| STOCK UPDATE Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs538
Current market price: Rs449 Lupin expands presence in Japan Key points -
Lupin expands presence in Japan: Lupin is set to acquire I'rom Pharmaceutical Co (I'rom Pharma) through its Japanese subsidiary, Kyowa. The agreement has been reached between Kyowa and I'rom Holdings Co. Ltd (IH) to acquire up to 100% of the outstanding shares of its subsidiary, I'rom Pharma. With this acquisition, Lupin's revenue from Japan is expected to expand by 50% in FY2012. We expect Lupin's annual revenue to increase by 5% due to this acquisition (on an annualised basis). -
$11-billion market opportunities: The market size for I'rom Pharma is estimated at $11 billion, which is approximately 10% of the Japanese pharmaceutical (pharma) market. I'rom Pharma generated $67.9 million worth revenue in FY20011 and is expected to reach $75 million by the end of FY2012. I'rom Pharma has strong presence in diagnosis procedure combination (DPC) hospitals in Japan, which is a fixed-rate treatment hospital segment in Japan, where the government mandates clinics to offer low-cost healthcare services. There are 1,400 DPC hospitals in Japan and I'rom Pharma covers 35% of all hospital beds nationwide. -
Strategic fit for Lupin: Through this acquisition, Lupin would not only expand its presence in the Japanese market but also get better synergies through product alignments and integration. I'rom Pharma's product portfolio mainly consists of injectibles in the anti-infective, gastro-intestinal, cardiovascular and nutrition segments. This will help Lupin to fill the gap in its products pipeline, which mainly consists of oral products like tablets and capsules. Besides, Kyowa will also get help in clinical trials through site management expertise from I'rom Holdings (this agreement has been signed separately), which will help Kyowa to ramp up its product filings. -
Valuation and view: Inorganic expansions have been one of key strategies for Lupin to grow at a faster pace. The acquisition of I'rom Pharma is a strategic move to expand its presence in Japan, which is the world's second largest pharma market. Japan is witnessing increased penetration of generic products, given the government's focus to contain healthcare costs through increased genericisation of the market. Through this acquisition, Kyowa will have control over the key distribution channels (hospitals), which will help fasten the introduction of newer products in the markets. Besides, the alliance with I'rom Pharma for clinical trial management would help Kyowa to get faster approvals in Japan, where the approval process is relatively stringent.
We expect this acquisition to be earnings accretive from the first year itself, which should grow faster over a period of time. We expect the revenue and profit after tax (PAT) to grow at compounded annual growth rate (CAGR) of 18% and 19% respectively over FY2011-13.
At the current market price, the stock is trading at 19.9x and 16.1x FY2012E and FY2013E earnings per share (EPS). We maintain our Buy recommendation on the stock with a revised price target of Rs538 (implies 19.6x FY2013E EPS). ISMT
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs42
Current market price: Rs29 Price target revised to Rs42 Result highlights -
Steady revenue growth: ISMT reported strong revenue numbers for Q2FY2012 with its net sales rising by 26.6% to Rs512.2 crore on the back of a volume growth and an improvement in the realisation. The tube segment reported a 19.5% volume growth and a 7.5% improvement in its realisation. The steel segment reported a 10.2% growth in its volume and a 7.8% improvement in its realisation. -
OPM declines: Despite the volume growth and realisation improvement, the EBITDA margin contracted by 640 basis points to 13.3% mainly due to input cost pressures. The raw material cost as a percentage of sales increased from 41% in Q2FY2011 to 51.3% in Q1FY2012 which led to a 14% fall in the EBITDA to Rs69.3 crore. On a segmental basis, the profit before interest and tax (PBIT) margin of the steel business declined sharply to 11.1% as compared to 20% in Q2FY2011 whereas that of the tube division fell by 294 basis points to 9.6%. We expect the margins to improve going forward as the company passes on some of the impact of the input cost pressures to its customers. -
Bottom line affected by forex charge: On the back of the rupee's depreciation from Rs44.6 as of June 30, 2011 to Rs48.98 on September 30, 2011 to the US Dollar, the company booked foreign exchange (forex) loss of Rs12.5 crore against a marginal loss in the corresponding previous quarter. The loss pertains mainly to the un-hedged portion of the foreign debt. On the back of lower tax provisioning at Rs4.2 crore, down from Rs15.7 crore in the corresponding quarter of the previous year, the fall in the net profit was restricted to 56.5% at Rs10.5 crore against a 63% fall in the profit before tax (PBT). -
Valuation and view: The company has maintained a good revenue performance but due to cost pressures it has seen a consistent fall in its margins. With the power plant now being commissioned towards the end of FY2012, the benefit of the same would be seen only in FY2013. On account of the delay in the commissioning of the power plant, which is the key driver of the margin improvement, we have downgraded our earnings estimates by 34% and 32% for FY2012 and FY2013 respectively. At the current market price, the stock is available at 4.2x FY2013 estimated earnings. We maintain our Buy rating on the stock with a revised price target of Rs42 (6x FY2013E earnings).
