| Summary of Contents STOCK UPDATE Larsen & Toubro
Cluster: Evergreen
Recommendation: Hold
Price target: Rs2,046
Current market price: Rs2,016 Price target revised to Rs2,046 -
Foray into South Africa: Larsen & Toubro (L&T) and Befula Investments (Pty) Ltd, a leading South African engineering and investment company, have signed an agreement to incorporate a joint venture company in South Africa to capitalise on the power transmission and distribution (T&D) opportunity there. Of late, South Africa has been facing a severe demand shortage in electricity. This power shortage has led to a line-up of sizeable investments by the government to augment the T&D network of the country in the next five years. We feel that this foray would help the company to geographically diversify as well as strengthen its T&D business. -
Domestic outlook also improved: On the back of the improving investment scenario, there has been an uptick in the domestic capital expenditure (capex) cycle, which has significantly increased the opportunities in the infrastructure sector. An investment opportunity of $1 trillion is expected in the Indian infrastructure sector in the 12th Five-Year Plan (2012-17). We believe that despite the rising competition, L&T is the best bet among the Indian players to capture this opportunity. -
Bagfull of orders for IDPL: Its 84.27% owned subsidiary, Infrastructure Development Projects (IDPL), is currently developing infrastructure projects worth Rs40,228 crore. Its project portfolio includes 15 road projects (project size: Rs13,000 crore), two port projects (project size: Rs5,297 crore), 19 real estate projects (five completed) amounting to Rs6,763 crore and the Hyedraabd metro rail project worth Rs15,000 crore. Dhamra Port (a 50:50 joint venture with Tata Steel) is expected to be commissioned in September this year. The company has invested Rs2,260 crore as equity till FY2010 and expects to invest over Rs6,000 crore more in the coming years. The funding requirements will be met through a mix of internal accruals and the parent company?s support. -
Upgraded estimates: We have upgraded our stand-alone earnings estimates for L&T after the improved visibility of the company?s revenues and after incorporating the company?s annual report numbers. We now expect L&T to report a 25% compounded annual growth rate (CAGR) in the revenue of its stand-alone business over FY2010-12. Our stand-alone earnings estimates stand revised at Rs60.6 and Rs80.4 for FY2011 and FY2012 respectively. On a consolidated basis, our revised earnings per share (EPS) estimates stand at Rs74.5 and Rs94.9 respectively. -
Price target revised to Rs2,046: In line with the revision in our estimates, we are also raising our price target for L&T to Rs2,046. In the recent past L&T has once again displayed its capability to bag large prestigious orders and its recent success in bagging some of the power projects is a big positive for its business. Moreover, the listing of some of its subsidiaries would further act as a positive trigger for the stock. Though we remain positive on L&T, the recent run-up in the stock provides a limited upside to our new price target. Hence, we maintain our Hold rating on the stock. At the current market price, the stock trades at 21.2x FY2012E earnings. Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs365
Current market price: Rs287 Price target revised to Rs365
Key points -
Key markets back on track: After a subdued performance in FY2010, Glenmark has reported a decent growth in its key markets such as the US and Latin America in Q1FY2011, whereas the domestic formulation growth remained robust. Some niche launches in the US including Tarka should ensure that the growth momentum is sustainable. While adverse currency trends and some de-stocking (in Poland) have hit growth in a few markets, secondary sales trends remained healthy during FY2010. -
Improving balance sheet: Glenmark?s working-capital cycle remained more or less stable in FY2010 with modest improvements visible in debtor days and inventories. The net debt declined by Rs260 crore in FY2010 to Rs1,869.4 crore and further down to Rs1,600 crore in Q1FY2011, as cash released from working capital (debtor days down to 159 days from 165 days earlier) was used to repay debt. The company restructured its debt to bring down cost, as visible in the sharp 37% dip in interest cost in Q1FY2011. We believe that further improvement in receivables would act as a re-rating factor for the stock as it would ease down one of the biggest concerns amongst investors. -
Reduced capex in FY2010: In the past three years, Glenmark has invested approximately Rs1,850 crore in capital expenditure (capex; a large part coming from FY2010), straining its balance sheet. The company has largely invested the capex amount in building capacities for its inhalers, hormones, injectables and oncology products apart from capitalizing its assets. Capex spend in FY2010 stood reduced at Rs392 crore as compared to Rs922 crore in FY2009. We expect the capex to moderate over the next two years in the range of Rs300-350 crore. -
Improving cash flow situation: The company?s free cash flow (FCF) deteriorated since FY2005-09 where it generated cumulative negative free cash of approximately Rs1900 crore. Although the FCF remained negative in FY2010 as well, it improved significantly from negative free cash of Rs1,043 crore in FY2009 to a negative 177 crore in FY2010 owing to the company?s enhanced focus on cost optimisation across operating markets where receivables were given prime importance. We anticipate a positive FCF generation of Rs940 crore over the next two years. With approximately Rs1,800 crore in operating profit over FY2011-12E, an improvement in working capital with reduction in receivables and moderation in capex, we expect Glenmark?s cash flow situation to sharply build up on its FY2010 performance. -
Concerns on R&D capitalisation ease: Glenmark followed a conservative accounting policy wherein it partially capitalised its research and development (R&D) expenses, which obscured the company?s true profitability (as lower R&D expenses in Profit & Loss [P&L] boosted profitability). The capitalised brands and work in process (WIP; including R&D) reduced to a mere 19.6% in FY2010?s earnings before interest, tax, depreciation and amortisation (EBITDA) as compared to 114% in FY2009. Further the management has highlighted in its annual report that it has stopped capitalizing R&D expenses from FY2010 onwards. Although capitalised expenses on the balance sheet are still high on an absolute basis, the significantly lower addition suggests considerable improvement in the real profitability of the company. -
GGL?s IPO plans shelved: The company?s plan to raise capital through an initial public offering (IPO) of its Glenmark Generics (GGL) subsidiary?s shares seems to have been shelved for the time being. With the improving cash flow situation and reducing debt portfolio, Glenmark?s management has decided to delay the GGL IPO indefinitely. -
Valuation: Glenmark?s performance in FY2010 exhibits encouraging signs on the balance sheet front. The key monitorables would be reducing the debt position, more out-licensing deals and easing up R&D pressure. At the current market price of Rs287, the stock remains attractively valued at a price/earnings (P/E) of 14.5x FY2011E and 13.5x FY2012E earnings. Given the out-licencing deals and the favourable risk-reward ratio, we maintain our Buy recommendation on the stock with a revised price target of Rs365 (15x FY2011E core earnings for the base business plus Rs39 per share for the R&D pipeline).
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