| Summary of Contents THE STOCK IDEAS REPORT CARD
FROM SHAREKHAN'S DESK
Year '007: Bonding with Bulls
The market had a jolly good run in 2006 and delivered a jaw-dropping return of 46%, despite the recurring concerns of rising crude prices, growing inflation, hardening interest rates etc. Triggered by an unprecedented and unrelenting boom in the economy the current bull run has lasted for four years now and lifted the market from the lows of 4227 in May 2004 to 14,000 levels. The question is, where is the Sensex going from here? Our twelve-month target for the benchmark index is 15,500-16,000 based on our expectations of a robust growth in India Inc's earnings, a positive Union Budget and benign global macro factors. The next few minutes of reading will tell you why we think that the Sensex might just achieve this target.
MARKET OUTLOOK
Setting sights on 16000
We expect the markets to reach 15500-16000 within the next twelve months. This appears a reasonable target given our expectation of a robust growth in corporate earnings, a positive Union Budget and benign global macro factors especially a possible rate cut by the US Federal Reserve (Fed) in mid-CY2007. With the global growth rate likely to moderate, inflationary pressures in the USA should ease in three to four months. India would continue to grow at a robust rate though and thus attract good foreign funds in line with the other emerging markets. This would lead to strong liquidity conditions and money supply will continue to grow at 19-20%. In this issue of Market Outlook, we have analysed the various positives and risks associated with our equity markets in the coming year. Our preferred sectors are those that are driven by domestic consumer demand and capital spending, and therefore are relatively insulated from a US slowdown. Thus sectors like automobiles, banking, capital goods and cement continue to remain our preferred bets.
Sharekhan top picks
In the December 2006 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on January 2, 2007, the return on this basket of stocks has been .12% as compared to the Sensex, which has given –0.21% returns and the S&P CNX Nifty, which has also given a -0.21% returns.
STOCK IDEA Fem Care Pharma
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs500
Current market price: Rs358 A name FEM(mes) trust Key points -
Leadership position in a niche category: Fem Care Pharma Ltd (FCPL) has a dominant market share (around 65%) in the niche segment of bleach cream. It is also among the leading players in the liquid soap and hair-removing categories. To boost its overall growth, the company has introduced several product variants at various price points to effectively tap the expected growth in the FMCG industry, especially the fast growing beauty treatment and skin care segments. -
Incremental growth from exports: In FY2006, FCPL acquired a US-registered premium bleaching cream brand, Jaquline, which has an established presence in the UAE and Middle-East markets. The company plans to utilise it as an umbrella brand to introduce skin care and beauty products, and boost the overall growth of its export business. -
Margins to firm up: The introduction of high-margin premium products has positively affected its operating margins. The company has also commissioned a new manufacturing facility in the tax-blessed region of Baddi, Himachal Pradesh. The fiscal incentives in the form of income tax and excise duty exemptions are further boosting its overall profitability. -
Consolidation of its marketing arm: The distribution of FCPL's products is done exclusively by its 60% subsidiary, Mirasu Marketing. FCPL is expected to acquire the remaining 40% stake (held directly by the promoters) in Mirasu Marketing over the next one year. The consolidation is likely to result in marginal dilution in its equity base (about 1-1.5% on the higher side) but would be earnings accretive. Attractive valuation: The consolidated revenues and earnings are estimated to grow at a CAGR of 17.5% and 48.3% respectively during FY2006-08. Currently the stock trades at 9.9x FY2007E and 8x FY2008E earnings. We recommend a Buy on FCPL with a price target of Rs500. Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs680
Current market price: Rs497 Product play Key points -
Niche player with established presence: Nucleus Software Exports Ltd (NSEL) is a niche player offering software products and services to companies in the banking and financial service space. It has established itself globally with product installation base of over 250 application modules in more than 30 countries. -
