| Summary of Content | STOCK UPDATE Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs520
Current market price: Rs458 Strong product pipeline provides earnings visibility Result highlights -
Earnings marginally below Street estimates: Lupin's net profit for Q1FY2012 grew by 7% year on year (YoY) to Rs210.1 crore which is marginally lower than Street estimates. The net sales grew by 17.6% YoY to Rs1,543.2 crore which were well supported by both domestic as well as export markets. However, on account of margin contraction the earnings growth was limited to 7%. -
Performance by geography: The formulation business in the domestic market contributed 32% to the company's overall revenue and registered a 17% growth to Rs496.9 crore. The key export markets like the US and Europe which account for 35% of the consolidated sales have booked revenue of Rs534.7 crore which is a growth of 7% YoY. Further other export markets like South Africa and Japan have witnessed a robust revenue growth of 47% and 28% respectively. -
Operating margin contracts: The operating profit margin declined by 250bps YoY to 17.5% due to an increase in material cost as a percentage of sales and increase in employee expense by 23.1% YoY. Consequently the operating profit grew by just 2.9% compared to a 17.6% growth at the revenue level. -
Received 4 ANDA approvals during the quarter: During the quarter the company filed for 4 abbreviated new drug applications (ANDAs) bringing the cumulative filings as of Q1FY2012 to 152, of which 51 stand approved (4 during the quarter) by the US Food and Drug Administration (USFDA). Further the company received approvals for its Metformin Hydrochloride extended-release tablets, Levofloxacin tablets, Pregabalin Capsules and Levetiracetam ER tablets from the USFDA. Among these the company launched Levofloxacin tablets during the quarter. -
Alliance with Natco Pharma: The company has entered into an alliance with Natco Pharma to jointly commercialise a generic equivalent of Glaxo's Tykerb tablets. Natco has filed an ANDA for manufacturing generic equivalent of Tykerb tablets. As per the company Tykerb had sales of $113.6 million as of March 2011. -
Tweaking FY2012 & FY2013 numbers: We have marginally tweaked our FY2012 and FY2013 numbers to factor in a higher cost push in terms of material costs. However, we also incorporate lower than expected research and development (R&D) spending which would largely offset the impact of increase in material cost. Our revised earnings per share (EPS) for FY2012E and FY2013E stands at Rs21.8 and Rs26.5 respectively. -
Maintain Buy recommendation with price target of Rs520: The expected launch of oral contraceptives and a robust pipeline of new launches in the domestic and overseas markets provide strong growth visibility going forward. The pressure on margins should also ease out with an improvement in the utilisation of its Indore special economic zone (SEZ) manufacturing facility. At the current market price, the stock trades at 21.0x FY2012E fully diluted earnings and 17.3x FY2013E fully diluted earnings. We maintain out Buy recommendation on the stock with a price target of Rs520. Phillips Carbon Black
Cluster: Cannonball
Recommendation: Buy
Price target: Rs205
Current market price: Rs143 Price target revised to Rs205 Result highlights -
Strong performance across all parameters: Phillips Carbon Black Ltd (PCBL) reported a very healthy set of numbers across all parameters. Sales grew by 41% year on year (YoY) and 28% quarter on quarter (QoQ) to Rs567 crore, led by strong export sales volume and higher blended realisation. The operating profit grew by 45% YoY and 21% QoQ to Rs77 crore in Q1FY2012. The same growth percolated to the net profit level and exhibited a growth of 45% YoY and 25% QoQ to Rs41.6 crore. -
Healthy sales growth driven by higher realisation: The net sales grew by 41% YoY, supported by a 45% growth in the carbon black business. The carbon black segment grew on account of a strong 24% improvement in realisation. Sequentially also the net realisation improved by 15% consequently leading to net sales of the carbon black segment growing by 28%. However, sales of the power segment remained subdued both on a YoY and QoQ basis. -
OPM remained in broad range of 12-13%: The operating profit for Q1FY2012 stands at Rs77 crore, a growth of 45% YoY and 21% QoQ. The operating margin has been reported at 12.8% in Q1FY2012 while the same was 12.3% in Q1FY2011 and 13.6% in Q4FY2011. On a Y-o-Y basis, the margin of the carbon black business expanded 373bps to 9.6%, as volume (providing benefit of economy of scale) and realisation both improved significantly. Consequently, the profit before interest and tax (PBIT) of carbon black grew by 136% to Rs52.4 crore while sales grew by 45% during this period. The PBIT margin of the power segment declined by 1,856bps YoY to 69.2%, on account of a higher input cost. The PBIT grew by 47% YoY on a sales growth of 41%. On a sequential basis, the PBIT margin of carbon black remains in the same range at 9.6%, but the same of power segment declined from 72% to 69%. The PBIT grew by 20% QoQ on a sales growth of 27%. -
