| Summary of Contents | | | | STOCK UPDATE Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,527
Current market price: Rs2,454
Price target revised to Rs2,527 Key points -
Highest ever monthly sales: Bajaj Auto has announced its monthly numbers for June 2010, reporting a robust growth momentum on the back of the low base of the previous year and the incremental volumes of its new launches. For June 2010, the total volumes grew by a massive 63% year on year (yoy) to 315,422 units, also the highest volumes recorded by the company in any month. Furthermore, the company?s total sales volumes also grew by a handsome 5% on a month-on-month basis. -
Motorcycle sales continue to shine in June: The motorcycle segment grew by a strong 68.4% yoy to 282,808 units in June 2010. The newly launched Discover 150cc sold over 20,000 units for the month. The performance of its key brands, Pulsar and Discover, has been impressive which has also resulted in the company gaining a major chunk of the market share in the motorcycle segment to 27% as against 19% a year ago. -
Strong three-wheeler and export volumes: Three-wheeler sales registered a growth of 32%yoy and that of 9% month on month (mom) to 32,614 units. Furthermore, the company will launch a new product, RE445, in the three-wheeler segment in this month, which is likely to result in incremental volumes going forward. The exports for the month grew by a healthy 68% yoy and by 19% mom to 114,024 units on account of a strong demand in the key export markets of Sri Lanka, Bangladesh, the Philippines and Africa. -
Debottlenecking of capacity: The management has indicated that the supply constraints from the company?s vendors limited the motorcycle sales during June. This constraint is likely to ease from July, translating into a monthly production capacity of 300,000 units of motorcycles. Moreover, the management has also indicated that the debottlenecking of its three-wheeler capacity from July will result in a higher production of 35,000 units per month. Consequently, after this debottlenecking of capacity, we expect the company to maintain an average monthly run rate of about 3.24 lakh units (a tad below the management?s guidance of 3.33 lakh units per month) for the remaining nine months of FY2011. -
Demand remains strong: In view of a strong demand in the segment and to partially overcome the raw material cost pressure the company had raised prices of the Discover and Pulsar brands by Rs500-1,000 per unit in mid June and has also taken a price increase of approximately 2% in the exports markets. Moreover, the management has indicated that the strong retail demand has resulted in a lower inventory of two weeks currently as against a normal inventory of three weeks. -
Raising estimates and price target: We believe that the incremental volumes of the new launches coupled with the low base of the previous year and the debottlenecking of capacities will result in a robust 38% volume growth in the motorcycle segment and a strong 16.7% growth in the three wheeler segment during FY2011. Thus, we expect the company to post an overall volume growth of 34.7% in FY2011 (this is higher than the earlier forecast of a 32.6% growth in FY2011). -
Factoring in the higher than earlier expected volume growth, we have revised upwards our estimates for FY2011 and FY2012 by 2.9% and 4.5% to Rs159.8 and Rs180.5 respectively. Consequently our price target stands revised to Rs2,527 (Rs2,419 earlier). We maintain our Buy recommendation on the stock. At the current market price, the stock is trading at 13.6x its FY2012E earnings of Rs180.5 and enterprise value/earnings before interest, tax, depreciation and amortisation of 8.2x. Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs178
Current market price: Rs149
Price target revised to Rs178 Key points -
TAN project on track: Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) is in the process of setting up a technical ammonia nitrate (TAN) plant in Taloja near Mumbai, which will enhance its TAN capacity more than three-fold, to 432,000 million tonne per annum (MTPA) from 132,000MTPA currently. The plant is expected to come on-stream by September 2010 and the project is progressing as per schedule. With the plant coming on stream, we expect the company?s TAN revenue to grow at a compounded annual growth rate (CAGR) of ~52% from FY2010 to FY2012. Thus the contribution of TAN to the company?s top line would increase to around 28% from 19% currently. -
Enhanced capacity utilisation due to improved availability of raw materials: DFCL?s capacity utilisation has suffered in the past on account of unavailability of raw materials such as natural gas. As a result, the capacity utilisation for methanol and ANP had remained low. To obviate the same, the company has now contracted around 90% of its natural gas requirement and this is expected to improve its capacity utilisation levels, going ahead. -
Demand for industrial chemicals remains strong: The demand for industrial chemicals remains strong on the back of a healthy growth expected for industries such as pigments and nitro cellulose, which are DFCL?s user industries. -
Expectations of a normal monsoon positive for fertiliser sales: The India Meteorological Department (IMD) in its latest update on the progress of monsoon has revised upwards its forecast for the monsoon this year to 102% of the long period average (LPA) from 98%. The expectations of a normal monsoon this year could positively impact the fertiliser sales with the same contributing around 30% to the company?s top line. -
Maintain Buy with a revised price target of Rs178: We continue to remain optimistic on the future prospects of the company and are upgrading our price target on the back of improved visibility of earnings accruing from the TAN plant, as the project implementation schedule remains on track and the date for commissioning approaches nearer. Additionally, the improved raw material availability as well as the expectations of a normal monsoon also bodes well for the future prospects of the company. At the current market price of Rs149, the stock trades at 6.7x its FY2012E earnings per share (EPS) and 1.1x its FY2012E book value (BV). We maintain our Buy recommendation on the stock and upgrade our price target to Rs178 (8x FY2012E EPS).