Product business drives growth: The product business grew exponentially in FY2006, on the back of some impressive order wins like the $12-million multi-year deal with GMAC. Apart from this, it added 21 new clients and bagged orders for 38 new installations in FY2006. In the first half of FY2007 also, the company added 14 new clients and continued to grow its pending order book that stood at Rs135 crore as on September 2006. Consequently, we expect the product revenues to grow at a CAGR of 67% over FY2006-08. -
Margins are sustainable: In spite of the cost pressures and the aggressive employee addition targets for this year, the company is likely to sustain its overall profitability. The growing contribution from the high-margin product business is expected to mitigate the adverse impact of the rising wage bill and the expansion-related pressures in the intermediate term. -
Alliance could throw positive surprises: The initiatives to forge joint marketing alliances with global technology giants and develop a network of channel partners could result in higher-than-expected order bookings. The partnership model has already started yielding results. -
Valuation: Revenues and earnings are estimated to grow at CAGR of 38% and 40% respectively over FY2006-08E. At the current price the stock trades at 11x its FY2008 earnings, which is relatively cheaper compared with the peer companies. We recommend a Buy on NSEL with a one-year price target of Rs680. Tata Elxsi
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs320
Current market price: Rs232 Designed to grow Key points -
Niche player with distinct competitive strengths: Tata Elxsi Ltd (TEL) has built the required scale of operations and established strong client relationships with leading global companies to effectively tap the huge opportunity emerging in the niche segment of product design and engineering space. In this space, the size of the opportunity for the domestic companies is estimated to more than double to $6.6 billion by 2010. TEL also has the advantage of having developed reusable components (intellectual property to provide faster and more valuable proposition to the customers) and is investing to boost its delivery capabilities in the high-end services like VLSI and chip design. -
Aggressive expansion plans: TEL has aggressive expansion plans in terms of the capital expenditure on physical infrastructure and employee addition. This clearly reflects the management's growing confidence in the revenue growth visibility over the next few years. -
Improving margins: The shift in the revenue mix in favour of the high-margin software development service business has significantly improved the company's operating margins in the past two years (up by 490 basis points to 19.8% in FY2006). The trend is expected to continue and further boost margins by 250 basis points during FY2006-08, in spite of the aggressive expansion plans and rising wage inflation. Attractive valuations and decent dividend yield: Revenues and earnings are estimated to grow at a robust rate of 26.8% and 34.5% respectively, during the period FY2006-08. Moreover, the company offers a decent dividend yield of 2.8% (based on the 65% dividend given in FY2006), which is likely to limit the downside risk. We recommend Buy call on TEL with a one-year target price of Rs320.
STOCK UPDATE Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,760
Current market price: Rs1,170 Open offer to hike stake in Sinvest Key points -
Open offer for Sinvest: Aban Offshore Ltd (AOL) is likely to fund the open offer to acquire an additional stake in Sinvest through the placement of a 25-30% stake in its subsidiary Aban Singapore Pte Ltd (ASPL) for around $250 million, as per media reports. This essentially means that ASPL is valued in the range of $833-1,000 million and has an implied value of Rs656-844 per share for AOL's remaining stake in ASPL. Adding this to the stand-alone value of AOL, the consolidated value per share works out to around Rs1,763-1,950. -
Earnings accretive: A successful acquisition of 100% stake in Sinvest through an open offer could strain the company's consolidated balance sheet but the same would be earnings accretive. After accounting for the additional debt on the books, the incremental share from Sinvest's earnings would add Rs35.4 to the earnings per share in FY2008 (and Rs45.6 in FY2009). Consequently, the acquisition of the additional stake would positively affect the valuation per share by Rs709 and Rs814 based on the incremental earnings in FY2008 and FY2009 respectively. Alphageo India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs214
Current market price: Rs155 Revision of earnings estimates
Alphageo has announced that its board has been authorised to issue and allot 5.5 lakh convertible warrants to the promoters at a price of Rs136 per share (ie a premium of Rs126 per share). The warrants are convertible within a period of 18 months and would enable the company to raise Rs7.5 crore.
