Fw: Investor's Eye: Max India (APE to grow at 15% in FY2013; margins likely to decline); Insurance (APE of life insurers grew 38.6% MoM in May 2012)

 

 

Investor's Eye [June 28, 2012] Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Max India Cluster: Emerging Star Recommendation: Buy Price target: Rs234 Current market price: Rs190 APE to grow at 15% in FY2013; margins likely to decline APE likely to grow by 15% in FY2013: The company plans to grow its annual premium equivalent (APE) by around 15% in FY2013 compared with the 13% growth in FY2012. In the first two months of FY2013 the APE growth was flattish while the peer companies recorded a higher growth due to their focus on selective products (those with the highest net asset value [NAV] and the other short-term products). Max New York Life Insurance (MNYL) continues to focus on the high-value traditional products targeting the affluent segment. This aids in maintaining a high persistency ratio and in posting healthy margins despite an adverse industry scenario.  NBAP margin may drop to ~14% after the regulations on non-par products: For FY2012 the company's new business achieved profit (NBAP) margin was about 15% after the adjustment of the new regulations for the unit-linked insurance policies (ULIPs). Going ahead, an Insurance Regulatory and Development Authority (IRDA) regulation is expected regarding the non-par policies (constituting 15% of MYNL's products) which could affect the margins by around 100-150 basis points. Earlier, the Finance Bill, 2012, had proposed life cover should be at least 10x the annual premium paid for availing tax benefits. This could also lead to a change in the product structure.  Distribution tie-up with Axis Bank remains intact: The company has renegotiated an existing equity arrangement with Axis Bank regarding the latter's 4% stake in MNYL. As per the deal, Max India will purchase the 4% equity stake held by Axis Bank in MNYL in tranches not exceeding 1% equity every year (before 2020). However, the distribution tie-up with Axis Bank, which contributes 40% of the sales, remains intact. Mitsui Sumito-the new joint venture partner in insurance: Recently Mitsui Sumito concluded the acquisition of a 26% stake in MNYL from New York Life International Holdings (16.63 %) and Max India (9.37%) at Rs2,731 crore, thereby valuing MNYL at 3.26x embedded value. Max India received around Rs800 crore in the transaction on a post-tax basis which could be deployed to expand the healthcare and health insurance businesses. Healthcare business to break even in FY2013, may turn profitable in FY2014: Max Healthcare had 1,800 beds in FY2012 and added 205 beds (at the Dehradun hospital) recently, thereby increasing the total capacity to approximately 2,000 beds. The operational beds in FY2013 would be around 1,600 and 2,000 in FY2014. For FY2012 the healthcare business reported a revenue growth of 20% YoY (Rs824 crore) and EBITDA of Rs12 crore (due to the fixed cost of expansion). The company expects to break even in FY2013 and report profit from this business FY2014 onwards. Valuations Max India's strategy to focus on traditional products, targeting the affluent segment, aids in maintaining a high persistency ratio and in posting healthy margins despite an adverse industry scenario. The company has invested in capacity addition in the healthcare business which could significantly add to the revenues in the coming quarters. Nevertheless, the other businesses (specialty films, health insurance etc) continue to grow at a healthy rate. The life insurance business is already delivering profits. This along with the treasury corpus of Rs397 crore will take care of the funding requirements of the health insurance and healthcare segments. We maintain our Buy recommendation on the stock with our sum-of-the-parts valuation method based price target of Rs234.   SECTOR UPDATE Insurance APE of life insurers grew 38.6% MoM in May 2012 During May 2012, the annual premium equivalent (APE) of the life insurance industry declined by 2.5% year on year (YoY) but increased 38.6% month on month (MoM). The month-on-month (M-o-M) growth in the APE was mainly contributed by the private players, which reported a growth of 66% in May this year. Life Insurance Corporation of India (LIC) showed an M-o-M growth of 28% (down 12.6% YoY). Companies like SBI Life Insurance Company (SBI Life), Bajaj Allianz Life Insurance (Bajaj Allianz) and HDFC Standard Life (HDFC Life) showed a strong growth on an M-o-M basis while Max New York Life Insurance (MNYL)'s APE growth remained flattish.  In terms of APE growth for May 2012, six out of 18 private players posted a decline YoY with Tata AIG Life Insurance (Tata AIG) showing the highest contraction of 35.8% followed by MNYL, which showed a contraction of 16.2% YoY. However, on a year-till-date (YTD) basis, the life insurance industry reported a decline of 4.4% in APE.  The market share of the private players increased to 33.7% in May 2012 while that of LIC decreased to 66.3% (71.8% in April). Among the private players, SBI Life's market share declined to 10.1% from 11.2% in May 2011 while that of ICICI Prudential declined to 16.3% from 17.2% in May 2011. The share of MNYL declined to 5.6% as against 8.4% in May 2011. Going ahead, the growth in APE is likely to remain sluggish as new guidelines for products may be announced and the insurers may have to refile the products with the Insurance Regulatory and Development Authority (IRDA) based on the new guidelines.  APE declines by 2.5% YoY (up 38.6% MoM) On a year-on-year (Y-o-Y) basis the APE growth declined by 2.5% in May 2012, mainly contributed by LIC, which showed a decline of 12.6% YoY in its APE. The private players, however, fared better as their APE increased by 26% YoY (up 65.6% MoM). The sharp sequential growth was mainly due to a sharp decline in April due to the seasonality after the end of a fiscal.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