Net income jumped by 45% YoY and 25% QoQ: The profit before tax (PBT) grew by 52% YoY while sequentially it grew at 18% to Rs55 crore. With an effective tax rate of 25%, the profit after tax (PAT) stands at Rs41.6 crore for Q1FY2012, which reflects a growth of 45% YoY and 25% QoQ. The earning per share (EPS) has percolated to Rs12.5 during Q1FY2012. -
Capacity expansion on track: During April 2011, a 10MW power plant commenced operation in Cochin. The Mundra Carbon Black expansion by 50,000MT also commenced its production during the month. Further, the project work at Vietnam is progressing as per schedule and financial closure of the same is expected in Q2FY2012. -
Revised FY2012 estimates: While the domestic sales volume has declined, the volume from export market has shown a strong growth in Q1FY2012. As per our interaction with the management, in some of the European markets, several carbon black capacities have closed down during the global crisis of 2008 and a marginal revival in demand from those parts of the globe are diving carbon black demand currently. However, we opine that such kind of growth is difficult to sustain. Hence, we have conservatively revised upward our FY2012 numbers. We have revised our net sales estimate by 5% to Rs1,975 crore, EBITDA by 4.4% and PAT by 7%. However, we have retained our FY2013 numbers broadly in line with previous estimates, considering the fact that the user industry of carbon black is likely to see a slow down for some time now. -
Trading at 0.7x FY2012 BV, maintain Buy: We believe the stock is undervalued given its growth potential and dominance in the domestic as well as global carbon black markets. We believe it should at least trade at its current year book value of Rs205 (revised from the previous Rs202 led by revision in FY2012 numbers), indicating an upside potential of 45%. Therefore, we remain positive on the stock and retain our Buy rating with a target price of Rs205, based on 1x FY2012 book value (BV). PTC India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs114
Current market price: Rs74 PTC Financial Services' robust performance augurs well for parent PTC Financial Services (PFS), a 60% subsidiary of PTC India (PTC), reported a strong set of numbers where income from operations increased by 80% and profit after tax (PAT) grew by 101% on a yearly basis. This jump in profit was largely led by strong core operating performance and stake sale in two of its investments-Ind Bharat Power Project (internal rate of return of 23.4%) and Indian Energy Exchange (IEX; ~9x return).
SECTOR UPDATE Cement Healthy growth in July 2011 on low base -
The volume growth of top three domestic cement players, ACC, Ambuja Cement (Ambuja) and UltraTech Cement (UltraTech) for July 2011 was healthy on a year-on-year (Y-o-Y) basis. Among the companies, ACC registered a better performance with a robust 28.2% growth in its dispatches whereas UltraTech and Ambuja posted a dispatch growth of 7.4% and 13.9% respectively. Hence, cumulatively the pan-India players have registered a 14.5% of volume growth which is the highest monthly volume growth recorded in the current fiscal. However, the volume growth was healthy largely on account of the low base affect and is thus not a sign of a real pick-up in the cement offtake. -
In terms of demand, dealers have confirmed that the cement offtake in most parts of the country was affected primarily due to the monsoon and political hurdles in Andhra Pradesh. In terms of region, the southern region, Rajashtan and Kolkata witnessed sluggish cement offtake. However, the demand environment was relatively better in the western market as Gujarat saw some signs of a pick-up in the volume particularly from the government infrastructure projects. -
Cement prices during the month decreased in most parts of the country by Rs10-12 per 50kg bag in July 2011. The price correction during the month was largely driven by a slowdown in the cement offtake and also an increase in inter-regional movement by the cement companies. The largest price correction was witnessed in Kolkata. Further, dealers are of the view that the present price is likely to decline further in the coming 15-20 days due to the monsoon season. -
We believe the sector could underperform in the coming six months given the possibility that the cement manufacturers may fail to adhere to supply discipline. However, we believe any correction in the sector will provide an investment opportunity for certain companies. We prefer Grasim Industries (Grasim) among the large companies and Orient Paper and Industries (Orient) in the mid-sized space.
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