In addition to the proceeds of the issue, the company is likely to take a debt of Rs10-12 crore to fund the capital expenditure (of around Rs18-20 crore) on setting up the third crew to carry out 3-D seismic study. Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,300
Current market price: Rs2,619 Pulsar 220cc launched in Pune Key points -
Bajaj Auto Ltd (BAL) has launched Pulsar 220 DTS-Fi in Pune. The national roll-out would take place by February 2007. This premium segment offering, priced at Rs84,000 (ex-showroom Pune), will be sold through BAL's Probiking network. -
BAL is looking to reduce its dependence on the 100cc segment. The company has plans to revitalise its Pulsar brand by launching its upgraded versions and following the same up with the launch of a 200cc Pulsar model in Q4FY2007. This launch would be in line with the management's strategy of focusing on the executive and premium motorcycle segments, where profitability is higher as compared with the entry segment. -
BAL's profitability was affected in Q2FY2007 due to the price reduction of Platina, an entry-level model. The company derives a large part of its profits from the entry segment. Though subsequently the price of Platina has been increased twice, the company's performance may not improve much in Q3FY2007 due to the higher selling costs being incurred. -
Though the profit margins are likely to remain subdued for a couple of quarters, the volume growth is expected to remain strong. The management has claimed that the company is on its way to recording its highest ever quarterly volume during the October-December quarter. -
At the current market price of Rs2,619, the stock discounts its FY2008E earnings by 17.3x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBITDA) of 10.5x. Based on our sum-of-parts valuation we maintain our Buy recommendation on the stock with a price target of Rs3,300. Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs185
Current market price: Rs165 Acquiring 76% stake in an Indonesian bank Key points -
Bank of India (BoI) is set to acquire a majority 76% stake in Indonesian bank, P T Bank Swadesi Tbk, at an estimated cost of Rs111.3 crore ($25 million). The deal will be completed in another couple of months, as certain clearance issues need to be sorted out. -
The Indonesian bank is a mid-sized bank, listed on the Jakarta Stock Exchange and has been operating in Indonesia for the last 38 years. It has an asset base of Rs445 crore ($100 million), a deposit base of Rs333.8 crore ($75 million) and a net worth of Rs48.9 crore ($11 million). -
The Indonesian bank has four branches, two each in Jakarta and Surayaba, and five sub-branches. International business contributes approximately 20% of BoI's assets as on September 30, 2006. -
BoI has been operating in Indonesia for the last 33 years through a representative office and hence its management felt that acquiring a local bank would be a better deal than setting up a bank in Indonesia as the capital requirements for setting up a new bank are high at Rs1,335 crore ($300 million). -
Since 20% of BoI's assets are from foreign operations, we feel that the deal would add value to the bank's overall operations considering the financials of the bank (refer table below). The bank acquired has an asset base of Rs445 crore (2% of BoI's international assets and 0.4% of BoI's total assets as on March 31, 2006) which we feel is fairly manageable. Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs202 GDL to operate Conware CFS
Gateway Distriparks Ltd (GDL) has won an operations and management (O&M) contract for the Conware container freight station (CFS) from the Punjab state government. The duration of the contract is 15 years. GDL will make an upfront payment of Rs35 crore and play an annual fee of Rs10 crore with an escalation clause of 5% on the same. The Conware CFS achieved a throughput of 55,662TEU and EBITDA of Rs13.8 crore in FY2006; the same translates into an EBITDA/TEU of Rs2,500. Genus Overseas Electronics
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs204 A Rs75-crore order from RSEB Key points -
With the recent order win of Rs75 crore from the Rajasthan State Electricity Board for the supply of single- and three-phase electronic energy meters (EEMs), the order book of Genus Overseas Electronics (Genus) has increased to Rs510 crore, which is approximately 2.2x its FY2006 sales. -
Genus is a leading manufacturer of tamper-proof EEMs, the demand for which is soaring because of the high transmission and distribution losses of the state electricity boards. -
We expect the company's revenues to grow at a CAGR of 39% during FY2006-08 on the back of the execution of its current order book. -
The order flow is expected to remain robust with the government's mission of "Power to all by 2012", and focus on 100% metering and replacement of old mechanical meters with EEMs fueling the growth. ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,020
Current market price: Rs820 ICICI Bank set to acquire Sangli Bank Key points -
ICICI Bank to acquire Sangli Bank: ICICI Bank, the country's second-largest bank is set to acquire Maharashtra-based Sangli Bank (SNGB) in an all-stock amalgamation deal valued at Rs303 crore. -
