Sharekhan ValueLine[For April 2008]
Summary of Contents
THE STOCK IDEAS REPORT CARD
FROM SHAREKHAN'S DESK
At the crossroads Apart from global cues, forthcoming Q4 results and RBI's monetary response to surging inflation would determine the market's direction.
The going was not easy for the market last month. Besides having to grapple with the ever-deepening global financial market crisis, it also had to deal with a sudden surge in inflation in domestic economy and the unearthing of huge foreign exchange derivatives losses of Indian corporates. Poor macro numbers, especially a further drop in industrial production, compounded the market's misery no doubt. Liquidity was also hard to come by, what with foreign institutional investors (FIIs), the main drivers of the market in the current bull run, continuing to sell.
Sharekhan top picks
In the March 2008 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on March 31, 2008 the basket of stocks declined by 2.6% during the month as volatility in the markets continued. The Sensex declined by 2.1% and the S&P CNX Nifty by 0.8% during the same period.
ACC Cluster: Apple GreenRecommendation: HoldPrice target: Under review Current market price: Rs810
ACC exits last of non-core businessesACC has sold its wholly owned subsidiary ACC Machinery Company Ltd (AMCL) for Rs45 crore to the HNG group.
Aditya Birla Nuvo Cluster: Apple GreenRecommendation: BuyPrice target: Rs2,035Current market price: Rs1,602
Price target revised to Rs2,035
The consolidated revenues of Aditya Birla Nuvo (ABN) in Q3FY2008 grew by 60% year on year (yoy) to Rs3,661.6 crore. The growth was driven by the solid performance of insurance business, which grew by whopping 185% yoy to Rs1,485 crore contributing 41% to the overall revenues. Garments, insulators, financial services, carbon black and telecom businesses also contributed well to the overall growth.
The share of high-growth businesses (garments, life insurance, business process outsourcing [BPO], software and telecom) to the total sales improved to 76% in Q3FY2008 as compared with 68% in the same period last year.
However, the operating profit margin (OPM) declined by 630 basis points to 6.8% on account of margin pressure in the key business segments and increased contribution of insurance division (which is still at its nascent stage). Consequently, the operating profit declined by 17.1% to Rs248 crore.
The segmental performance showed margin decline in all the businesses except telecom, insulators and software. Profit before interest and tax (PBIT) margin declined sharply in garments, rayon, BPO, fertilisers and life insurance businesses reducing the overall margins by 440 basis points to 3.3%.
The net profit after minority interest declined by 46.4% yoy to Rs30.2 crore due to higher depreciation costs and taxes as tax benefit from loss in insurance business is not fully reflected in the consolidated numbers.
The company continued to invest the cash generated from the value businesses into the growth businesses like life insurance and telecom. The company is also planning for aggressive retail expansion and joint venture for value added fabrics. Recently, the promoters have increased their stake by issuing warrants worth over Rs4,100 crore to themselves. At the current market price, the stock trades at a price/earnings ratio of 45.8x FY2009E consolidated earnings and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 14.6x FY2009E. Based on the sum-of-the-parts valuation of the merged entity, we estimate the fair value of ABN to be Rs2,035 per share. We maintain a Buy recommendation on ABN with a 12-month revised price target of Rs2,035.
Alphageo India Cluster: Emerging Star Recommendation: BuyPrice target: Rs480Current market price: Rs385
Price target revised to Rs480
Q3FY2008 results of Alphageo India (Alphageo) have been disappointing due to foreclosure of one of its contracts and delay in the start of new contracts. The revenues during the quarter declined by 18.7% year on year (yoy) to Rs10.7 crore.
The company's order backlog at present is Rs65 crore including the two newly-bagged orders worth Rs42 crore during the current quarter. The company also has a strong order pipeline with bids for contracts worth over Rs100 crore.
The company is planning to enhance its execution capabilities through organic as well as inorganic route from the proceeds of preferential allotment to its promoters. The company is looking for overseas acquisition to add four-five crew to its team.
At the current market price, the stock trades at 15.7x FY2008 and 8.8x FY2009 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs480 (11x FY2009 earnings).
Ashok Leyland Cluster: Ugly DucklingRecommendation: HoldPrice target: Rs43
Current market price: Rs35
Sales drop in February
Ashok Leyland's total vehicle sales during February 2008 declined by 6.7% to 7,501 units from 8,036 units in the same month a year ago. Sales in the domestic market declined by 7.2%, whereas exports were marginally down by 0.9% for the same month. On a month-on-month basis, the total sales declined by 17.7%, taking the year-till-date sales volume down by 2.7%.
Passenger or bus sales grew marginally by 1.1% year on year (yoy) to 1,690 vehicles. The growth has come from exports, which grew by 17.8% to 443 vehicles. Truck sales declined by 9.5% to 5,743 vehicles. The domestic sales declined by 8% yoy to 5,554 vehicles whereas exports dropped by 38% to 189 vehicles.