 

Fw: Investor's Eye: Update - Construction (Infra investment catches PM's attention finally // PMO to monitor infra investments), Pharmaceuticals (R&D plays)

 

Investor's Eye [June 26, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR UPDATE Construction Infra investment catches PM's attention finally // PMO to monitor infra investments Key points Recent meeting of PM promises to push infrastructure development: In a recent meeting of the Planning Commission, the ministers and secretaries of the key infrastructure and related ministries, and the prime minister promised a big push to infrastructure development in FY2013 and pledged quick action to award airports, highways and port projects. This comes on the back of a series of steps taken by the Prime Minister's Office (PMO) over the past six months to stimulate investment. The government proposes to award (1) 9,500km of road projects, (2) 42 ports including two major ports, (3) seven airports including three greenfield airports, (4) public-private partnership (PPP) initiative in the railways (such as elevated suburban rail corridor in Mumbai and bullet train between Mumbai and Ahmedabad), (5) 18,000MW of power generation capacity, and (6) 470 million tonne (mt) of coal dispatch by Coal India Ltd (CIL). But will the government walk the talk? In our view, the direct intervention by the PMO should stimulate infrastructure investment in FY2013, though the outcome of it will be reflected over the next two to three quarters. The involvement of the PMO clearly shows the intent of the highest government body to stimulate growth. Since January 2012 a series of steps have been taken in this respect. These include: (1) 17 public sector undertakings (PSUs) have been advised to speed up their capital expenditure (capex) so that the private sector can follow suit; (2) a dedicated freight corridor has been given top priority; (3) CIL has been directed to sign fuel supply agreements (FSAs) with power plants that have entered into long-term PPAs with distribution companies (discoms); and (4) an investment tracking system has been set up for infrastructure projects. All this will be monitored from time to time and necessary action will be taken, if required. We believe these steps are in the right direction to bring the infrastructure segment out of the deep waters. But how significant a change these may bring in will be known only over the next two to three quarters.  Measures for implementation of large projects hold the key: Further, in order to push the infrastructure sector effectively, the most important measure required today is the speeding up of the implementation of the large projects by fast tracking the approvals and clearances. The procedural delays are to be blamed for the slippages seen in the last few years. However, the deputy chairman of the commission, Montek Singh Ahluwalia, has hinted that measures in this regard will be announced soon wherein new mechanism will be put in place to move things faster.  Order inflow continues its lacklustre show even in Q1FY2013: The order inflow continues its downslide even in Q1FY2013 with new projects announced so far standing at merely Rs243 billion (with only five days left for the quarter to end) on account of a lack of project inflow across sectors. Currently, the inflows are down by a sharp 51% on a year-on-year (Y-o-Y) basis and by 46% on a quarter-on-quarter (Q-o-Q) basis. Regulatory hurdles, delays in project clearances and land acquisition issues continue to take their toll on the sector. It's only the building and urban infrastructure segments that have seen higher inflows. Otherwise, the critical segments like power, oil & gas and industrial have been a major disappointment. Even the road build-operate-transfer (BOT) segment, which has been the main driving force over the last few quarters, has been tepid this quarter with only Rs65 billion worth of projects announced against an average of Rs200 billion worth of projects announced over the last three to four quarters. Outlook: The direct intervention of the PM in providing an impetus to infrastructure investment seems to be a positive step but a lack of clear deadline, methods to accelerate clearances, fast land acquisition process and concrete execution detailing seem to be taking the steam out. Thus, measures to be taken to implement projects will be the key monitarables. However, if the procedural delays are addressed then it will be a huge positive for the infrastructure sector. Mr Ahluwalia has also hinted at the same. Thus, we believe that one can start accumulating infrastructure stocks from a long-term perspective as the downside now seems limited.   Pharmaceuticals R&D plays Key points Long gestation R&D projects with potential for high reward are accompanied with relatively higher risks: The six companies under our study that have material exposure to research and development (R&D) have increased their research spent from 5.2% in FY2007 to 7.3% in FY2012. However, most of their R&D projects are still at a nascent stage and are cost centres for the companies which hold significant risks. In order to mitigate the risks, the key players have either out-licensed the partially developed molecules or are looking for partners for collaborative research. Of the 39 new chemical entities (NCEs) under clinical trials, only 5 are in an advance stage of development (phase-III and beyond).  Most out-licensing deals have failed; Glenmark Pharma is the only player standing: Indian companies like Dr Reddy's Laboratories (Dr Reddy's), Ranbaxy Laboratories (Ranbaxy) and Glenmark Pharmaceuticals (Glenmark Pharma) have out-licensed their novel molecules to foreign partners in the past; however most of the foreign partners also could not see a head-way. After initial failures, Glenmark Pharma has emerged the most successful player on the out-licensing front and has netted over $200 million in milestone and upfront payments while it has spent about $120-130 million in cash. We believe Glenmark Pharma holds more promising out-licensing opportunities in its current NCE pipeline which could generate earnings in the foreseeable future. Piramal Healthcare takes inorganic route to fast track research outcome: In order to mitigate the risk and fast track the R&D activities, players like Piramal Healthcare have acquired late stage products (acquired BST-Cargel and molecular imaging portfolio of Bayer Sciences). Apart from Piramal Healthcare, Glenmark Pharma (which in-licensed a NCE from Nepo Pharma) is also running through an advanced stage and is expected to generate revenue in the medium term. Prefer companies with late stage products; our R&D plays - Glenmark Pharma and Piramal Healthcare: Though the risk associated with R&D focused pharmaceutical (pharma) companies is relatively much higher, and the past experience shows that the stock price movement can be quite volatile based on success or failure of out-licensing deals, the rewards could also be quite substantial in such stocks. To play the R&D theme in the pharma sector, we prefer companies with late stage products like Glenmark Pharma (target price: Rs462 including Rs64 for the R&D pipeline) and Piramal Healthcare (target price: Rs519 including Rs40 for its R&D pipeline). Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Thematic Report (Switch from ITNL to IRB)

 

 