SHAREKHAN SPECIAL Q2FY2012 Construction earnings review Key points -
Poor show continues; in line with expectation: The net profit for the engineering, procurement and construction (EPC) companies (ex Punj Lloyd) fell by 31.4% year on year (YoY; in line with our estimate), despite stable operating performance, mainly on account of higher interest burden which shot up by 60% YoY. Revenues for the same grew by 7.5% YoY (below expectation), pulled down by poor execution from NCC and IVRCL. However, the performance at the operating level for the EPC companies was satisfactory with the operating profit growing by 9% YoY (in line with expectation). All the companies were able to sustain their margin which cumulatively expanded by 20 basis points (bps) YoY to 11.1% and was 50bps above our estimate.
In case of infrastructure developers, revenues were up 45% YoY (much above our expectation) on the back of large portions of their portfolios being under construction. But margins saw a contraction (as expected) due to a higher share of their revenue coming from their construction arms, resulting in a 36% growth at the operating level. Despite a strong operating performance, the net profit was up by just 8.2% YoY on account of a high interest burden. -
Asset developers & small EPC players outperform: Asset developers and small EPC players outperformed the mid size construction players on account of better execution. While IRB Infrastructure Developers (IRB) and IL&FS Transportation Networks (ITNL) both surprised us positively on the execution front, NCC & IVRCL disappointed the most. Among EPC players, small companies outperformed the mid sized ones on the back of strong execution and expansion in the EBITDA margins. While Pratibha Industries (Pratibha) outperformed at the revenue level with a strong 30% growth, Gayatri Projects (Gayatri) and Unity Infraprojects (Unity) outperformed at the operating level seeing a margin expansion of 329bps and 186bps respectively. On the other hand, mid cap players displayed a disappointing performance with NCC & IVRCL registering a fall of 9% and 3% respectively in their revenues due to poor execution. However Simplex Infrastructures (Simplex) gave a surprise by posting a 26% revenue growth (much ahead of expectation) led by better execution in their international division. Further Punj Lloyd gave a better than expected result led by a high foreign exchange (forex) gain for the quarter. -
Outlook: For the midcap construction companies in our universe, we have downgraded our estimates for FY2012 and FY2013 to factor in slower execution and higher interest burden as compared to our earlier estimate. The near-term outlook for the infrastructure sector remains challenging till the government indecisiveness continues, pace of awarding of new projects remains slack and major policy actions remain unresolved. The government has to speed up decision making in order to support the desired policy changes and there will have to be a quicker roll out of projects which would boost investment in infrastructure. Till then the poor performance of the infrastructure companies will continue. Thus we prefer being very selective and favour companies with healthy order books along with healthy balance sheets. Our top picks in the sector are ITNL and Unity among our coverage stocks, and Ramky Infrastructure (Ramky) among the non-coverage stocks that could be watched by investors. |
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