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STOCK UPDATE Glenmark Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs376
Current market price: Rs338 Q1FY2012 results: First-cut analysis Result highlights -
Earnings growth ahead of street estimates: Glenmark Pharmaceutical (Glenmark) reported a strong growth (23.1% year on year [YoY]) in its net profit on a consolidated basis at Rs210 crore which is ahead of Street estimates. A higher than expected earnings growth has been largely driven by better than expected revenue growth in some key geographies and margin expansion. -
Revenue grew by 27.8% supported by rebound in the US generic business & formulation business in the domestic market: The revenue of the company (excluding out-licensing fees) grew by 27.8% to Rs757 crore with the specialty business division which forms 55% of the total revenue reporting a 29% growth. In terms of geographies, the Indian market witnessed a 20% growth on the back of launch of two new products-Vorth TP and Doriglen while Latin America registered a 62% growth supported by 9 new product launches across the region. The generic business which forms 45% of the total revenue also supported the overall revenue growth. The US market rebounded with a revenue growth of 37% whereas the company booked a revenue of Rs17.5 crore (grew by 118% YoY) from the European market. In addition the company has also booked out-licensing fees to the tune of Rs111.2 crore as compared to Rs89.5 crore in the corresponding quarter previous year. -
Operating profit margin expanded due to decrease in material cost & increase in out-licensing fees: The operating profit margin of the company increased by 53bps YoY to 34.2% on account of a decrease in the material cost as a percentage of sales and increase in the out-licensing fees by 24%. However, adjusting for the out-licensing fees, the operating profit margin (OPM) for the quarter stood at 24.5% which is ahead of management guidance of 22-23%. However, the management has maintained its earlier guidance of 22-23% on the OPM. -
ANDA approval received for 4 new products: During the quarter the company has received final abbreviated new drug application (ANDA) approval for 4 products and filed 3 ANDAs with the US Food and Drug Administration (USFDA). In the forthcoming quarter the company plans to file 4 new products and anticipates launch of 7 new products. At the end of Q1FY2012, the company has a portfolio of 69 generic products authorised for distribution in the US market as well as 40 ANDAs in various stages of approval with the USFDA. -
The company received $15 million from Salix Pharmaceuticals Inc, USA. This is as per an agreement for advance against commitment fee which is to cover Glenmark's risks associated with upgrading its manufacturing facilities to meet Salix's anticipated increased requirements in demand for Crofelemer which is for multiple diarrhoeal conditions. Through an agreement between the two companies, Salix agreed to pay Glenmark a $21.6 million commitment fee in five equal annual installments, with the first annual installment in July 2012. The commitment fee is in addition to the compound purchase price payable by Salix to Glenmark. -
Given the healthy performance expectation on the core business and a favorable risk-reward ratio, we maintain our Buy recommendation on the stock with a price target of Rs376. We will shortly come out with a detailed note with likely upgrades in the earnings estimates for FY2012 and FY2013. At the current market price, the stock trades at 21.6x FY2012E earnings and 16x FY2013E earnings.
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,596
Current market price: Rs1,909 Q1 results a one off, order inflows need to improve Result highlights -
Q1FY2012 results-a mixed bag: Bharat Heavy Electricals Ltd (BHEL)'s Q1FY2012 results were a mixed bag with the revenue falling short of our expectation (caused by multiple one off events) and profit after tax (PAT) coming above our expectation. Despite significant margin pressure and lower revenue booking in the power business the net profit was higher due to a strong performance in the industry segment and a higher other income. However, low order booking is a concern as the book-bill ratio has further come down to 3.7x. -
Revenue growth disappointing due to one off events: The net income from the operations increased by merely 10% year on year (YoY) against our expectation of a 23.8% growth. This sluggishness was caused by a poor pick-up in the sales of its power segment on account of various reasons like delay in clearances at ports, lower pick up in delivery from customers etc. The industry division's revenue grew by 12% YoY (vs our expectation of a 10% growth). The company has indicated that revenue booking would pick up in the coming quarters and maintained its earlier Rs50,000 crore revenue booking target for FY2012. -
Power system division's margin the lowest in 15 quarters: The company reported an operating profit margin (OPM) of 13.6%, which was higher than our expectation of 12%. Here, the effect of the rise in the raw material cost was balanced by an increase in the inventory. Other expenses increased on account of Rs114 crore provisioning for contractual obligations. Segment-wise, the power segment reported a fall in the profit before interest and tax (PBIT) margin to 16.5% from 19.8% in Q1FY2011 on low revenue booking. The industry segment reported a doubling of the PBIT margin to 22.6% on account of execution of good margin orders in the quarter. -