The decline in truck sales is attributed to the postponement of purchases in anticipation of an excise duty cut in the budget.
The management has decided to pass on the benefit of a reduction in the excise duty on buses from 16% to 12% and of the cut in the cenvat on trucks from 16% to 14%. Earlier, Ashok Leyland had announced a price hike of 2.5% in end February 2008. Subsequent to the pass-on of the benefit of the lower duty on trucks, the effective price increase will be only to the extent of 1%.
We maintain our volume estimate at 83,200 for FY2008. However, the management continues to be confident of closing the year with sales of 85,000 plus vehicles.
The outlook for the commercial vehicle industry is expected to be weak for one more quarter. From May/June onwards the base effect should come into play. We maintain Hold on the stock.
Bajaj Auto Cluster: Apple GreenRecommendation: HoldPrice target: Rs2,635
Current market price: Rs2,080
Scheme of demerger
The courts have approved Bajaj Auto Ltd (BAL)'s demerger. March 14, 2008 is the ex-date for the price adjustment and March 25, 2008 is the record date for finalisation of the list of shareholders to be allotted shares in the two other companies. From March 14 BAL would trade on the price attributed to Bajaj Holdings & Investments Ltd (BHIL; also the new name for BAL).
For every one share held in the existing BHIL, the shareholders would get one share of the new BAL of Rs10 each and one share of Bajaj Finserv Ltd (BFSL) of Rs5 each. The new BHIL will hold 30% stake in both the new BAL and BFSL, which are expected to get listed by May 2008.
From 14 March 2008 the price of the existing BAL will get adjusted to that of the existing BHIL. Our sum-of-the-parts (SOTP) calculation attributes a value of Rs1,044 per share to the existing BHIL.
We have fine-tuned our estimates for FY2008 and FY2009 on account of a change in the company's product mix, its higher other income and lower tax rate. The stock is currently trading at 16.6x its FY2009E earnings and 11.6x its enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA). We continue to value the stock using the SOTP valuation method and maintain our Hold recommendation with a price target of Rs2,635.
Bharat Heavy Electricals
Cluster: Apple Green
Price target: Rs2,845
Current market price: Rs1,878
Conquering new frontiers
According to media reports Bharat Heavy Electricals Ltd (BHEL) has been awarded the order to supply boiler package for National Thermal Power Corporation (NTPC)'s 1,320-megawatt (MW) Barh stage-II supercritical power project in Bihar. The value of the order has not been disclosed. The breakthrough in the supercritical space would help address the concerns over the company's capability to secure supercritical orders and beat competition.
BHEL has a healthy order book. It has already won orders worth Rs10,583 crore or 3,345MW in Q4FY2008 so far. We expect the order inflow to remain buoyant especially for the projects based on the supercritical technology.
The company has brought on stream an additional manufacturing capacity of 4,000MW during the current quarter, taking its total installed capacity to 10,000MW. The timely expansion of its manufacturing capacity augurs well for the company considering the favourable demand outlook across the globe.
The robust order inflow and timely capacity expansion provide visibility to the company's future earnings. We continue to remain positive on the stock and reiterate our Buy recommendation on it with a price target of Rs2,845.
We believe the recent correction in the stock and the concerns over the company's ability to secure supercritical orders are overdone. The stock's current valuations are extremely attractive. At the current market price it trades at 22.4x FY2009E and 16.5x FY2010E earnings. In terms of enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA), the stock trades at 15.5x and 11.1x its estimates for FY2009 and FY2010 respectively.
Cluster: Apple Green
Price target: Rs1,100
Current market price: Rs825
Key beneficiary of ADC phase-out
Telecom Regulatory Authority of India's (TRAI) move to phase out access deficit charge (ADC) is likely to benefit Bharti Airtel in the range of of Rs180 to Rs200 crore in FY2009. However, The company is likely to pass on the benefits accruing from the ADC removal to the end consumers by way of reduced tariffs or similar benefits.
Trai's move encompasses phasing out ADC from April 1, 2008. However, the component on the international incoming calls would be payable at a reduced rate of Rs0.50 (paise fifty only) for the period from April 1, 2008 to September 30, 2008. From October 1, 2008 this component of ADC would also stand phased out.
Bharti Airtel remains our top pick within the telecom space in view of its strong execution strength and economies of scale. At the current market price the stock trades at 23.5x FY2008 and 19.4x FY2009 estimated earnings. We reiterate our Buy recommendation with a price target of Rs1,100.
Esab India Cluster: Vulture's PickRecommendation: BuyPrice target: Rs575Current market price: Rs460
Buoyant demand to spur growth
For Q4CY2007, ESAB India reported a growth of 11.5% in the net sales to Rs87.7 crore, which was below our expectation.