Thematic Report [June 22, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Switch from ITNL to IRB Key points Trading premium gap at all-time high; buying opportunity in IRB: The recent sharp correction in IRB Infrastructure Developers (IRB) has created a huge divergence in the valuations of IRB and IL&FS Transportation Ltd (ITNL). ITNL trades at a 40% premium to IRB as against a mean average of an 11% premium and the usual band of a 5% to 20% premium. Notwithstanding the legal tangles of the IRB promoter, we believe that the divergence of more than 2x standard deviation (2SD) offers a compelling buying opportunity. IRB-sharp correction and clearance from a legal case to limit the downside: Though the charges levied against the promoter of IRB are serious, the correction of over 30% in the stock factors in a lot of the negatives and has made the stock available at a 40% discount to its mean average valuation multiple. The improving outlook for the road infrastructure developers should limit the downside risk in the stock though. Moreover, any positive development on the legal issue could result in a sharp re-rating of the stock. IRB's profitability less vulnerable to interest rates: Considering the economic turbulence that our country is going through (with inflation still at levels beyond the comfort zone of the central bank), we think the interest rate reversal cycle might be delayed by one or two quarters. For the companies with a high debt burden this would mean continued pain in terms of high interest charges for at least the next couple of quarters. Here, we think IRB is better placed in comparison with ITNL since the debt/equity ratio of IRB stands at 2.5 vs 3.7 for ITNL. On a closer analysis of the interest payments we find that while IRB pays almost 40% of its operating profit as interest charge, ITNL pays 50% of the same as interest charge (due to the interest payment on the annuity projects under construction). Further, in the last two years, IRB has been efficient in generating higher returns on invested capital (RoIC) as compared with ITNL with the FY2012 RoIC at 11.5% as compared with ITNL's 9.3%. Switch from ITNL to IRB: Fundamentally, we like both the companies and believe both would be likely beneficiaries of the tall target set by the National Highways Authority of India for project awarding this fiscal. In fact, ITNL shall score better than IRB on many financial parameters over the long term. However, the recent event-driven sharp correction in IRB has thrown open a tactical opportunity to shift from ITNL to IRB for superior returns in the near term.  Click here to read report: Thematic Report Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Cement (CCI penalty an overhang), Fertilisers (Normal monsoon to drive growth)

 

 

