THE STOCK IDEAS REPORT CARD
FROM SHAREKHAN'S DESK
Uncertainty begins at home
The market's cup of woes seems to be overflowing all at once. In a matter of two months the Sensex has lost almost two thousand points. In addition to the global uncertainties the market now has to deal with certain local risks as well. Till yesterday, every time the market stumbled and fell on global concerns, such as the possibility of recession in the USA, higher crude prices or unwinding of yen carry trades, it was the promise of India's long-term growth story that helped it get back on its feet. Alas, today, there hangs a big question mark on this source of strength itself. Inflation has raised its ugly head again, you see. It has stubbornly remained well above 6% for four weeks now.
Sharekhan top picks
In the March 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on April 2, 2007, the basket of stocks has gained 3.7% as compared with the decline of 3.3% and 2.6% in the Sensex and the S&P CNX Nifty respectively during the period.
STOCK IDEA
Hexaware Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs220
Current market price: Rs159
Growth at attractive valuations
Key points
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Strong presence in niche areas: Hexaware Technologies Ltd (HTL) is a mid-cap company with a differentiated strategy of focusing on the fast-growing niche areas of enterprise package implementation and HR IT services. It has dominant share in the PeopleSoft implementation market and is growing its presence in Oracle and SAP space. Even in terms of verticals, it is focused on three key industry domains—transportation, BSFI and manufacturing—that account for over 95% of its revenues.
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Better mining of clients by expanding portfolio of service offerings: HTL is using a combination of organic and inorganic initiatives to expand its portfolio of service offerings that would enable it to enhance the share of business from its existing clients. One such initiative has been to build capabilities in the fast growing testing and quality assurance service practice, by developing manual testing services in-house and gaining a foothold in automated testing solution and consulting business through acquisition of US-based FocusFrame Inc. HTL aims to scale up the revenues from this practice to over $100 million per year in the next three years.
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Strong growth visibility with sustainable margins: The strong order book position of $250 million (of this $170 million is executable in CY2007), improving range of service offerings and a growing support for PeopleSoft by Oracle are some of the key drivers of the significant improvement in HTL's revenue growth visibility. Moreover, it has a number of levers to cushion it against the severe cost pressures and is expected to maintain its OPM in a narrow band of 15.5-16% over the next two years.
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Attractive valuations: The consolidated revenues and earnings are estimated to grow at a healthy rate of 31.6% and 28.5% respectively but the same is not reflected in the stock's prevailing valuations of 14.2x CY2007E and 11.2x CY2008E earnings. We recommend Buy on HTL with a price target of Rs220.
STOCK UPDATE
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,430
Current market price: Rs1,780
Price target revised to Rs2,430
Aban Offshore Ltd (AOL) has announced the signing of a contract with affiliates of Addax Petroleum and Sinopec to deploy its deepwater drill ship, Aban Abraham, in the offshore block located at the Gulf of Guinea. The contract to drill five firm wells (with an option to drill another five wells) over a duration of 300 days is worth $123 million (can be increased to $246 million). It works out to a charter rate of $410,000 per day (around 36.6% higher than the charter rate of $300,000 for its contract starting from July 2007). The recently acquired contract is effective from end of May 2008 and would positively affect the earnings of FY2009.
ACC
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs753
Annual report review
Riding on the back of a cement boom in the economy, ACC, the largest cement producer in India, witnessed the highest growth rate in the revenues in its history. The company's production stood at 18.73 million metric tonne (MMT) against a total capacity of 19.91MMT translating into capacity utilisation of 94%. The sales volume grew by 8% year on year (yoy) to 18.76MMT. As the cement demand growth at 11.5% in CY2006 far exceeded the supply, the industry witnessed a rising utilisation scenario and consequently rising prices. Thanks to such a buoyant scenario, the cement realisations of ACC grew by a whopping 32% yoy to Rs2,866 per tonne resulting in a top line growth of 43% yoy to Rs5,405.35 crore. The overall revenues stood at Rs5,803 crore with the ready mix concrete (RMC) business contributing Rs300 crore.