The consumables division reported a growth of 14.3% year on year (yoy) to Rs62.6 crore. The profit before interest and tax (PBIT) for the division grew by 37.8% to Rs16.5 crore. The equipment division reported a dismal performance with revenues growing by only 5.2% to Rs25.1 crore, while the PBIT for the division grew by 13.2% to Rs4.7 crore.
The operating profit for the company grew by 33.2% to Rs19.2 crore. The operating performance of the company continues to be healthy and the margin reported an improvement of 350 basis points yoy to 21.9%.
The other income grew by 8.1% to Rs2.5 crore. The interest cost declined by 22.2% to Rs0.2 crore, while the depreciation charge rose by 13% to Rs1.6 crore. Consequently, the net profit grew by 31.4% to Rs13.3 crore.
For the full year, ESAB India reported a growth of 19.4% to Rs342.9 crore in the revenues. The operating profit grew by 23% to Rs80 crore resulting in an improvement of 70 basis points in the operating profit margin (OPM) to 23.3%.
The net profit for the year grew by 25.1% to Rs53.4 crore against our full year estimates of Rs57.4 crore.
We believe, the demand for welding products would continue to be buoyant due to the planned investments in core infrastructure sectors like roads, ports, airports, construction and the other industrial sectors in India. ESAB India, the market leader in welding products, is all set to tap this opportunity. Currently, we maintain our estimates for CY2008 and would bring our CY2009 estimates post the annual general meeting (AGM) of the company.
At the current market price, the stock trades at 10.3x its CY2008 earnings per share (EPS) and 5.2x enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation with a price target of Rs575.
Genus Power Infrastructures
Cluster: Ugly Duckling
Price target: Rs643
Current market price: Rs385
Price target revised to Rs643Genus Power Infrastructure Ltd (GPIL) has bought a 6 mega watt (MW) power generation plant from Genus Power Products Ltd (GPPL). Subsequently, the shareholders of GPPL would receive one fully paid-up share of GPIL for every 60 fully paid-up shares of GPPL currently held by them.
Cluster: Apple Green
Price target: Rs280
Current market price: Rs231
Annual report review
The revenue of Hindustan Unilever Ltd (HUL) grew by 13.3% year on year (yoy) to Rs13,717.8 crore in CY2007 contributed by an increase in its volumes, a better product mix and price hikes effected during the year. Active cost-cutting measures across segments and prudent price hikes led to a 130-basis-point improvement in the company's operating profit margin (OPM) to 13.7%. The net profit of the company increased by 14.9% to Rs1,769.1 crore.
The home and personal care (HPC) business comprising soap & detergent and personal care products (contributing around 73% to the total revenue) continued to show a double-digit growth of 12.2% yoy to Rs10,046.4 crore.
The food business posted a strong growth of 20.4% yoy to Rs2,231.1 crore. The company's innovative and strong brand building capabilities have resulted in strong growth of 15.2%, 39.8% and 17.2% in its beverages, processed foods and ice cream sales respectively. Exports were affected by the appreciation of the rupee and grew by 5% in rupee terms as against a growth in excess of 15% in dollar terms. The company is rationalising its product portfolio by exiting from low-value businesses to improve the performance of the export business going forward.
HUL completed the buy-back of 3.02 crore shares from the open market at an average price of Rs207.13 per share, leading to an outflow of Rs626.27 crore in CY2007. The equity capital reduced by 1.37% to Rs217.7 crore. Total reserves declined from Rs2,502.81 crore to Rs1,221.49 crore in CY2007. This has led to a hefty improvement in the return ratios. While the return on capital employed (RoCE) improved from 72.6% to 102.2%, the return on net worth (RoNW) improved from 61.2% to 85.0% in CY2007.
Better business performance, efficiencies through cost savings across segments and an efficient collection system resulted in strong operating cash flows of Rs1,710.5 crore. Nitin Paranjpe (ex-executive director of the HPC segment) has been appointed as the managing director and chief executive officer (CEO) of the company.
We believe that in CY2008 HUL will continue to face intense competition across categories and high cost pressures. Thus the company would have the challenge of maintaining its market share and margins. We believe cost efficiencies along with measured price hikes are going to be the way forward to combat increased input costs to maintain the margins. At the current market price of Rs231, the stock trades at 24.8x its CY2008E earnings per share (EPS) of Rs9.3. We maintain our Buy recommendation on HUL with a price target of Rs280.
Cluster: Ugly Duckling
Price target: Rs622
Current market price: Rs643
Price target revised to Rs622
The board of directors of ICI India has approved divestment of its adhesives business for a total consideration of Rs260 crore to an Indian affiliate of Henkel group, subject to adjustments for actual working capital and cash balances.
This is in line with AKZO Nobel's (which has acquired 100% stake in ICI Plc, the parent company of ICI India) decision to divest ICI's global adhesives and electronic materials business to Henkel AG.