Investor's Eye [June 20, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR UPDATE Cement      CCI penalty an overhang Key points  CCI to impose penalty on cement companies: As per media reports, the Competition Commission of India (CCI) is set to pass an order in a day, accusing top cement companies of creating a cartel. According to the CCI officials, a few short-listed cement companies are likely to face a penalty of 8% of their average revenue in the past three years. The order has been signed by all members of the commission but is yet to be signed by its chairman.  Aditya Birla group to face the highest penalty: In total there were 39 cement companies that are under the CCI scanner; however, only the top 11 by revenue are likely to face penal action of 8% of their average sales in the past three years. If the order is approved by the CCI chairman, then it will affect companies like UltraTech Cement (UltraTech), Ambuja Cements, ACC, JP Associates, India Cements, Madras Cements and Shree Cement. As per the average revenue of the respective companies the highest penalty of about Rs1,025 crore is expected to be imposed on UltraTech. ACC and Ambuja Cements are likely to face a penalty of Rs600 crore to Rs650 crore whereas the other players like JP Associates, India Cements, Madras Cements and Shree Cement may have to face a penalty in the range of Rs300-400 crore. However, the managements of the Aditya Birla group, ACC and India Cements have mentioned that they have not received any correspondence from the CCI. Penalty works out to 20-35% of the cash and liquid investments: The cement companies will have to pay the penalty amount either from their cash and liquid investments or by raising debt. Considering the cash and liquid investments of the cement companies, we feel that none of the companies will have to resort to debt to pay the penalty. However, the impact of the penalty on their cash balance will be in the range of 20-35% except for Madras Cements, which shall suffer an impact of as high as close to 70%.  Impact on India Cements and Madras Cements severe in terms of market cap: The penalty as a percentage of the market capitalisation (market cap) for most of the cement companies on the penalty list is in the range of 2.5-3.0% except for India Cements and Madras Cements, which shall face the highest penalty. The penalty on India Cements works out to close to 12% of its current market cap and that for Madras Cements works out to 6% of its current market cap.  Impact of penalty on FY2013 estimated profit in range of 35-95%: Though the impact of the penalty on the market cap of the cement companies does not seem severe, but the impact of the same on our earnings estimate for FY2013 appears to be much severe and in the range of 35-95%. The companies with the highest impact on the FY2013E earnings include India Cements (an impact of 97%) and Shree Cement (an impact of 81%). Outlook We believe the cement companies shall challenge the CCI order (likely to be announced in a day) in the court. However, any penalty imposed by the CCI will be a negative for the cement companies particularly for India Cements, Madras Cements and Shree Cement (as per the earnings impact).  We maintain our neutral stand on the sector as we believe the positives in terms of a partial recovery in the demand environment and a better realisation are likely to support the revenue growth of the companies but cost pressure, a likely correction in the realisation and the penalty burden could be the key concerns for the earnings of the cement companies. However, we are selectively positive on Grasim Industries in the large-cap space and Orient Paper & Industries in the mid-cap space.      