Alphageo India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs270
Current market price: Rs202
Bags Rs60-crore contract from ONGC
Alphageo India has bagged a 3D (three-dimensional) survey contract worth Rs60 crore from Oil & Natural Gas Corporation (ONGC). With this order in hand, the company is likely to opt out of the low-margin 2D (two-dimensional) survey order of Oil India Ltd (OIL) which is worth around Rs20 crore. Thus, the effective increase in the order backlog works out to Rs40 crore.
Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs56
Current market price: Rs39
Good growth at attractive valuations
Key points
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Ashok Leyland Ltd (ALL) has reported good vehicle sales numbers for the month of February 2007 with an overall growth of 33%. The truck segment recorded a 33% growth and the bus segment grew by 27% during the month.
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The company is all set to surpass its sales target of 80,000 vehicles for the current fiscal. We maintain our positive outlook on the growth prospects of Ashok Leyland on the back of the continuing buoyancy in the commercial vehicle segment.
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The company is expected to spend about Rs4,000 crore in the next three-four years, including about Rs1,200 crore for setting up a plant in Uttaranchal.
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ALL is also a front runner for the acquisition of a stake in Punjab Tractors Ltd (PTL). The acquisition, in case it goes through, would give ALL an entry into the fast growing tractor market in India, and the acquirer would also be able to take advantage of the strong brand equity of PTL and its strong distribution network. However, the acquisition would come at a high price, and the acquirer would have to shell out anything between Rs1,200 crore and Rs1,500 crore, which would necessitate further raising of funds by the company.
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A sharp correction on the bourses following a global meltdown has seen the stock price of Ashok Leyland take a heavy beating. Considering its strong growth outlook, we believe that this is a good buying opportunity, as the stock is available at very attractive valuations, which are at a considerable discount to its peers. At the current market price of Rs39, the stock discounts its FY2008E earnings by 9.5x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 5.3x. We maintain our Buy recommendation on the stock with a price target of Rs56.
Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,715
Current market price: Rs1,550
Budget positive for BEL
The budgetary allocation for the defence sector has been pegged at Rs96,000 crore for 2007-08, which amounts to a growth of 7.9% over the earmarked figure of Rs89,000 crore in the last year's budget. The same is 11.6% higher than the Rs86,000 crore shown in the revised estimate for 2006-07. The growth in the total defence allocation is in line with the trend seen in the past couple of years.
The huge jump in the capital outlay for equipment is likely to benefit a company like Bharat Electronics Ltd (BEL), which has emerged as one of the key suppliers of electronic and other high tech equipment to the defence forces. This coupled with the order backlog of around Rs7,300 crore (as on December 2006) and a strong traction in civilian business provides a reasonably strong revenue growth visibility for the company. Moreover, the recent alliances with leading defence contractors would also add to the overall growth in revenues over the coming years.
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,255
Foray into defence equipment space
Bharat Heavy Electricals Ltd (BHEL) is planning to produce defence equipment, including weapons. It has already applied for a licence to produce defence products. It is likely to manufacture all types of guns, including field guns, air defence guns, and mortars for the Indian defence sector and para-military forces. It has also firmed up plans to produce underwater weapon systems, weapon control solutions and their components.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs311
Remains strong and stout
Key points
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Cadila Healthcare aims to become a $1 billion company by December 2010 (FY2011), of which $800 million will come through organic growth and the remaining $200 million from inorganic initiatives. From estimated sales of approximately $400 million in FY2007E, this implies a doubling of the organic revenues over the next 4 years. The key drivers of this growth will be the growing revenues of the US and French businesses, a rebound in the growth of the domestic business and steady contributions from its joint ventures.
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Cadila has selected a basket of 60 products for the US market, which include existing generics, would-be generics (including certain blockbusters) and NDDS-based products. The company plans to file 20-25 abbreviated new drug applications (ANDAs) every year and launch 6-7 new products per year in the USA. With a strong pipeline of products and good marketing reach, we believe Cadila's US business is set to grow at a compounded annual growth rate (CAGR) of 65% from $11 million in FY2006 to over $50 million in FY2009E.
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Through a stream of new launches and an increasing market share (through Evolupharm's network of pharmacies), we believe Cadila's French business will grow at a CAGR of 43.5% from 10 million euros in FY2006 to over 31 million euros in FY2009E. Further, with an improving top line and a shift of manufacturing to India, the margins should also improve. The management has guided towards a H2FY2008 turnaround in the French operations.