Details of the deal: The share exchange ratio has been fixed at 100 shares of ICICI Bank for every 925 shares of Sangli Bank. The proposed merger will result in issuance of additional 3.45 million shares of ICICI Bank, equivalent to about 0.4% of its existing equity share capital. JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs295
Current market price: Rs186 Yet to catch investor's fancy Key points -
JK Cement has put up an impressive performance in the first half of the current fiscal year. The company's leverage to cement prices has led to a massive 142% year-on-year (y-o-y) jump in its operating profit to Rs129 crore. Its operating profit margin (OPM) has expanded by a whopping 10% to 23.7%. The EBITDA per tonne has more than doubled to Rs717 from Rs297 in the same period last year. -
The company's power cost has dented its profitability significantly. Recognising the need to manage its power cost, the company had earlier announced its plans to set up captive power plants (CPPs), including a waste heat recovery plant, at its facilities at Nimbahera and Mangrol. The work on the CPPs is progressing well and the CPPs are expected to be commissioned on schedule. -
On setting up these power plants, the company will be able to save close to Rs2.5 per unit of power which will translate into savings of approximately Rs200 per tonne and of Rs60-70 crore in absolute terms. -
Recently the company completed the expansion of its grey and white cement capacities to 4,000,000 metric tonne (MT) and 400,000MT respectively. -
JK Cement has also embarked on an exercise to set up a 3.5-million-tonne greenfield facility at Karnataka at a total cost of Rs1,070 crore. The plant would get commissioned by the end of December 2008 and will cater mainly to Karnataka, Andhra Pradesh and pockets of Maharashtra and Goa. -
Going forward, the firm cement prices and higher volumes from the increased capacity will drive the company's top line. This coupled with the company's efforts to bring down the power cost would result in margin improvement and cause the earnings to grow at a compounded annual growth rate (CAGR) of 158% year on year (yoy) over FY2006-08. -
At the current price of Rs186 the stock is discounting its FY2007E earnings by 8.7x and FY2008E earnings by 6x. On an enterprise value (EV)/tonne basis, it is trading at USD77 per tonne whereas its closest peer, Shree Cement, commands a valuation of USD173 per tonne. -
Even after discounting for the efficient cost structure and the consistent performance of Shree Cement, we believe such a steep discount is unjustified and the stock should command higher valuations. Thus we maintain our Buy recommendation on JK Cement with a price target of Rs295. Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs670
Current market price: Rs582 USFDA nod for Trandolapril Key points -
Lupin has obtained a tentative approval from the US Food and Drug Authority (USFDA) for its abbreviated new drug application for Trandolapril tablets of strengths 1mg, 2mg and 4mg. Trandolapril is prescribed for the treatment of hypertension. -
Abbot Laboratories Plc, USA is the innovator of Trandolapril, which is sold under the brand name Mavik®. The annual sales of the product in the USA stood at approximately $53 million for the twelve months ended July 2006, based on IMS data. The product patent expires in June 2007. -
Lupin would launch the generic equivalent of the Mavik® tablets in US markets on receiving the final approval from the USFDA. The final permission is expected upon the expiry of the patent protection for the branded product in June 2007. -
Anticipating a 25% market share for Lupin at a 30% price erosion, we expect the product to generate revenues worth Rs27.8 crore (for the eight months after the expiry of the patent in June 2007) in FY2008. - At the current market price of Rs582, Lupin is quoting at 14.9x its FY2008E earnings estimate, on a fully diluted basis. Keeping in mind the strong business fundamentals and growth potential of the company, we maintain our Buy recommendation on the stock with a price target of Rs670.
Mahindra and Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs848 Price target revised to Rs1,050 Key points -
We are revising our price target for Mahindra and Mahindra (M&M) from Rs870 to Rs1,050 considering the continuing strong growth in its core businesses (mainly tractor) and the recent run-up in the prices of its subsidiaries, particularly Tech Mahindra. -
The growth in M&M's core business continues and shall be further fuelled by new launches like Ingenio and Shaan. Further, the launch of its new passenger car Logan next year, is not only a positive for its domestic business, but also opens further export possibilities. -
M&M's subsidiaries have been performing splendidly in the recent times. Tech Mahindra delivered a strong performance in the last quarter. Its robust order book should further drive up valuations. The plans for Systech are also on track with the management planning to make it a US$1 billion company by FY2009. -
We maintain our Buy recommendation on the stock with a revised price target of Rs1,050. At the current market price of Rs848, the stock quotes at 12.7x its FY2008E consolidated earnings. Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs634
Current market price: Rs547 De-coding Egyptian market Key points -
