| Summary of Contents STOCK UPDATE Tata Chemicals
Cluster: Vulture?s Pick
Recommendation: Hold
Price target: Rs341
Current market price: Rs315
Rallis acquisition to lead to earnings upside -
During November 2009, Tata Chemicals acquired additional ~ one million equity shares of Rallis India at Rs908.5 per share, raising its stake from 46% to 50.1% and thereby making Rallis India a subsidiary of Tata Chemicals. Tata Chemcials held only a 9.4% stake in Rallis India as on March 31, 2009. The acquisition will lead to consolidation benefits as well as improved business synergies for Tata Chemicals, going ahead. -
Rallis acquisition?Entry into crop protection segment: The acquisition of a majority stake in Rallis India will bring about a positive change in the business model of Tata Chemicals. Currently, the company is a dominant player in the crop nutrition segment but is more or less absent in the crop protection space. The crop protection industry is devoid of some of the inherent weaknesses that form part of the fertiliser (regulatory control) and chemical industries (cyclicality). The acquisition of the majority stake in Rallis India will provide Tata Chemicals an entry into this business. -
Rallis consolidation to add 6% to Tata Chemicals? FY11E earnings: According to our first-cut estimates for Rallis India, the profit after tax (PAT) of the company is expected to witness a compounded annual growth rate (CAGR) of 19.3% over FY2009-2011. The net profit is estimated to grow to Rs85 crore in FY2010 and to Rs102 crore in FY2011 on the back of an 11% cumulative annualised growth rate in the sales coupled with a margin improvement of 170 basis points to 15% from FY2009 to FY2011. As a result of the consolidation of Rallis India?s financials with those of Tata Chemicals, the latter?s FY2011E PAT will increase by Rs51.6 crore (50.06% of Rallis India?s FY2011E PAT), leading to a 6% increase in its FY2011E earnings per share (EPS) to Rs37.8. The upward revision in the EPS estimate for FY2011 would act as a trigger for raising the price target for the stock going ahead. -
The stock of Tata Chemicals has seen a significant upmove in the recent past in reaction to positive news flows such as Rallis acquisition, extention of safeguard duty on Chinese imports, likely repricing of the international soda ash contracts. As a result of these positive events, we upgrade our price target to Rs341 (10x FY2011E EPS), while maintaining our Hold recommendation on the stock. Our earning estimates do not include the consolidation of Rallis financials. At the current market price of Rs315, the stock is trading at 11.3x and 9.2x its FY2010 and FY2011 expected earnings. Larsen & Toubro
Cluster: Evergreen
Recommendation: Hold
Price target: Rs1,702
Current market price: Rs1,637
Stake sale in BIAL -
L&T Infrastructure Development Projects Ltd, a subsidiary of Larsen and Toubro (L&T), has sold its 17% stake in Bengaluru International Airport Ltd (BIAL) to GVK Power and Infrastructure (GVK) for Rs686 crore. GVK has paid Rs105 a share for the stake. With this, GVK's stake in BIAL has gone up to 29 %. Recently, the L&T management had indicated that the company was planning to sell the stake in the Bangalore airport as it did not want to have a minority holding. Besides being an equity holder, L&T had been the engineering, procurement and construction (EPC) contractor for the airport project. As per L&T?s annual report, L&T has acquired 6.5 crore shares at a face value of Rs10. Hence, we estimate that L&T has made an estimated profit before tax of Rs621.1 crore on the deal (on a selling price of Rs105 a share). -
Although we are positive about L&T?s new ventures like power generation, yet we have not accounted them in our projections on account of their long gestation period as well as the project execution risk associated. We maintain our consolidated earnings per share (EPS) estimates for FY2010 and FY2011 at Rs67.7 and Rs80 respectively. -
At the current market price, the stock is trading at 20.5x its FY2011E consolidated earnings. We remain positive on L&T given its capabilities, robust order book and opportunities in the infrastructure space, and maintain our Hold recommendation and sum-of-the-parts (SOTP) based price target of Rs1,702 on the stock.
SECTOR UPDATE Pharmaceuticals Growth led re-rating Key points -
Our bullish stance on mid-cap pharmaceutical stocks has played out exceedingly well since our sector update on September 03, 2009. The three mid-cap pharmaceutical stocks?Torrent Pharmaceuticals (Torrent Pharma), Ipca Laboratories (Ipca Labs) and Cadila Healthcare (Cadila)?recommended in the update have given cumulative returns of ~44% as against 11-12% appreciation in the benchmark indices. -
Notwithstanding the recent strong outperformance, we still maintain positive view on pharmaceutical stocks due to their improving financial performance and under-ownership by institutions. Moreover, there are number of positive themes that would play out in 2010 in different segments of pharmaceutical sector and spur the stocks ahead. -
The two key concerns that bug the sector are exchange rate volatility (which impacts the export-driven models) and the strict US Food and Drug Administration (USFDA) stance. -
In terms of picks, Sun Pharmaceutical Industries (complex generics, controlled release substance) and Lupin (complex generics, branded formulations) are safe investment bets that would provide steady returns. Cadila (strong domestic formulations, niche IND filings), Ipca Labs (focused on domestic and emerging markets, API advantage) and Torrent Pharma are our top picks in the mid-cap segment. Among front line companies, Biocon India (not rated) and Cipla (not rated) are interesting investment avenues for short-to-medium term outlook. | |