Net profit rose by 22.1%: The other income jumped by 38.5%. Further, boosted by almost a nil interest charge and a lower tax rate, the adjusted net profit jumped by 22.1% YoY, which was above our estimate. -
Order inflow disappoints, book-to-bill ratio falls further: BHEL has reported a total order inflow of Rs2,714 crore for Q1FY2012 (down 74.9% YoY), finishing the quarter with a total order backlog of Rs1,596 crore (down 2.8% YoY). The book-bill ratio has further come down to 3.7x its FY2011 revenue, implying dire need for the order inflow to pick up in the coming quarters. The power segment order inflow was extremely weak due to multiple problems prevailing in the power sector like coal linkage issues and environmental clearances resulting in delay in finalisation of orders. However, the company maintained its 60,000 crore plus of order inflow target for FY2012 based on expected orders from state utilities. The iIndustry segment secured orders amounting to Rs2,410 crore (up 37.6% YoY) during the quarter. -
Maintain estimates: In spite of weak order inflow, the company has maintained its robust order inflow outlook for the year, based on the strong bids in the pipeline like NTPC bulk tendering. Hence, for now we have maintained our estimate, which are already on the conservative side compared to consensus estimates. We are estimating a compounded annual growth rate (CAGR) of 13.9% in the top line and 16.1% in the adjusted earnings over FY2011-13. -
Maintain Buy: While BHEL has one of the best business models amongst our coverage universe, given its strong revenue visibility and a robust balance sheet, we feel that there could be execution challenges from the client side. While the competition is intensifying in the private sector, order inflows from state electricity boards (SEBs) would be key for the company in achieving the Rs60,000 crore plus guidance for FY2012. Hence, unless the order inflow picks up in the next six months, we feel that there could be a severe downgrade in our as well as the Street's estimates. On the positive side the company's non- power business has done well and the company is taking initiatives to enter new areas like solar and transmission & distribution which have also started bearing fruits as reflected in Q1FY2012 results. At the current market price, the stock trades at 12.9x FY2013E earnings, which is quite attractive and at a significant discount to its historic multiple of 20-21x. Overall, we maintain our long term bullish stance on the stock and price target of Rs2,596.
Maruti Suzuki India
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,316
Current market price: Rs1,178 Price target revised to Rs1,316 Result highlights -
The first quarter of FY2012 saw the highest ever realisation per vehicle for Maruti Suzuki at Rs3.02 lakh. On a sequential basis, the same was up 3% on account of lower discounts and a change in the domestic product mix. The company saw the diesel mix improving from 19% in Q4FY2011 to 21% in Q1FY2012. On a year-on-year (Y-o-Y) basis, despite the discounts being higher by Rs1,200 per vehicle, the realisation increased by 4.3% YoY. The management has indicated that the discount levels are likely to increase in Q2FY2012 due to a seasonally weak quarter. -
The contribution per vehicle improved by Rs342 on a sequential basis which is a positive sign (we were expecting a decline in the same). This was primarily on account of a better product mix in favour of diesel variants, price hikes and lower discounts (discounts are netted off from sales). -
Q1FY2012 also saw the other expenses declining by 21% quarter on quarter (QoQ) as against a volume decline of 18%. This was primarily on account of a lower royalty and reduced activity level. Consequently, the operating profit margin (OPM) came in at 9.5%, which was higher than our expectation. -
The other income for the quarter saw an incremental impact of capital gains (Rs40 crore) and a higher yield on investment. As a result, the profit after tax (PAT) was higher than expected at Rs549.2 crore, indicating an increase of 18% YoY. -
The management indicated that most of the cost increases in the raw materials have been factored. Further, it expects the prices of steel, aluminium and rubber to moderate from Q3FY2012 onwards. Also, on the localisation front, the management intends to reduce its indirect exposure to the Japanese Yen-denominated imports through vendors. Currently the indirect yen exposure is at 15% of net sales which the management aims to bring down by 2-3% every year. -
We have revised upwards our estimates for FY2012 (owing to the higher than expected Q1FY2012 PAT) and that for FY2013 (on account of the shift in the product mix towards the diesel segment). Consequently, our earnings per share (EPS) estimates for FY2012 and FY2013 stand at Rs93.5 and Rs109.7 respectively. Though we revise our estimates upwards, we have lowered our target multiple from 13x to 12x on account of the macro headwinds that have intensified. We maintain our Hold recommendation on the stock with a revised price target of Rs1,316.
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