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Cadila is ranked fifth in the domestic formulation market. Even though the domestic formulation business has been slow in recent times, we believe the worst is over. With the benefits of the restructuring programme flowing in, an increased thrust on rural areas, a continued focus on the lifestyle segments and a target of 35+ new launches per year, we expect Cadila's domestic formulation business to grow at a CAGR of 10.4% from Rs979 crore in FY2006 to Rs1,317 crore in FY2009E.
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Cadila has formed 50:50 joint ventures (JVs) with three companies in order to exploit specific opportunities, namely with Altana, Hospira/Mayne and Bharat Serums. We expect marginal growth in the contributions from Altana as Altana is already sourcing 60-70% of its requirement from Cadila. Upon expiry of the Pantoprazole patent, the loss in revenues and profits from the Altana JV is likely to be compensated for by the Mayne JV, the revenues from which should start flowing in by FY2009E.
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We are introducing our FY2009E estimates for Cadila. We estimate the sales to grow at a CAGR of 18.5% over FY2006-09E to Rs2,471.5 crore in FY2009. The growth will largely be driven by a 12.2% CAGR in the domestic business and a 35% CAGR in the exports. A growing top line and expanding margins will cause Cadila's net profit to grow at a CAGR of 26.7% to Rs335 crore in FY2009E, translating into earnings of Rs26.7 per share.
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At the current market price of Rs311, Cadila is trading at 14.1x its estimated FY2008E earnings and at 11.7x its estimated FY2009E earnings. The stock has underperformed the market in recent times, but we believe that as Cadila's international efforts start translating into gains, the stock's performance should improve. At these levels, the stock is available at near its 52-week low level. Considering the strong growth momentum of the company, we view this as a strong buying opportunity and hence maintain our Buy recommendation on the stock with a price target of Rs425.
Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs320
Current market price: Rs186
AMC JV between Canara Bank and Robeco
Key points
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Canara Bank has decided to sell its 49% stake in its asset management arm, Canbank Investment Management Services (CIMS), to the Netherlands-based Robeco Groep NV for Rs115 crore.
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The proposed venture has got the nod of the Reserve Bank of India. However approval from the capital market regulator, Securities and Exchange Board of India, and the Foreign Investment Promotion Board are awaited.
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The company plans to float five new equity-based products and aims to capture 5% market share in the next five years.
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The assets under management (AUM) of the bank stood at Rs2,200 crore, which is comparatively lower than that of industry leaders like Prudential ICICI (AUM of Rs43,280 crore as on February 2007).
Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs392
Angellini hikes stake in Elder
Italian pharma company Angellini ACRAF SPA (Angellini) has hiked its stake in Elder Pharmaceuticals (Elder) by 5% to 15%. According to Elder, the stake hike would not activate the takeover code; rather it would strengthen the business tie-up between the two companies. Angellini is one of Italy's top five pharmaceutical companies in terms of sales volume and has a wide presence in 60 countries. During FY2006, Elder had entered into an ownership deal with Angellini, whereby the Italian company had out-licenced three products to Elder and picked up a 10% stake in the company.
Esab India
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs328
Top line growth ahead of expectations
Results highlights
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Esab India's Q4CY2006 results are good. Its top line grew by 32.4% which was ahead of our expectations. The profit before tax grew by an impressive 50%. However due to a higher tax rate vis-à-vis Q4CY2005, the net profit growth of 21.7% was below our expectations.
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The higher top line growth was aided by the company's new facility in Chennai. This facility, on a fully operational basis, can contribute additional Rs60 crore to the top line. The revenues for the quarter recorded an impressive 32.4% growth as the equipment division's revenue increased by a whopping 98% and the consumable division's revenue grew by 16%.
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The operating profit for the quarter grew by 49.6% to Rs14.4 crore as the operating profit margin (OPM) improved by 211 basis points to 18.4%.
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The improvement in the OPM was on account of the better profitability of the equipment division. The earnings before interest and tax margin of the equipment division improved by 1,200 basis points to 17.5%.
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The depreciation for the quarter increased by 35% as the company has commissioned its new plant in Chennai.
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The tax rate for the quarter stood at 33.3% as against 18% in the same quarter last year.
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Consequently, the net profit grew at a lower rate of 21.7% to Rs10.1 crore.
Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs160
Gateway forms a 51:49 JV with Concor
Key points
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Gateway Distriparks Ltd (GDL) through its subsidiary Gateway Rail has formed a 51:49 joint venture with Container Corporation of India (Concor) to construct and operate a rail-linked double-stack container terminal at Garhi-Harsaru, 7 kilometre from Gurgaon in Haryana.
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The rail-linked inland container depot (ICD) currently operated by GDL will be transferred to the joint venture. The excess land (approximately 70 acre) owned by GDL will also be transferred to the joint venture and GDL will earn lease rentals on the same.
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The total cost of setting up the joint venture will be Rs70 crore which will be funded in the debt/equity ratio of 2:1.
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The revenues (handling charges and ground rent) arising from the joint venture will be shared in the ratio of the stakes held by the two companies.
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The profits from the rail operations for the movement of container rakes from the Garhi ICD to the ports will be equally shared between GDL and Concor.
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We maintain our bullish stance on the company as it will be the direct beneficiary of the growth in container traffic, which currently accounts for just 10% of the total cargo.
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The stock has significantly underperformed the Sensex in the last three months, declining by 21% over the period. So we believe this to be a good buying opportunity for the investors and thus maintain our Buy recommendation with a price target of Rs250.
ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs550
Current market price: Rs435
ICI sells Quest International
Key points
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ICI India (ICI) on March 02, 2007 sold its 100% equity share holding in Quest International India to Givaudari (India) Pvt Ltd for Rs320 crore. The company had also received an interim dividend of about Rs31 crore prior to the sale of Quest International India. Further, it expects an additional consideration of about Rs35 crore for various agreed adjustments in the next quarter.
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At the current market price of Rs435, the stock trades at 14.7x its FY2008E earnings per share (EPS) of Rs29.7. We maintain our Buy recommendation on the stock with a price target of Rs550.
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,240
Current market price: Rs820
New holding structure to unlock value
Key points
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Key investments in insurance and asset management businesses to be transferred: ICICI Bank has decided to transfer its 74% stake in the insurance and 51% stake in the asset management businesses to a separate wholly owned subsidiary company called ICICI Holdings. It plans to further list ICICI Holdings separately in CY2007. The independent listing should unlock significant value for its life insurance business and provide further visibility to its stock's valuation. The bank plans to transfer the investments at the current book value, which stands at Rs1,950 crore.
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Listing will provide insurance companies greater access to capital: The insurance business needs a huge amount of capital infusion and ICICI Bank could not have met the capital demands without having to go for another equity issue. The transfer of stakes to a holding company was done with the idea of providing insurance companies greater access to capital.
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Significant value to be unlocked in the insurance business: Currently there are no listed insurance companies in the Indian market and the valuation provided to certain stocks like ICICI Bank and Bajaj Auto based on the new business adjusted profit (NBAP) multiple varies across the analyst community. The analyst community has taken a cue from comparable valuations given to the Chinese insurers which in the past year had been re-rated to 30-40x NBAP multiples. The listing of the holding company will provide a valuation benchmark for these high-growth businesses of the bank and unlock significant value for the insurance businesses. We have valued the life insurance business at 21x FY2009E NBAP, which we feel is a fair multiple for such a high-growth business.
ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs142
VAT on cigarettes
Key points
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ITC has been underperforming the market for quite some time owing to fears of the implementation of the value added tax (VAT). We believe the stock would continue to underperform till clarity emerges on how VAT would be implemented and how the subsequent price hike would affect the company's volumes.
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Historical data shows that whenever there has been a price hike in the range of 10-12%, cigarette volumes have dipped. We believe that a 12.5% VAT may result in a 8-10% price hike across segments. Consequently, we may see lower growth or no growth in volumes in 2008.
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We believe that with VAT getting implemented, our earnings per share (EPS) estimate for FY2008 would change by 9% from Rs8.8 to Rs8, which is still a 9.6% growth over the FY2007 EPS. At the current market price of Rs142, the stock is quoting at 17.7x its FY2008E EPS and 10.7x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a revised price target of Rs200.
KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs518
Strong performance
Result highlights
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KSB Pumps delivered good results for Q4CY2006. Its net sales grew by 24.9% to Rs108.3 crore during the quarter. There was a delay in the dispatch of certain orders in the previous quarter; the delayed sales got reflected in the fourth quarter, boosting the Q4CY2006 performance.