While ICI's global business is transferred to Henkel AG at a valuation of 2.1X its sales, the Indian adhesive business has fetched 2.3X its expected sales for FY2008. The deal will include transfer of portion of Thane manufacturing facility and about 120 employees currently working with the business and the company's shareholding in its subsidiary Polyinks to Henkel.
We remain positive on ICI India primarily on account of good prospects for paint industry going forward, synergies that would arise on concerted efforts of Akzo Nobel in growing ICI India's business and a huge pile of cash that opens up opportunities for organic and inorganic growth. Valuing the core business at 20X FY2009E earnings per share (EPS) of Rs17.8 (excluding other income) and adding the cash per share of Rs266, we arrive at a fair value of Rs622 for the stock. Thus we raise our price target to Rs622 and put a Hold recommendation. At the current market price of Rs643, the stock trades at 21X its FY2009E EPS of Rs30.9.
Cluster: Apple Green
Price target: Rs1,528
Current market price: Rs757
Clarification on difference in reported marginsWith a view to allay concerns over the difference in margins reported by ICICI Bank, India and the Prudential group UK, ICICI Bank had arranged a conference call to provide clarification.
International Combustion (India)
Price target: Rs519
Current market price: Rs423
Margins surprise positively
After the dismal performance in the second quarter, the Q3FY2008 results of International Combustion India Ltd (ICIL) were inline with our expectation with the revenues reporting a growth of 18.4% to Rs23.1 crore.
The material handling equipment (MHE) division reported a growth of 7.6% year on year (yoy) to Rs17.3 crore, while on a lower base the geared motor & geared box division (GMGBD) reported a growth of 61.5% to Rs5.9 crore. GMGBD revenues are expected to pick up from FY2009.
The operating profit grew by 35.4% to Rs5.2 crore. The operating profit margin (OPM) improved by 280 basis points yoy to 22.3% on account of operating leverage. The net profit was up 59.8% yoy to Rs3.1 crore, inline with our expectation.
The current order book of the company stands at Rs51 crore. Rs41 crore worth of orders are for the MHE division, while the balance Rs10 crore of orders are for the GMGBD. We expect the order inflow to pick up from FY2009 particularly in the GMGBD given the opportunity from the B-2000 series geared motors and geared boxes.
We have fine tuned our FY2008 estimates to factor in the first nine months performance of the company. We maintain our FY2009 estimates and our Buy recommendation with a price target of Rs519.
At the current market price, the stock trades at 9x FY2008E and 7.3x FY2009E. In terms of enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) the stock is quoting at 4.9x and 3.9x FY2008 and FY2009 estimates respectively.
Cluster: Apple Green
Price target: Rs247
Current market price: Rs206
Non-filter cigarette production halted
ITC has suspended the production of non-filtered cigarettes owing to the steep excise duty hike proposed on non-filter cigarettes in the 2008-09 Union Budget. The suspension of the production of non-filtered cigarettes is a temporary action and would be reviewed by the company in the coming months.
ITC has also decided against hiking the prices of filter cigarettes. This along with the reduced availability of the non-filter cigarettes would help the company to capture a large population of smokers shifting from non-filter cigarettes to filter cigarettes.
With no price increase expected in the regular filter cigarettes, we expect the volumes of regular filter cigarettes to increase by 5% to Rs5,408 crore in FY2009.
For Q4FY2008, we expect ITC to register a robust revenue growth of 14.8% year on year (yoy), driven by an improved performance of its non-cigarette fast moving consumer goods (FMCG) and hotel businesses.
At the current market price of Rs206, ITC trades at 20.6x its FY2009E earnings per share (EPS) of Rs9.80. We maintain our Buy call on the stock with a price target of Rs247.
Cluster: Ugly Duckling
Price target: Rs390
Current market price: Rs233
Stake sale in Jaypee Infratech
ICICI Bank buys 1% stake in Jaypee Infratech Ltd (JIL) for Rs250 crore, thereby valuing the company at Rs25,000 crore. This is largely in line with our estimates of Rs24,400 crore. JIL also obtains long term financing of Rs900 crore from ICICI Bank.
The stake sale and closure of long-term financing from ICICI Bank is a positive development both in terms of raising required resources and boosting investor confidence.
At the current market price, the stock is trading at 41x its estimated FY2009 earnings. We have revised the sum-of-the-parts (SOTP) based price target to Rs390 to reflect the de-rating of some of its businesses in line with the prevailing market conditions. We maintain our Buy call on the stock.
