Investor's Eye: Update - Patels Airtemp (Price target revised to Rs101); Cement (Pricing hits sector performance); Special - Q3FY2010 Pharma review

Investor's Eye [February 05, 2010]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Patels Airtemp India  Cluster: Emerging Star Recommendation: Buy  Price target: Rs101 Current market price: Rs89 Price target revised to Rs101 Result highlights Patels Airtemp?s net sales in Q3FY2010 increased by 14.4% year on year (yoy) to Rs15.4 crore backed by robust execution of its order book. The operating performance surprised positively with the operating profit margin (OPM) expanding by 150 basis points yoy to 23.8% in the quarter from 22.3% in the corresponding quarter of the last year. This was mainly due to lower raw material cost as percent of sale in the quarter. Consequently, the operating profit for the quarter rose by 22.2% yoy to Rs3.7 crore.  The interest cost increased to Rs0.26 crore and the depreciation charge increased to Rs0.23 crore in the quarter. Driven by strong operating performance, the net profit came in at Rs2.1crore, a 19.7% year-on-year (y-o-y) increase. During M9FY2010 the top line grew by 4.9% yoy with the profit after tax (PAT) growing by 18.2% yoy.  The order book in the quarter stood at Rs50 crore, up from Rs46 crore at the end of Q2FY2010. Sectors such as power continue to do well and drive the company?s growth and the investments in oil & gas and refinery sectors, which are picking pace gradually, are also likely to further benefit the company. Add to this the outlook for the fertiliser sector, which remains bright on huge investments outlined by the Indian Farmers Fertiliser Cooperative in Gujarat. The companies like Patels Airtemp are also likely to benefit from the installation of about 300 new compressed natural gas stations in Gujarat.  In view of M9FY2010 results, we have revised our estimates and expect the company to post an earnings per share (EPS) of Rs16.5 and Rs18.6 in FY2010 and FY2011 respectively. We are also introducing our FY2012 estimates and expect an EPS of Rs21.8 in the fiscal. At the current market price the stock is available at 4.8x FY2011E earnings and 4.1x FY2012E earnings. Given its low debt to equity ratio of 0.2:1 and a healthy return on net worth of 31.5%, the valuation appears to be fairly attractive. We are rolling over our target multiple of 5x to the average of FY2011 and FY2012 earnings estimates. Hence, we are revising our price target to Rs101 and maintain Buy recommendation on the stock. SECTOR UPDATE Cement Pricing hits sector performance In Q3FY2010 the domestic cement industry faced severe pressure on earnings manily on account of higher than expected pressure on realisation and increase in input costs like freight cost due to increase in lead distance and raw material cost. Recently, two leading players of the domestic cement industry namely ACC and Ambuja Cement having pan India operations have posted their Q4CY2009 results which were below street expectations.  In terms of volume growth, the industry has posted year to date (YTD) growth of 12.6% and a growth of 11.6% year on year (yoy) for Q3FY2010. Region-wise, the southern region witnessed lacklustre volume growth on account of floods and political uncertanity in Andhra Pradesh due to Telangana issue. The demand in other regions like north, east and central was however impressive. In case of ACC and Ambuja Cement inspite of having pan India operations, the volume growth remains muted (4.1% and 4.7% yoy respectively for Q4CY2009) on account of limited capacity adition during the last one year. On the realisation front, cement prices have started declining across the county from August/September 2009 with the same coming under severe pressure in the southern and western regions. In Hyderabad, cement prices dropped to as low as Rs130 per bag, which was around its 15-year low. In Mumbai, prices dipped to Rs230 per bag and in Kolkata it dropped to Rs250 per bag. However, the prices have started moving up from November 2009 on account of supply shortage due to logistic problems and in December and January on improved demand. The recent price hike accounts for approximately 50% of the recovery in the price drop. During Q3FY2010, the south-based companies like India Cement and Madras Cement posted sharp correction in their realisation compared to the north- and east-based companies. In case of ACC and Ambuja Cement the average realisation fell by 8.8% and 6.1% respectively on a sequential basis.  After significant correction (touching a low of US$55 per tonne), imported coal prices have started moving upward touching a high of US$91 per tonne in the beginning of January and currently quoting at US$83.4. This upward price movement is likely to adversely impact the earnings before interest, depreciation, tax and amortisation (EBDITA) margin of domestic cement makers especially those which depend on imported coal like UltraTech Cement, Ambuja Cement and India Cement. The management of ACC and Ambuja Cement holds the view that the domestic cement industry is likely to post a volume growth of 9-10% in the coming year on account of initiatives taken by the government to boost infrastructure and due to robust rural consumption. However, on stabilisation of new capacity addition, the supply is expected to surpass incremental demand, which will create pressure on utilisation and consequently on prices. In addition to pressure on prices, the EBDITA of cement makers is likely to be further hit by the recent increase in the price of imported coal. SHAREKHAN SPECIAL Q3FY2010 Pharma earnings review  Most pharmaceutical companies under Sharekhan?s coverage reported a strong Q3FY2010 led by robust performance in the domestic formulation business and no major extra-ordinary items (limited foreign exchange losses and no more one-offs) during the quarter. The domestic formulation business resumed normalcy in this quarter and the buoyant growth witnessed in the quarter was on a low base of the corresponding quarter of the last year (Q3FY2009). We expect a similar trend in Q4FY2010 as well as FY2011 due to low base in FY2010 across the board. Exports however were grappled with challenging geographies like Russia and Germany, the US approvals at a slower rate and intensifying competition (Lupin, Ipca Laboratories [Ipca], Cadila Healthcare [Cadila] and Torrent Pharmaceuticals [Torrent] reported strong growth in international formulation business). We expect a revival in the export formulation business on the back of increased focus on branded and niche products and huge abbreviated new drug application (ANDA) pipeline (for Sun Pharmaceutical Industries [Sun Pharma], Lupin and Glenmark Pharmaceuticals [Glenmark]) in FY2011. The operating margins of all the pharmaceutical companies under Sharekhan?s coverage have been pretty strong led by better product mix (improved gross margins) as well as favourable currency (Sun Pharma and Glenmark suffered due to high base of the last year, but have shown strong sequential growth). The mid-caps pharma companies continue to outperform with exceptionally strong Q3. Our result picks?Cadila, Lupin and Opto Circuits delivered a strong growth as compared to their peers. Torrent and Lupin remain our top picks as earning upgrades and robust growth visibility drive their performance.   Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com  Manage your newsletter subscriptions