Marico has entered into a strategic alliance with Cairo-based Pyramids Group for the latter's Rs40-crore hair care brand, Hair Code. The Hair Code range includes hair creams, hair gels and gel creams. The brand has a market share of about 23% in the Rs170-crore pre- and post-wash hair care market in Egypt. -
With the acquisition of Hair Code, Marico will now have a dominant share (of about 50%) of the hair care market. It already has a strong presence in this market, thanks to its earlier acquisition of Fiancée. -
A back-of-the-envelope calculation shows that this deal will be earnings accretive, as it will add Rs0.1 or 0.6% to Marico's FY2007E earnings per share (EPS) and Rs0.5 or 2.2% to its FY2008E EPS. -
The stock is also trading at a price/earnings ratio (PER) of 21.8x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.3x FY2008E. We continue to remain bullish on Marico and reiterate a Buy on the stock with a price target of Rs634. New Delhi Television
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs260
Current market price: Rs230 Not quite the ugly duckling Key points -
New Delhi Television (NDTV)'s performance on the bourses has remained sluggish over the last few months due to increased competition and the company's unimpressive Q2FY2007 results. -
While the other media companies like Zee Telefilms and Television Eighteen India (TV18) have soared on catching the investors' fancy, NDTV has lagged behind in the last three months. If we compare the market capitalisation to sales (Mcap/Sales) of the major media companies, we find that the gap between the valuation of these companies and that of NDTV is alarming. This leads us to believe that the market's reaction to NDTV's non-performance is overdone. -
NDTV has two potential triggers. One, the demerger of Zee News and the listing of Global Business News (GBN), which would provide better valuation comparables. Two, a new business model that would provide more clarity about the news business, leading to improved valuations. -
We see merit in NDTV's media property and evolving business model, and continue to maintain a Buy on the stock with price target of Rs260. ORG Informatics
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs190
Current market price: Rs173 $10mn raised through GDR issue
ORG Informatics has successfully raised $10 million through a global depository receipt (GDR) issue in the overseas markets. The issue has been priced at around Rs155 per share and would result in dilution of the equity base by 28.6 lakh shares. The company has also done a preferential issue of 6 lakh warrants to investors at an average price of Rs170 recently. Consequently, the fully diluted equity base would expand to Rs17.2 crore, up from Rs13.7 crore. Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs384 Be-Tabs to be earnings accretive Key points -
Ranbaxy Laboratories Limited (Ranbaxy) has acquired a 100% stake in Be-Tabs Pharmaceuticals Limited (Be-Tabs) of South Africa, for a total consideration of $70 million (500 million ZAR). -
Be-Tabs is the fifth largest generic company in South Africa. It is the largest manufacturer of penicillin formulations and markets and manufactures a portfolio of ethical and over-the-counter (OTC) solid-oral and liquid formulations in South Africa. Be-Tabs has annual sales of approximately $30 million, with earnings before interest, tax, depreciation and amortisation (EBITDA) margin of about 13%. -
The acquisition of Be-tabs will complement Ranbaxy's existing business in South Africa. Ranbaxy currently derives $20-25 million of revenues from South Africa. The acquisition of Be-tabs will double Ranbaxy's South African business. With a combined turnover of $50-55 million, Ranbaxy will now enjoy a market share of 1.6% in South Africa. -
At $70 million, the deal is valued at 2.2x sales and 7.7x EBIDTA. Even though the deal appears cheap when compared to other acquisitions, the price seems fair when viewed in light of the relatively lower EBIDTA margin and growth rate of Be-Tabs. -
Based on the back-of-the-envelope calculations, we believe that Be-Tabs would add $2.4 million (approximately Rs11 crore) to Ranbaxy's bottom line in CY2007E. Due to Ranbaxy's large equity base, we believe that the impact on the earnings per share would be marginal. -
At the current market price of Rs384, Ranbaxy is quoting at 20.8x its CY2007E estimated earnings, on a fully diluted basis. We maintain our Buy recommendation on Ranbaxy with a price target of Rs558. Shree Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs1,700
Current market price: Rs1,333 Joining the big league Key points -
Shree Cement has lined up capital expenditure (capex) of Rs1,200 crore for the next couple of years to augment its cement capacity to 10 million tonne from the current 4.5 million tonne. -
The company is setting up three more captive power plants (CPPs) of 18 megawatt (MW) each to cater to the incremental capacities. The total CPP capacity of 99MW by FY2009 will help the company to cater to 100% of its power requirements. The entire capex (cement capacity + CPP capacity) will be funded through a mix of internal accruals and debt. -
The company's recent announcement to set up a 2 million metric tonne (MMT) grinding unit at Khushkera (in the proximity of National Capital Region [NCR]) is strategically advantageous, as it will enable it to cater to one of the fastest growing regions in the country. It would also help it to procure fly ash from the power plants in the region, thereby optimising its inward and outward freight costs. -