Cluster: Emerging Star
Price target: Rs451
Current market price: Rs307
Price target revised to Rs451
KSB Pumps' Q4CY2007 results were slightly ahead of our expectations, both on the top line and the profitability front. The net sales for the quarter rose by 21.7% to Rs131.8 crore. After a couple of disappointing quarters, the profitability improved substantially during this quarter as the overall margin improved by 60 basis points year on year (yoy) and by 770 basis points sequentially to 19.1%. On a segmental basis, the profit before interest and tax (PBIT) margin of the pump division rose to 15.6% (up 220 basis points yoy and 860 basis points sequentially) while that of the valve division stood at 25.1% (down 30 basis points yoy but up 610 basis points sequentially).
We believe that the profitability of the company improved on the back of higher contribution of the project business, which carries higher margins. We understand that the order book of the company in the project business is growing at about 40% yoy. Considering this, we continue to expect strong revenue booking in the subsequent quarters also.
A higher other income, stable interest and depreciation costs, and lower taxes led to a 62.1% growth in the net profit to Rs19.6 crore.
In view of the slower growth this year, particularly in the first nine months, we are downgrading our earnings estimate for CY2008 by 18.8% to Rs32.2. We shall introduce our CY2009 estimate in our subsequent update.
Considering the buoyancy in its user segments, particularly refineries and the power sector, we maintain our positive outlook on the company. At the current market price of Rs307, the stock is trading at 9.5x its CY2008E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.2x. We maintain our Buy recommendation on the stock with a revised price target of Rs451.
Larsen & Toubro
Price target: Rs4,428
Current market price: Rs2,728
Hedging loss likely in Q4FY2008Larsen and Toubro (L&T) has indicated that its Middle-Eastern arm, LTFZE, is likely to report a foreign exchange (forex) loss on account of commodity hedging. LTFZE is a 100% subsidiary of the company and is the main investment arm for its international operations. It also undertakes commodity derivative transactions in order to hedge the group's commodity exposure. The forex loss could be to the tune of Rs150-200 crore against a gain of Rs130 crore last year.
Cluster: Apple Green
Price target: Rs70
Current market price: Rs63
Exiting from non-focus business
Marico has exited from its processed food business by divesting its brand Sil to Scandic Food Pvt Ltd, the Indian subsidiary of Good Food Group A/S.
Sil, the no.2 brand in jams (no.1 is Hindustan Unilever's Kissan) in India, has a market share of 8%. The brand was part of Marico's non-focus portfolio, contributing around 1% to the total turnover of the company.
The company is aiming at rationalising its portfolio, so that it can focus on the beauty and wellness segment. This divestment will help Marico to focus on its core beauty and wellness portfolio.
Marico's business model has multiple revenue drivers that make us bullish on the company's prospects. The company also has a strong foothold in the domestic haircare and edible oil markets. In the absence of details of the deal, we would revise our estimates as and when the details are available to us. We remain positive on Marico's businesses and maintain our Buy recommendation on the stock with a price target of Rs70. At the current market price of Rs63, the stock is trading at 18.9x its FY2009E earnings per share (EPS) of Rs3.34.
Maruti Suzuki India
Cluster: Apple Green
Price target: Rs1,230
Current market price: Rs940
Biggest beneficiary of the Budget
Maruti Suzuki Ltd (MSL) is expected to be the biggest beneficiary of the Union Budget FY2009, which has given a fillip to the automobile sector by cutting the excise duty on small cars from 16% to 12%.
The benefit of this reduction in the excise duty has already been passed on to the consumers by MSL. The company has reduced the price of six models that qualify for the lower excise duty by 3.5% each. The positive impact of this reduction should result in a higher demand and become visible in a couple of months, ie from April or May onwards.
The focus on increasing the disposable income in the hands of the consumer by rationalising the personal tax slabs and the recommendations of the Sixth Pay Commission scheduled for April 2008 are expected to spur spending on consumer goods and automobiles. The sedan version of Swift is slated for launch in the last week of March 2008. The "A star" compact car is planned to be launched in October 2008, simultaneously in the export and the domestic market. The success of these products could further fuel the volume growth for MSL. Going forward, we believe the passenger car segment will report a better volume growth compared with commercial vehicles (CVs) and two-wheelers on the back of an increase in the disposable incomes and changing demographics. We are fine-tuning our estimates for FY2008 (due to a slow growth in Q4FY2008) and revising our volume estimate for FY2009. We now expect MSL to report a volume growth of 12.7% for FY2009. At the current market price of Rs940, the stock trades at 12.2x its FY2009E earnings and 7.8x enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA). We maintain our Buy rating on the stock and retain Maruti Suzuki as our top pick in the automobile space with a price target of Rs1,230.
Cluster: Apple Green
Price target: Rs620
Current market price: Rs319
Recent order win allays slowdown fearsA Punj Lloyd Ltd (PLL) led consortium with Malaysia's Dialog E & C Sdn Bhd and Petrosab Logistik Sdn Bhd has been awarded an order involving the engineering, procurement and construction (EPC) as well as commissioning of a 512-kilometre, 36-inch diameter onshore natural gas pipeline. The project is expected to commence immediately and be completed over the next 36 months. The order is valued at USD500 million. Though the exact quantum of work for PLL has not been disclosed, PLL is expected to carry out the EPC work of the complete contract. This, we believe, would help address the concerns of a slowdown in the order inflow for PLL.
