just 19% discount to
ZEEL’s FY11E earnings (potential downside of c.25% from CMP). Over
the past one month, the stock has risen by c.20% outperforming the
Sensex and ZEEL by c.23% and c.15% respectively. Post our discussion
with the management, we believe the fundamentals has not changed,
hence we maintain future estimates and TP of Rs50 for the company.
We believe that Balaji should trade at a higher discount to ZEEL on
account of the following reasons 1) The EBITDA margins for ZEEL is
better than the margins of Balaji Telefilms 2) The ROE of Balaji
Telefilms is in single digit compared to double digit ROE of ZEEL 3)
Relatively greater visibility of ZEEL earnings compared to the earnings
of Balaji Telefilms.
* Valuations look expensive: Our TP for Balaji is the sum of (1) Cash
on books of Rs36/share, and (2) Rs14/share as the value ascribed to its
FY11E operating net income (i.e. PAT excluding treasury gains). The
value of Rs14/share is derived by applying our target FY11E P/E
multiple for ZEEL (i.e. 16.2x discounted by 50%), on Balaji’s FY11E EPS
excluding treasury gains (Rs1.7/share) (see exhibit 3). At Rs50, the
stock would trade at a P/E of 12.8x (FY10E) and 11.5x (FY11E). If we
were to disregard the discount to ZEEL’s FY11E earnings multiple, the
fair value comes to Rs64, suggesting the stock is fairly valued.
* Bull case scenario suggest stock is fully valued: Considering that
Balaji business operations performs better than our estimates in terms
of more show/movie launches and better margins for the remainder of
FY10E and FY11E, we get a value of Rs64 (see exhibit 3). At this price
further upside is capped from current levels of Rs67. For our bull case
scenario, we have assumed more shows/movies under Balaji banner
and higher margins for TV business and movie business for FY10E and
FY11E.