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On segmental basis, the revenues of the pump business went up by 16.2% to Rs78.9 crore while that of the valve business grew by a strong 57.7% to Rs28.7 crore. However, the margin in the pump business declined to 13.4% from 15.3% last year, while the profit before interest and tax (PBIT) margin in the valve business grew by 120 basis points to 25.4%.
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Overall, the operating profit grew by 24.2% to Rs20 crore, while the operating profit margin (OPM) was stable at 18.5%. This despite a steep hike in the raw material cost, which rose from 41% in the same quarter last year to 46.4%. However, substantial savings were made in the staff cost and other expenses.
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The profit after tax (PAT) for Q4CY2006 rose by 42.4% to Rs12.1 crore. For CY2006, the OPM grew to 20.4% from 18.1%, while the full years' PAT grew by 38.3% to Rs51.6 crore.
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Sales are traditionally better in the first and second quarters for pump makers because of seasonal factors. Hence, we should expect even better results from the company in the coming quarters, both in terms of revenues and margins.
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The pumps industry is set to benefit from the huge investments being planned in the user industries, particularly power and petrochemicals. KSB Pumps, enjoying a 12% market share, would be one of the key beneficiaries of the same and hence we expect the growth momentum to sustain going forward. We are introducing our CY2008 earnings per share (EPS) estimate at Rs46 for KSB Pumps. At the current market price of Rs518, the stock quotes at CY2007E price/earnings ratio (PER) of 11.3x and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Buy recommendation on the stock with a price target of Rs650.
Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs670
Current market price: Rs570
Building momentum in EU business
Lupin, together with its French Regulatory agent Venipharm, has received the marketing approval for generic Cefpodoxime Proxetil 100mg tablets in France. Cefpodoxime Proxetil is a cephalosporin antibiotic used to treat a variety of bacterial infections. Lupin's Cefpodoxime Proxetil tablets would be the generic equivalent of Sanofi-Aventis's Orelox tablets. The sales of Orelox tablets in France are close to 75 million euros as per IMS. The patent on Sanofi's Orelox is due to expire in August 2007 in France.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs731
Acquisition marginally earnings accretive
Key points
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As mentioned in our earlier note dated March 9, 2007, M&M had won the bid to acquire a 43.5% stake in Punjab Tractors at Rs360 a share in an all-cash deal. Private equity fund Actis and the Burman family are selling their respective stakes of 29% and 14.5% in Punjab Tractors.
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M&M's management expects a number of strategic benefits and synergies from the acquisition. Several benefits are expected to come from the brand Swaraj, a well-respected brand that enjoys a good brand loyalty, particularly in the northern states like Punjab, Haryana, Uttar Pradesh and Bihar. M&M is particularly strong in the central, western and southern regions. The acquisition of Punjab Tractors would further increase its presence in the north Indian market.
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The acquisition would make M&M an undisputed leader in the tractor segment, with an overall market share of about 40%. It would help it consolidate its presence in the 31-40 horsepower (hp) category and help it to acquire a dominant status in the >51hp category. This would be a huge positive as a strong growth is expected in the higher-end tractor segment.
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We believe that the acquisition would have a marginal impact on M&M's earnings for FY2008. The management has indicated that it will use a mix of internal resources and debt to fund the acquisition. At present the management has surplus funds of up to Rs800 crore, and its debt equity ratio currently stands at 0.43:1. We expect that about 40-50% of the acquisition cost would be financed through debt. Considering this, our calculations suggest that the deal would be marginally earnings accretive for M&M for FY2008. However, we believe that the deal is a good strategic move by M&M, which would yield substantial long-term benefits for M&M.
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At the current levels, M&M trades at 11x its FY2008E consolidated earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,050.
New Delhi Television
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs348
Current market price: Rs304
Fund mobilisation begins for new channels
New Delhi Television (NDTV) has received a major push towards implementing its ambitious plans of diversifying its broadcast offerings by entering the general entertainment and lifestyle space. Last week the news broadcaster received the approval of the Foreign Investment Promotion Board to raise foreign investment of Rs585 crore (~$130 million) for its proposed channels through its UK-based subsidiary NDTV Network Plc. Taking a step forward, it has also entered into a definitive agreement with Com Ventures V.I.L.P for infusing $20 million in NDTV Network Plc. We believe the company will expedite the fund raising process by roping in strategic/financial investors or go for a listing on the Alternative Investment Market (commonly known as AIM).
