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.