Fertilisers      Normal monsoon to drive growth Key points  Government defers urea price hike: The government has deferred the fertiliser ministry's proposal to hike the retail price of urea by 10% to Rs5,841 per tonne for FY2013. Urea is the only fertiliser that remains under the government's full control. Its current retail price is Rs5,310 per tonne. The proposal to hike urea prices was made to redress the imbalanced use of soil nutrient and to reduce the subsidy burden of the government. In 2011-12, indegenious urea and imported urea contributed Rs20,300 crore and Rs17,475 crore respectively to the fertiliser subsidy bill. The government's decision not to increase the price of urea will not affect the financials of the urea manufacturers because any increase in the variable cost shall be fully compensated by the government as urea is still under government control.   30 to 60% increase in prices of complex fertilisers: Non-urea fertiliser companies have resorted to massive rate hikes in all other nutrient products for the current kharif planting season. Non-urea fertiliser companies will increase the price of complex fertilisers due to a cut in the subsidy pay-out by the government and the depreciation in the rupee which has increased the cost of the imported raw materials such as phosphoric acid, diammonium phosphate (DAP) and Muriate of Potash (MOP). The new prices are technically effective from June 1, 2012. However, farmers would not have to pay these rates for the stocks that have been already dispatched to dealers. The stock of non-urea fertilisers is expected to last till the end of July 2012. The total quantity in stock is estimated at about 5.5 million tonne (mt) including 2.5mt of DAP, 1mt of MOP, 2mt of single super phosphate (SSP) and various other complex fertilisers. A steep increase in the price of non-urea fertilisers and the unchanged price of urea have increased the difference between the prices of urea and non-urea fertilisers which may affect the demand for the non-urea fertilisers adversely, thereby spurring the demand for urea in the short term. However, in longer run demand for non-urea fertiliser is expected to be strong.   Monsoon to remain key monitorable for demand: The India Meteorological Department (IMD) has forecast a normal monsoon for India in FY2013. This will increase the demand for fertilisers in the kharif season. The June-September monsoon season accounts for 85% of the total annual rainfall in the country and is crucial for India's largely rain-fed kharif crops. Apart from a timely arrival of the monsoon, the spread of the rainfall also matters. The spread and distribution of the rainfall will be the key monitorables rather than just the timely arrival of the monsoon. A random and ill-distributed rainfall may hurt the agri production as well as the fertiliser demand. Any delay in the arrival of the monsoon or an inadequate rainfall due to El Nino expected in August 2012 may affect the demand for fertilisers.    Government increases MSP for all major crops: The Cabinet Committee on Economic Affairs has approved the minimum support prices (MSPs) for kharif crops of the 2012-13 season. The MSP of paddy (common) has been fixed at Rs1,250 per quintal and that of paddy (Grade A) at Rs1,280 per quintal. This represents an increase of Rs170 per quintal over the last year's MSPs. The higher MSPs as compared with the last year's MSPs for all major crops will motivate farmers to improve their yield which will ultimately drive the demand for fertilisers.    Outlook: A 20 to 30% increase in the MSPs will motivate farmers for better yield which will support the consumption of the fertilisers in FY2013. In addition, the forecast of a normal monsoon also augurs well for the demand. Hence, we believe that the volume growth of the fertiliser companies in FY2013 will be better as compared with that in FY2012 (a 6% growth in FY2012). Further, on the valuation front companies like Coromandel Fertilisers, Chambal Fertilisers and GSFC are trading at a discount to their mean valuation which leaves room for an upside. At the current market price Chambal Fertilisers, Coromandel Fertilisers and GSFC are trading at 8.4x, 8.63x and 4.7x to their respective FY2014 consensus earnings estimates. However, the depreciation in the rupee and a sub-normal monsoon could be the key concerns for the sector.   Click here to read report: Investor's Eye Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Pulse - RBI's mid quarter policy review; Update - Pharmaceuticals