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,341
Current market price: Rs1,012
R&D pipeline adds sheen
Key points
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Sun Pharma Industries has de-merged its innovative research division into a separate company called Sun Pharma Advanced Research Company (SPARC) Ltd.
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As anticipated Sun Pharma has unfolded the innovative research pipeline for SPARC Ltd, which comprises of 4 new chemical entities (NCE) and 4 novel drug delivery systems (NDDS). The lead molecule—SUN 1334H—that targets anti-allergic disorders is undergoing Phase-II clinical studies in the USA and is likely to enter Phase-III trials in 2008.
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On the NDDS technology front, Sun is working on four platforms including controlled release system (which covers gastro retentive innovative device and WRAP matrix system), dry powder inhalers (DPI), targeted delivery by Nanoemulsion and biodegradable injections/implants.
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Sun Pharma's NCE research is analogue-based which means that the research is for creating newer drugs by modifying the existing ones. Hence, the risks of uncertainty about the molecules are minimal.
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The de-merger would positively affect Sun Pharma Industries, as Sun Pharma currently spends 35-40% of its research and development (R&D) expenses for innovative research, which will be saved on the de-merger. On the other hand, the NDDS technologies developed by SPARC would help Sun Pharma to launch new NDDS products in various markets where it has a presence.
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For lack of information, we are maintaining our earlier estimate for SPARC at Rs54 per share. And as per our earlier estimate, the base business is valued at Rs1,287 per share. Hence, our target value for Sun Pharma remains at Rs1,341 per share.
Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs774
Good performance
Sales highlights
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Tata Motors (TAMO) has reported decent numbers for February with an overall growth of 19% as its total sales rose to 53,707 units in the month from 45,113 units last February.
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The growth in the commercial vehicle segment continues to be strong despite the high base of last year. The segment recorded a 22% growth in February. The medium and heavy commercial vehicle segment saw a growth of 19.4% while the light commercial vehicle sales grew by 25.3% year on year (yoy).
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The passenger car sales were slower in February compared with that in the earlier months, with an overall growth of 12.8%. Indica reported sales of 12,580 units (up 19% yoy) while the Indigo family registered a decline of 6% in sales.
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The utility vehicle segment reported a phenomenal growth of 40.7% during the month, led by the strong sales of both Sumo and Safari. Safari sales grew by a staggering 258% to 2,009 units.
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TAMO's exports for the month stood at 4,526 vehicles as compared with 4,257 vehicles in February 2006. That's a growth of 6% yoy.
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At the current market price the stock is trading at 12.3x its consolidated FY2008E earnings and at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.4x. We remain bullish on the stock and maintain our Buy recommendation with a price target of Rs1,075.
Transport Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs86
Current market price: Rs62
Results ahead of our expectations
Result highlights
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The Q3FY2007 net profit of Transport Corporation of India (TCI) registered a year-on-year (y-o-y) growth of 53.65% to Rs8 crore, in line with our expectations.
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The net revenues (excluding trading revenues) grew by 32.7% year on year (yoy) to Rs257.8 crore on the back of a 30.6% y-o-y growth in the combined revenues of the transport and supply chain divisions to Rs178.6 crore.
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The earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 59% yoy to Rs18.3 crore on account of a significant decline in its raw material costs arising from the closure of its petrol pumps. Consequently the EBITDA margins grew by 140 basis points yoy to 6.6%.
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The profit before interest and tax (PBIT) margins in the transport and express cargo (XPS) divisions improved by 70 basis points to 3.4% and 40 basis points to 8.3% respectively on account of higher capacity utilisation of the company's fleet whereas the margins in the shipping division declined on account of an increase in the fuel prices.
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The net profit at Rs8 crore grew by 54% yoy whereas the net margins improved by 80 basis points yoy to 2.9%.
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To capitalise on the growth opportunity, the company has lined up a huge capital expenditure (capex) plan of Rs430 crore to be implemented over the next four years. The capex plan broadly includes Rs150 crore for setting up warehouses, Rs120 crore for acquiring trucks and Rs100 crore for buying ships.