SECTOR UPDATE Insurance Strong growth despite regulatory changes
The annual premium equivalent (APE) for the life insurance industry grew by a robust 52.3% year on year (yoy) in May 2010. The strong APE growth for the month was led by Life Insurance Corporation of India (LIC), which reported a 83.2% year-on-year (y-o-y) growth in the APE, and private players, which saw their APE growth revive to 23.2% y-o-y in the month.
SHAREKHAN SPECIAL Q1FY2011 Pharma earnings preview Key points -
Positive momentum to continue in Q1FY2011: We expect the pharmaceutical (pharma) companies to report a strong growth for Q1FY2011 wherein the mid-caps will continue their winning streak. The growth is expected to be driven by new product launches in the USA, a strong growth in India, higher penetration in the emerging markets and the rebounding contract manufacturing business. On the base business front, the improving growth visibility from some of the rest of the world (ROW) markets provides thrust on companies like Glenmark Pharma (Glenmark), Sun Pharma and Torrent Pharma from our universe. -
Buy Glenmark, Lupin before the results: We believe Lupin and Glenmark are result plays with a possible strong growth year on year (yoy). Sun and Glenmark are expected to post robust numbers on account of their low base in Q1FY2010 and improving base business outlook, while the branded business would boost up Lupin?s numbers. Glenmark is expected to book $20mn from the GRC15300 outlicensing deal in this quarter, while the costs savings from Caraco (in terms of raw material and employee expenses) would perk up the margins for Sun Pharma. Further, currency stability during the quarter would also ease the pressure on the margins for our universe. Although the pharma sector has shown a decent run-up during the quarter, yet we believe any weakness around the results will be an opportunity to buy. We adopt a pick and choose strategy and find value in the mid-caps. -
Maintain positive bias: We are of the view that the premium valuations commanded by the Indian pharma generic players is sustainable given the strong growth visibility in the domestic markets and the merger and acquisition (M&A) possibilities. We expect the Indian pharma industry to continue its out-performance largely influenced by positive newsflow on niche abbreviated new drug application (ANDA) launches, increasing interest evinced by big pharma companies in emerging markets and continued earnings growth momentum. -
Sharekhan?s pharma universe is expected to report a 23.8% increase in the revenues for Q1FY2011 with an improving operational performance (an expansion of 1,174 basis points).
MARKET OUTLOOK Local push, global pull Key points -
The Indian economy has returned to normalcy with a smart recovery in industrial production, credit offtake and exports, hinting towards a broad-based revival in the real economy. In addition, the fiscal position is expected to improve considerably on the back of the third generation (3G)/broadband auction bonanza and the slew of initiatives taken to curtail food and oil subsidy burdens. -
Notwithstanding the low base effect, the improving macro environment has translated into a strong rebound in the earnings, as borne out by the Q4 earnings season. The earnings of the Sensex companies registered a growth of 27.6% year on year (yoy) vs about a 15% growth in the previous quarter. Importantly, the strong earnings growth momentum is likely to continue in the years ahead with the FY2011 earnings expected to grow by 21% yoy (though commodities remain the key risk given the recent softening of base metal prices). -
Further, the earnings growth momentum in FY2012 and beyond would be supported by three key pillars: (1) A surge in infrastructure creation across sectors; (2) booming domestic consumption; and (3) ground-breaking tax reforms. Effectively, the current fiscal would mark the beginning of the next earnings growth cycle. -
The key risks to our thesis are: (1) Scarcity of foreign inflows that are essential to support a high real gross domestic product (GDP) growth and fill in the fiscal gap; (2) the continued weak domestic flows in domestic institutions, mutual funds and insurance companies; and (3) the inflationary pressures resulting from the hike in fuel prices and a possible abnormal monsoon this year as well. -
While the domestic indicators have reported reassuring trends, the developed economies have weakened once again. While the European crisis was already putting a question mark on the sustainability of the global recovery, the recent economic data from the USA has turned weak and revived debates of a double-dip recession. The weakness primarily stems from the worsening trends in the housing space after the expiry of tax benefits that has also dampened consumer sentiments. -
All in all, the short-term outlook remains muddied by the troubles in the developed nations with persistent doubts over the recovery in the USA and the unresolved challenges for the East European nations. Hence, the valuation for the Sensex is likely to hover around the long-term average multiple of 15x (one-year forward earnings). Having said that, the medium-to-long-term outlook remains strong driven by India?s robust macro fundamentals and the beginning of the next earnings growth cycle. |
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