Punjab National Bank
Cluster: Ugly Duckling
Price target: Rs675
Current market price: Rs508
Is PNB selling stake in PNB Gilts?It has been reported in certain sections of the media that Punjab National Bank (PNB) is planning to sale its stake in PNB Gilts. Currently, PNB holds a 74% stake in the gilt subsidiary whereas financial institutions and public shareholders hold the remaining 26%. Sale of stake is one of the options being considered by PNB for unlocking value of its investment in PNB Gilts. The other available options include a merger of PNB Gilts with PNB and a reduction of the capital base. According to media sources, PNB had decided to opt for merging the gilt subsidiary with itself and had offered to do so at book value. However, PNB Gilts' board of directors felt that the other options would offer better valuation.
Cluster: Apple Green
Price target: Rs558
Current market price: Rs446
Multiple triggers in the offing
Following the reversal of an earlier court ruling, Ranbaxy Laboratories (Ranbaxy) has lost a Canadian appeals court ruling against Pfizer on a patent protecting Lipitor in Canada due to expire in July 2010. Even though the above ruling is not likely to have an impact on Ranbaxy's timeline of launch of generic Lipitor in Canada, it is likely to have a sentimental impact on the stock.
Ranbaxy was the first to file a Para IV abbreviated new drug application (ANDA) with US Food and Drug Administration (USFDA), seeking approval to market Nexium in the USA, ahead of its patent expiry in 2018. Having already received a tentative approval from the USFDA for its generic version of Astra Zeneca's Nexium in February 2008, we expect the final approval to come through in April 2008, upon expiry of the 30-month stay period.
The final approval will allow Ranbaxy to launch the product "at-risk" in the USA with a 180-day exclusivity. Based on our calculations, we believe the Nexium opportunity could yield earnings of Rs21 per share for Ranbaxy. However, we do not believe Ranbaxy would launch the product "at-risk" in the USA. Ranbaxy could attempt to enter into an out-of-court settlement with Astra Zeneca for the launch of generic Nexium. We expect the news flow on the launch options of generic Nexium to act as a short-term trigger for the stock.
Ranbaxy has already announced four exclusivity opportunities until 2010. Based on our discounted cash flow (DCF) calculations, we believe the first-to-file (FTF) opportunities announced so far are collectively valued at Rs2,716 crore, translating into a per share value of Rs68. Further, Ranbaxy has in its kitty, 18 more Para IV filings with potential FTF status, representing a market size of about $27 billion. The company expects to monetise at least one FTF opportunity every year. We expect the news flow on Para IV challenges and associated exclusivity opportunities to continue.
The management has guided towards an impressive 18-20% top line growth in dollar terms in CY2008 and an expansion of the operating profit margin (OPM) to 17.5-18% in CY2008 from 15.1% in CY2007, resulting in a net profit growth of 20-25% in CY2008.
At the current market price of Rs446, Ranbaxy is trading at 20.9x its base CY2008E and 18.2x its base CY2009E earnings (excluding exclusivity opportunities). We maintain our Buy recommendation on the stock with the sum-of-the-parts price target of Rs558 (20x CY2009E earnings of base business plus Rs68 for exclusivity opportunities).
Cluster: Ugly Duckling
Price target: Rs273
Current market price: Rs146
SEAMEC Princess deployed at much higher charter rateSEAMEC has deployed its newly upgraded support vessel "SEAMEC Princess" with Sime Darby Engineering, Qatar at a charter rate of around US$110,000 per day. The charter rate is much higher than the expected rate of US$60,000. The contract has been signed for charter hire and diving operations for a period of six months with an option for extension. It has already become effective from March 01, 2008 and its total value for the firm period is USD19 million approximately.
Price target: Rs1,625
Current market price: Rs966
Capacity additions drive volume growthShree Cement has commissioned Unit VI of 1 million tonne per annum (MTPA) clinker capacity at Bangur, Rajasthan. Thereby the total clinker capacity of the company has increased to 6.5MTPA, while the grinding capacity stands at 9.1MTPA. In FY2008 the company added 2MTPA of clinker and 3.5MTPA of grinding capacity along with 36 mega watt (MW) captive power plants (CPPs) taking the total CPP capacity to 101MW. With the earnings before interest, tax, depreciation and amortisation (EBIDTA) per tonne being the highest in the industry, Shree Cement remains one of the most cost efficient player with a hefty cash flow. Thus out of the total capital expenditure (capex) of Rs850 crore, it funded Rs400 crore through debt while the balance Rs450 crore was funded through internal accruals. The entire capex of the company has now been completed. Even after the completion of the capex, it has cash and equivalents of about Rs800 crore, which we expect to increase to Rs1,500 crore by the end of FY2009.