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The company plans to fund this capex through debt, internal accruals and fresh equity in equal measures. The equity issue is expected to be undertaken in two parts. The first equity issue of close to Rs75 crore will be done in the next couple of months. Hence we have assumed that the first tranche of equity will be raised at Rs65 per share in FY2008 whereas the second tranche of Rs75 crore will be raised at Rs75 per share in FY2009. Consequently we have adjusted our numbers factoring in the same.
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Considering the company's focus towards high-margin XPS and supply chain divisions as well as higher volumes from the transport division, we are upgrading our FY2007 and FY2008 profit after tax (PAT) estimates by 4.9% to Rs32.1 crore and 8.8% to Rs44.2 crore respectively. On the revised numbers, the earnings per share (EPS) would stand at Rs4.8 per share for FY2007 and Rs5.6 per share for FY2008.
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We expect TCI's net revenues to grow at a compounded annual growth rate of 21% over FY2006-08 to Rs1,330 crore. The net profit is estimated to register a 28% CAGR growth to Rs44.2 crore by FY2008. At the current market price of Rs62, the stock trades at 13x FY2007E earnings and 11x FY2008E earnings. Considering the bullish outlook for the company as well as higher profitability, we maintain our Buy recommendation with a price target of Rs86.
Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs362
US FDA nod for painkiller
Wockhardt has received the approval of the US Food and Drug Authority (US FDA) for marketing painkiller tablets, containing a combination of Dextropropoxyphene napsylate and Acetaminophen (DPN+APAP), in the US market. The DPN+APAP combination is the generic version of Xanodyne Pharma's patented product, Darvocet-N. It is one of the more potent analgesic drugs and is widely used all over the world for control of various kinds of pain.
SHAREKHAN SPECIAL
Q4FY2007 IT earnings preview
The street expectations have toned down considerably in terms of both Q4 performance and the annual guidance for FY2008, and the recent underperformance of the tech stocks indicates that the same has already been factored in the valuations. This essentially means that the negatives have been priced in, leaving limited scope for downside. But positive surprises, especially in terms of higher than expected annual guidance by Infosys, are not ruled out. However, the continued strengthening of the rupee and seasonal weakness in Q1 (due to wage hikes and additional visa related cost) would continue to influence sentiments on tech counters in the short run. We believe that any further weakness would be an opportunity to accumulate the front-line tech stocks and prefer Infosys and TCS.
MUTUAL GAINS
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SECTOR UPDATE
Automobiles
High interest rates affect two-wheeler sales
Hardening interest rates seem to be having a dampening impact on automobile sales, as the sales during March were lower than expectations despite the month containing a number of auspicious days like Gudi Padwa and Navratri. The impact seems to be more severe in the two-wheeler segment, particularly motorcycles, while four-wheelers continued to record decent growth.
Our checks also reveal that the auto finance companies have been extra careful while disbursing loans, hence the rejection rates have gone up in the past few months. To counter the effect of rising interest rates, auto-manufacturers are partnering with auto finance firms to offer loans at a lower rate to consumers. The cost of the same is being borne by the manufacturers, financers and the dealers. However, the same shall have a negative impact on the earnings of the companies.
Banking
CRR hike—negative for banks
The Reserve Bank of India (RBI) has surprised the market with another 50-basis-point hike in the cash reserve ratio (CRR) to 6.5% from 6.0% at present and a 25-basis-point hike in the repo rate to 7.75%. The CRR is a percentage of the net demand and time liabilities, read deposits, which the banks need to maintain in the form of cash balances with the RBI. The CRR hike would be in two stages of 25 basis points each (effective from April 14 and April 28 of this year). The hike is expected to absorb Rs15,500 crore of liquidity from the banking system. The RBI has also reduced the interest on CRR balances from 1% to 0.5%.
Information Technology
Rupee plays spoilsport
The sharp appreciation of the rupee against all the other major currencies in the past couple of weeks has dented the sentiments towards the tech stocks and rightly so. That's because the unexpected sharp appreciation in the rupee at the end of the quarter would not only adversely affect the fourth quarter's financial performance of the information technology (IT) companies but also have a strong influence on their annual growth guidance for FY2008.
