What are CARS? CARS are Zero Coupon Convertible Alternative Reference Securities issued by Tata Motors in July 2007 to raise $490 million from foreign bond holders. These bonds are due for redemption on June 12, 2012 and carry yield to maturity (YTM) of 131.82%.
Scenario 1: CARS conversion by bondholders The conversion price as well as the rupee-dollar rate while estimating the bond conversion into equity shares has been fixed. The bondholders who may opt for conversion will get a conversion price of Rs181.4. The $473 million worth CARS will fetch a dollar-rupee rate of 40.6.
Scenario 2: CARS redeemed by the bondholders The bond holders are entitled to a 131% YTM on their zero coupon CARS. There is no fixed dollar-rupee rate for the redemption. The redemption would take place at current currency rates.
Probability of conversion low We estimate a mere 23.3% return for bondholders in five years, assuming they sell the converted shares at Rs270 per share. The returns are much lower than 131%, five-year YTM return on the respective bonds. The conversion is highly unlikely at the current prices due to the lower relative return.
Valuation Our FY2012 consolidated earnings per share (EPS) estimate stands at Rs36. The stock has traded between 8x and 9x one-year forward earnings in the past. Given the excellent performance of Land Rover, the company may continue to see long-term investment interest. However, the short-term overhang of CARS redemption would stay. We are positive on the stock with a long-term investment horizon.
SHAREKHAN SPECIAL
Q3FY2012 Pharma earnings review
Key points
Pharma universe grows 29% in Q3FY2012: Sharekhan's pharmaceutical (pharma) universe reported a 29.1% year-on-year (Y-o-Y) growth in net sales during Q3FY2012. The growth was mainly driven by the export of formulations which grew by 39% year on year (YoY) on a weaker currency and acquisition-led volume growth for a few. Excluding the contribution from the newly acquired entities the growth would have been at 16% YoY. Adjusted for the marked-to-market (MTM) foreign exchange (forex) losses and the extraordinary items, the net profit grew by 49% YoY, mainly driven by an improvement in the margins and better operating leverage. Revenues of players like Opto Circuits (up 46% YoY), Sun Pharma (up 34% YoY), Ipca Laboratories (Ipca; up 29% YoY) and Glenmark Pharma (up 37% YoY) were better than our expectations. Other players like Divi's Laboratories (Divi's; up 33.7% YoY), Cadila Healthcare (Cadila; up 21.9% YoY), Lupin (up 22.1% YoY) and Torrent Pharma (up 21.8% YoY) performed in line with our expectations.
Weaker rupee helps OPM but pinches bottom line: The operating profit margin (OPM) of our pharma universe stood at 26.2% (up 362 basis points YoY) mainly due to favourable currency movement and a better operating performance by players like Sun Pharma (up 1,741 basis points YoY, due to the consolidation of Taro Pharma), Ipca (up 586 basis points YoY) and Lupin (up 390 basis points YoY). However, players like Glenmark Pharma (core operating profit down 420 basis points YoY), Divi's (core operating profit down 280 basis points YoY) and Cadila (core operating profit down 114 basis points YoY), mainly on a higher raw material cost and higher payments to foreign employees due to the rupee's depreciation. However, lower values of the rupee against major international currencies also resulted in huge MTM losses which eroded a substantial portion of the profits. During the quarter, our pharma universe collectively provided non-cash forex loss of Rs222 crore against forex gains of Rs39 crore in Q3FY2011. Players like Glenmark Pharma, which has substantial foreign liabilities, provided Rs102 crore of MTM forex losses, followed by Ipca with Rs40 crore, Lupin with Rs34 crore, Cadila with Rs31.7 crore and Torrent Pharma with Rs18 crore. Players like Divi's recorded forex gains of Rs8 crore during the quarter. However, since these are non-cash items, we expect a partial write-back in the subsequent quarter as the rupee has strengthened against the major international currencies.
Universe's bottom line grows 26% YoY despite forex losses: Despite the provisioning of MTM forex losses, the net profit of the pharma universe grew by 26% YoY, mainly driven by Sun Pharma, which reported a 90% Y-o-Y rise in its net profit due to the consolidation of Taro Pharma, Opto Circuits (up 31% YoY) and Divi's (up 20.6% YoY). However, the forex losses affected the net profit of Glenmark Pharma (down 58% YoY) and Cadila (down 7.9% YoY) during the quarter. The adjusted profit after tax (PAT; excluding the forex loss and extraordinary items) grew by 48% YoY for our universe.
We introduce estimates for FY2014: Since we are closer to the end of FY2012 and the visibility of the revenues and earnings of our universe is better, we have introduced estimates for FY2014. On an average, our pharma universe is trading 14x and 12x FY2013E and FY2014E earnings. We have based our valuation on the average of the earnings for FY2013 and FY2014. We prefer Sun Pharma (an impressive performance of Taro Pharma and a better operating performance on a cash-rich balance sheet), Divi's (niche business segments and a clean balance sheet) and Ipca (a better operating performance on operationalisation of the Indore plants).