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Price target: Rs1,475 Current market price: Rs1,252
Sun Pharmaceuticals (Sun) has received the final approval from the US Food and Drug Administration (USFDA) for its abbreviated new drug application (ANDA) to manufacture and market Amifostine injection 500mg, the therapeutic equivalent of MedImmune's Ethyol. Being the first to file an ANDA for generic Ethyol with a Para IV certification, Sun has been awarded a 180-day marketing exclusivity for the product. We do not exclude the possibility of an at-risk launch by Sun, in which case Sun could generate $14 million in revenues, leading to incremental earnings of Rs1. 4 per share.
The company has received tentative approval for generic Gemzar, for which it had filed an ANDA containing a Para IV certification. Gemzar, or generic gemcitabine injection, is Eli Lilly's anti-cancer drug with annual sales of $680 million in the USA. According to our calculations, the launch of generic Gemzar under exclusivity for 180 days could yield revenues and profits of $51 million and $25 million respectively, translating into incremental earnings of Rs4.8 per share for Sun.
In the last one month, Sun has received three final approvals from the USFDA--for benzonatate capsules, fosphenytoin sodium injection and torsemide tablets. Additionally, Sun has also received tentative approval for divalproex sodium delayed release tablet, which is the generic version of Abbott's anti-epileptic drug, Depakote, with annual sales of $755 million. We expect the final approval for generic Depakote to come through in July 2008, upon the expiry of the patent. However, the market for this product is crowded with numerous players already having tentative approvals and hence we expect the gains from this product to be limited.
There are two positive developments related to Sun's bid to acquire Taro Pharmaceuticals (Taro). On the one hand, Sun has acquired the 9.4% stake of Brandes, which is one of the major institutional investors in Taro and was opposing Sun's bid for Taro. Following the acquisition, Sun's stake in Taro has increased from 25% earlier to 34.4%. On the other hand, Taro, in its declaration of its preliminary unaudited financials for CY2007, has reported a very strong operating performance, which is positively surprising. The Taro acquisition is not part of our current estimate and will provide upside to our FY2010 earnings estimate, if Sun is successful in its bid.
With the base business performing well, clarity on the launch of generic Effexor XR under exclusivity, the receipt of USFDA approval for and the subsequent launch of generic Gemzar, the potential launch of generic Ethyol under exclusivity and the progress on the Taro acquisition will act as near-term triggers for the stock. At the current market price of Rs1,252, Sun is valued at 25.1x FY2008E and 19.4x FY2009E fully diluted earnings. We reiterate our Buy recommendation on the stock with a price target of Rs1,475.
Cluster: Apple Green
Price target: Rs792Current market price: Rs655
JLR deal negative in short term
Tata Motors has entered into a definitive agreement with Ford Motor Company (Ford) to buy the latter's utility vehicle brands Jaguar and Land Rover (JLR) for $2.3 billion (Rs9,200 crore) in an all-cash deal.
The agreement encompasses the two brands, three manufacturing plants and intellectual property rights. The transfer of ownership of the same to Tata Motors is expected to close by the end of the next quarter, subject to applicable regulatory approvals. Tata Motors will fund the purchase with a bridge loan arranged by banks and look to repay these loans by selling off some of its subsidiaries and associates and raising debt. Ford will contribute $600 million towards JLR pension plans.
We feel there is no synergy between Tata Motors' brands and JLR. JLR has a huge research and development (R&D) expenditure and with recession expected in the USA, turning around these luxury brands could be difficult.
This acquisition will have a negative impact on the balance sheet and earnings of Tata Motors in the short term. We would be in a position to revise our estimates only after getting the exact funding details and debt of JLR from the company. We maintain our Hold recommendation on the stock.
Q4FY2008 IT earnings preview
The frontline tech stocks are expected to show a sequential revenue growth of 5-8% during the fourth quarter ended March 2008. The sequential growth is likely to be driven by a 4-7% growth in the volumes aided by the depreciation of rupee by around 90 basis points over Q3FY2008. We expect Satyam Computer to continue with its strong growth momentum and outperform its frontline peers. On the other hand, Tata Consultancy Services (TCS) could lag behind due to customer specific issues, whereas HCL Technologies will face pressure on its earnings growth due to foreign exchange (forex) fluctuation.
Not much pain from yen
The Japanese Yen has appreciated against the US Dollar (USD) all the way to the 97 level. It has appreciated by about 6% during this month alone and is ~21% up from the last year's low touched in June 2007. Against the rupee also the yen has appreciated by 6.4% in the current month till date.
In light of the recent rally in the yen we have tried to assess the impact of the same on the companies under our coverage.
