Fw: Investor's Eye: Update - Pharmaceuticals (Still the best remedy), Fertilisers (Demand for complex fertilisers moderates further)

 

 

Investor's Eye [September 07, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   SECTOR UPDATE Pharmaceuticals Still the best remedy Key points Pharma outperformed benchmark indices: Given the general preference for the defensives and the robust financial performance of the pharmaceutical (pharma) companies (partially aided by the benefits of the rupee's depreciation), the pharma stocks have attracted a lot of attention from investors in the past few quarters. Consequently, on a one-year forward price-earnings ratio, the BSE Healthcare Index has outperformed the benchmark indices. The BSE Healthcare Index trades at a 53% premium to the Sensex which is much higher than the average premium of 39% the pharma benchmark index has enjoyed over the Sensex for the last five years. Rally in pharma stocks sustainable: Notwithstanding the strong outperformance of the pharma stocks, the current valuations of the BSE Healthcare Index are at a 10-14% discount to its long-term (three-year and five-year) average multiples. Even within our coverage universe, the pharma stocks are trading at a premium of only 4-6% over their long-term average multiples. Thus, we believe that the outperformance of the pharma stocks is sustainable. Divergence in valuations within pharma stocks: Though we maintain our positive stance on the pharma sector, but we believe that it is time to get selective. We suggest playing on the divergence in the valuations within the universe of the pharma stocks. Our analysis shows that a lot of positives are already priced in Lupin and Sun Pharmaceuticals, which are trading at a huge premium to their long-term average multiples. On the other hand, Cipla and Dr Reddy's Laboratories are at a discount to their long-term average multiples and offer a better risk-reward ratio. Similarly, within the mid-cap space, we see valuation comfort in Torrent Pharmaceuticals and Cadila Healthcare.   Fertilisers Demand for complex fertilisers moderates further Key points Weak monsoon and high prices dent demand environment: In August 2012, the aggregate sales of fertilisers (by 15 leading manufacturers) declined by 14% as compared with that in the same period of the last year. The sales fell mainly because of a steep decline in the demand of DAP and complex fertilisers. In August 2012, the production and imports of non-urea fertilisers, DAP and complex fertilisers declined drastically due to a lower demand for and higher prices of non-urea fertilisers. The imports of DAP and complex fertilisers decreased by 22% and 74% respectively during the month due to lower imports by Indian Potash and IFFICO. The imports of MOP and urea were higher by 20% and 1,414% respectively on the back of higher imports from Indian Potash. Fertiliser sales decline on YTD basis: The total fertiliser sales declined by 16% on a year-till-date (YTD) basis as compared with that in the same period of the last year. The fertiliser sales declined largely due to lower production and lower imports of non-urea fertilisers owing to a lower demand and higher prices of non-urea fertilisers. The sales of DAP, urea and complex fertilisers were lower by 38%, 4% and 34% respectively whereas the sales of MOP increased by 21% due to higher imports by Indian Potash, which is one of the major importers of potash in India. The imports of urea on a YTD basis declined by 32% to nearly 4.95 lakh tonne as compared with that in the same period of the last year.  Outlook: We maintain our cautious outlook on the complex (non-urea) fertiliser manufacturers but the recovery of the monsoon in the later part of the season could have a positive impact on the demand which augurs well for the rabi season. However, we continue to prefer the cheaper alternatives like urea and SSP as compared with DAP and the other NPK fertilisers due to the price differential. A possible hike in the price of urea is also a trigger for pure urea stocks like Chambal Fertilisers, Zuari Industries and SPIC. We also maintain our preference for pure SSP players like Rama Phosphates and Liberty Phosphate. 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.