 

 

Investor's Eye [June 18, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK RBI's mid quarter policy review  Amid the expectation of a 25-basis-point reduction in the repo/cash reserve ratio (CRR) rates the Reserve Bank of India (RBI) surprised the market by keeping the key rates unchanged in its mid quarter policy review. According to the central bank, it has already frontloaded the rates cuts (a 50-basis-point rate cut in April this year) while the inflation scenario continues to be challenging. With regard to growth the RBI asserts that several other factors are responsible for the slowdown in the investment cycle as banks' effective lending rates remain lower than the levels seen during the 2003-08 period. Going ahead, the government's fiscal action especially with regard to the fuel price hike and macro data will decide the course of the monetary action. SECTOR UPDATE Pharmaceuticals      Mid-sized players prepare to take center-stage in the USA We have studied and analysed the pattern of the latest abbreviated new drug applications (ANDAs) approved by the US Food and Drug Administration (USFDA). On the basis of the number of ANDAs approved for the key Indian players, we feel that the mid-sized players have outpaced the major players in the past few months. Though the number of approvals does not exactly represent the revenue potential of the individual players, but the pace of the approvals surely shows relative activity and preparation of the players for the US market.    Key trends    Major global players outpace Indians during first half of June 2012  The starting weeks of June 2012 witnessed a dry period for the Indian players, as most of them could not open an account in terms of obtaining ANDA approvals. Except for Dr. Reddy's Laboratories Ltd (DRL), which received an ANDA approval for the generic Requip (ropinirole hydrochloride), none of the Indian players received any ANDA approval during this period. In contrast, major global players like Teva Pharmaceutical Industries, Watson Pharmaceuticals, Sandoz and Mylan Inc together received six ANDA approvals out of the 11 approvals sanctioned by the USFDA up to June 14, 2012.    Mid-sized players perform better  In the past few months a sizeable number of ANDA approvals were received by the mid-sized players like Aurobindo Pharmaceuticals, Strides Arcolab, Glenmark Pharma and Torrent Pharmaceuticals. Companies like Ranbaxy Laboratories, whose approvals were stalled due to the ban on two of its manufacturing facilities in India, also received approvals (from the newly approved Mohali plants) in April and June this year. However, the pace of approvals fell for Lupin and Sun Pharmaceuticals during April-June 2012 (up to June 14th), though on a cumulative basis these players hold a strong pipeline of ANDA approvals.   A few blockbuster products go off patent during April-June 2012; but stiff competition limits the scope The first two and a half months of Q1FY2013 have seen a few blockbusters getting off patent. However, most of them are witnessing intense generic competition leading to severe erosion in product prices. We do not expect much upside from these products for the Indian pharmaceutical players.    Outlook  The trend of approving ANDAs in the USA during the past few months was mixed. The big players like DRL and Lupin showed a fewer number of approvals relative to their historical trends whereas players like Strides Arcolab, Glenmark Pharma and Ranbaxy Labs seemed prepared to grab the center-stage in the US generic markets. Nonetheless, we believe players like Sun Pharma and Lupin would continue to be strong players in the USA owing to its large product basket and ability to play in niche segments.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.