Sharekhan's top equity fund picks
We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the one and two year returns, the Sharpe ratio and Fama (net selectivity).
The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.
FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.
Grasim and UltraTech to benefit from capacity addition
Aditya Birla group, comprising of Grasim Industries (Grasim) and UltraTech Cement (UltraTech) has commissioned 6.6 million tonne per annum (MTPA) clinker capacity, 1.3MTPA grinding capacity and a 23-mega watt (MW) thermal power plant. Post timely commissioning of the above mentioned capacities, the volumes will drive the earnings of Grasim and UltraTech. Grasim has commissioned 3.3MTPA clinker capacity at Sambhupura in Rajasthan along with 1.3MTPA grinding capacity at Panipat in Haryana. A 23MW thermal power plant has also been commissioned at Jawad in Madhya Pradesh.
UltraTech, in which Grasim holds 54.09% stake, has also successfully commissioned 3.3MTPA clinker capacity in Andhra Pradesh. UltraTech will also set up captive power plants (CPPs) aggregating to nearly 146MW, of which 96MW will be commissioned during the early part of Q1FY2009 and the remaining 50MW will be commissioned by August 2008. The added capacity will reduce the cost of power and fuel per tonne of cement by almost 6.7%.
Grasim will add another 4.5MTPA capacity at Kotputli in Rajasthan by September FY2009. Of the total cement capacity commissioned by Aditya Birla group, 4.4MTPA capacity is being added by Grasim in northern India, where we believe prices will remain firm until the entire planned capacity for the region for FY2009 comes on stream. Until such time, Grasim will enjoy better realisations coupled with higher volumes. UltraTech has added another 4.9MTPA capacity in south India, where the demand is favorable currently. However as huge capacities are in the pipeline, we believe the prices will soften in the region once the entire planned capacity for FY2009 comes on stream.
Aditya Birla group will benefit vis-a-vis its peers from early commissioning of its capacities, as the total capacity addition in the industry during H1FY2009 will be 25MTPA of which 13.8MTPA comes from Aditya Birla group. This implies that about 53% of the total capacity being commissioned in India during the first half of FY2009 will be that from Aditya Birla group. The group will benefit the most from the firm prices, which we believe will soften once the entire planned capacities for FY2009 come on stream. The remaining 12.2MTPA capacity addition announced by other manufacturers is planned capacity and will not be necessarily commissioned on schedule, which will put Aditya Birla group in an even sweeter spot.
Grasim stands to benefit from both its standalone capacity addition of 8.9MTPA and the 4.9MTPA capacity added by its subsidiary UltraTech in which Grasim holds 54.09% stake. We maintain our Buy recommendation on Grasim with price target of Rs3,853 and UltraTech with price target of Rs1,100.
BKC auction indicates realty slowdownAs per media reports, the Mumbai Metropolitan Region Development Authority (MMRDA) had recently put five plots on auctions in the G-Block of the Bandra-Kurla Complex, comprising two commercial, two residential and a clubhouse. Out of the these five plots, the authority only managed to sell three plots for Rs1,322 crore. Of these three plots, the authority sold one commercial plot, spanning 24,000 square metre, to Jet Airways for Rs826 crore. This implies a selling price of approximately Rs32,000 per square feet (Rs314,467 per square metre) for the commercial plot. This selling price is at a 31.7% discount to the Wadhwa Builders' bid of Rs46,806 per square feet (or Rs503,636 per square metre). It is also interesting to note that Jet Airways was the sole bidder for the commercial plot in the recent auction.
Lakshmi Energy and Foods
Turning over a new Leaf Lakshmi Energy and Foods (Leaf), formerly Lakshmi Overseas Industries, is the largest manufacturer of non-basmati rice in India with a manufacturing capacity of 1.35 million tonne per annum (mtpa). The company has integrated plants of solvent extraction and a cattle feed mill, which along with the recently installed packaging plants will add value to its existing business. It has also implemented India's largest husk fueled power plant with a capacity of 30 megawatt (MW).
Tata Power Company
Bright futureTPC, one of the largest private utility companies, has a strong business model with presence in the power value chain from generation till distribution. The company is also looking at new opportunities by expanding its presence in T&D space and is further strengthening its position as an integrated power utility company. TPC has set a target to increase its capacity from 2,389MW at present to 12,861MW by FY2013. The target to grow five-six folds looks overwhelming, but in our view the target is achievable considering the progress in the projects currently under implementation by the company. One of the challenges for all the power generation utilities has been fuel linkages. TPC's stake in Indonesian coal mine and concession agreement with mines in India (Tubed, Mandakani and Ganeshpur) put it in a strong position on the fuel linkage front. The key risk however remains the highly regulated environment in which the company operates. At the current market price the stock trades at 33.2x FY2009E consensus estimates and 3.3x FY2009E Price/Book value.
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Regards,The Sharekhan Research Team email@example.com
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