Pharmaceuticals
Strong competition to limit gains from Zolpidem
Ranbaxy Laboratories has received a tentative approval from the US Food and Drug Administration (US FDA) to manufacture and market Zolpidem Tartrate tablets, of 5mg and 10mg strength.
Telecommunication services
TRAI reduces ADC burden
The Telecom Regulatory Authority of India (TRAI) has announced a reduction in the access deficit charge (ADC) levied on the private sector operators to provide support to Bharat Sanchar Nigam Ltd (BSNL) for its operations in unviable rural areas. The regulator has gone ahead with the decision to reduce the ADC despite a strong protest voiced by BSNL and it clearly reflects that TRAI intends to gradually phase out the ADC regime.
Tyres
Rubber's loss, tyre's gain
The easing of the rubber prices is a positive development for tyre makers, given the fact that rubber accounts for around 39% of the total raw material cost.
In the past, owing to a buoyant demand scenario, the tyre manufacturers had been able to pass on a large part of the increased cost of inputs to user industries. Most of the tyre majors have announced a number of price hikes in the last twelve months (in the region of 20-25%). In fact, a price hike was initiated in February this year to pass on the upmove in the rubber prices during January. Apollo Tyres raised its prices in the passenger car radial segment by about 2% while MRF Tyres raised the prices by about 1.5-2%. The price hikes has limited the adverse impact of the rising input costs on the margins of the tyre manufacturers. We have also noticed that the tyre prices tend to remain sticky and do not come down as sharply with a fall in the raw material prices.
VIEWPOINT
ABC Bearings
Expansion to drive growth
The bearing industry is expected to grow at a rapid pace of about 15-20% going forward. ABC is expected to keep pace with the industry. To cater to the strong demand, the company is expanding its capacity from the current 6.5 million units to about 8.0 million units by October 2007. The company would be able to do this at a minimal capital expenditure. With technological inputs from NSK it would be able to make all its lines "universal", capable of producing both taper as well as cylindrical bearings. At present, the company is operating at 100% utilisation.
Garware Offshore Services
Fleet expansion to drive growth
Incorporated in 1976, Garware Offshore Services Ltd (GOSL) is part of the Garware group of companies and involved in providing supply and support vessels to oil exploration & production (E&P) companies operating in offshore blocks.
Currently, the company has a fleet of six vessels: four anchor handling tugs (AHTs; deployed with Oil & Natural Gas Corporation [ONGC] with day rates of $4,500) and two platform support vessels (PSVs; one deployed with Transocean [day rate of $15,500] and another with British Gas on long-term charter at day rate of $14,500).
Glenmark Pharmaceuticals
An all-round growth
The recent developments on Glenmark are indicative of the management's aggressiveness in growing the company. The management has been undertaking an all-round effort to grow in all the different segments of the business, whether it is expanding its product basket in the USA and Latin America, entering new markets like Europe or creation and unlocking value from assets created out of its research and development (R&D) assets. Through selection of niche, difficult to manufacture products with limited competition for the US market, Glenmark has been able to capitalise on each of its products and grow its US business by leaps and bounds. The recent disclosure of its Para IV ANDA filing for generic Ezetimibe (for which it is the only ANDA filer till date) is reflective of the strong product selection strategy of the company. Further, Glenmark has positioned itself as a truly innovative, research-driven company by the successful creation and unlocking of value of its IP assets.
Glenmark is upbeat about its growth prospects for the next two years, with its US and Latin American business being the major growth engines. As per the company's projections, it is planning to grow at a CAGR of 52% over FY2006-08E to $379 million, with the profits growing at a CAGR of over 137% over the same period to $115 million. The company has given earnings per share (EPS) guidance of Rs23.6 per share in FY2007E and Rs43.8 per share in FY2008E. The projected EPS however includes the anticipated milestone payments of $31 million in FY2007 and $69 million in FY2008. On excluding the impact of the uncertain milestone payments, the EPS would reduce by 50%.
Matrix Laboratories
Mylan's exclusivity for Norvasc to benefit Matrix
Mylan, the US-based generic company, has been awarded 180-day exclusivity to market Amlodipine Besylate, the generic version of Pfizer's anti-hypertensive, Norvasc. India's Matrix Laboratories, in which Mylan had acquired a controlling interest in 2006, is the supplier of active pharmaceutical ingredients (APIs) to Mylan.
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