The company's current CPPs use and all the future CPPs would use pet coke as a feedstock. With the crude oil prices coming down, one may be able to witness higher savings on account of lower pet coke prices. -
The year-till-date cement dispatches of Shree Cement grew by a staggering 54% year on year (yoy) to 3.1 million tonne, fuelled by the recent commissioning of the 1.5MMT plant at Ras. -
We expect the company to register a net profit growth of 71% over FY2006-08E. At the current market price of Rs1,333, the stock is trading at 14x its FY2007 earnings and 10.4x its FY2008 earnings, and commands an enterprise value (EV) per tonne of USD186. Looking at the sanguine outlook for the company, we maintain our Buy recommendation on its stock with a price target of Rs1,700. State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,380
Current market price: Rs1,236 PLR hike to improve margins Key points -
SBI hikes PLR by 50 basis points: State Bank of India (SBI), the country's largest bank, has announced a 50-basis-point hike in its prime lending rate (PLR) to 11.5% effective from December 27, 2006. -
SBI had hiked deposit rates by 25-75 basis points: SBI had earlier announced a hike in its term deposit rates by 25-75 basis points effective from December 11, 2006. -
PLR hike to improve NIM: SBI's net interest margin (NIM) is expected to improve by five basis points on an annualised basis, considering the net effect of the 50-basis-point hike in the PLR and the increase of 25 to 75 basis points in the deposit rates. -
CRR hike to be a drag on the bank's profitability: The cash reserve ratio (CRR) balances of banks have stopped earning interest post-June 2006. Also the impact of this on market liquidity will push the cost of funds higher for the banks. Both the factors are a drag on SBI's profitability. -
An 8.5% equity dilution factored in: We have factored in an 8.5% equity dilution (based on the current equity of Rs526.3 crore) in our valuation for the FY2008E numbers. -
We maintain Buy on SBI: We have valued SBI at 1.4x FY2008E consolidated book value of Rs955 plus another Rs57 per share for its life insurance subsidiary. At the current market price of Rs1,236 the stock is quoting at 12x its FY2008E earnings per share (EPS), 5.7x FY2008E pre-provision profit (PPP), 1.7x FY2008E stand-alone book value and 1.3x FY2008E consolidated book value. We maintain our Buy recommendation on the stock with the price target of Rs1,380. Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,200
Current market price: Rs1,017 Awaiting demerger Key points -
Sun Pharmaceutical Industries' (Sun Pharma) domestic formulation business has been growing in line with the industry, clocking growth rates of around 15-17%. With approximately 30 new launches per year and a strong brand building capability, we believe Sun Pharma's domestic business will continue to grow by 16-17%. -
An abbreviated new drug application (ANDA) pipeline of 56 pending approvals combined with the 30+ filings per year is likely to translate into strong growth for Sun Pharma's US business. We anticipate Sun Pharma's US business to reach Rs515.6 crore and Rs688.1 crore in FY2007E and FY2008E respectively. Further, Sun Pharma has roughly seven Para IV litigations, a favourable outcome of which will result in further gains. -
Capitalising on the huge opportunity in the rest of the world (ROW) markets, Sun Pharma is replicating its successful domestic strategy of targeting niche and chronic segments in branded generic markets. Sun Pharma has 750 products registered and another 300+ products pending approval in these markets. We estimate Sun Pharma's formulation revenues in the ROW markets to grow at a compounded annual growth rate (CAGR) of 59.2% over FY2006-08E. -
The demerger of Sun Pharma's innovative research division is likely to be completed by the end of the current fiscal. Sun Pharma's innovative research and development (R&D) pipeline currently consists of one new chemical entity (NCE) and two novel drug delivery system (NDDS) products. The NCE is an anti-allergic molecule undergoing Phase II trials in the USA, whereas the NDDS products are waiting for the USFDA signal to commence the Phase III trials directly. Considering the reduced R&D expenses post-demerger and the implications of the same, we estimate the demerger to add Rs2.1 and Rs2.6 per share to the estimated FY2007 and FY2008 earnings respectively. -
At the current market price of Rs1,017, Sun Pharma is quoting at 22.2x its estimated FY2008 earnings. As per the sum-of-the-parts valuation, the base business is valued at Rs1,081 per share, the demerger would add Rs66 to Sun Pharma and the demerged R&D company would be valued at Rs54 per share. This gives us a fair value of Rs1,200 for Sun Pharma. Hence, we maintain our Buy recommendation on Sun Pharma with a revised price target of Rs1,200. Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,325
Current market price: Rs1,192 Orders galore Key points -
Large orders bagged: Tata Consultancy Services (TCS) has bagged seven large outsourcing deals in the past six weeks, amounting to a combined value of over $500 million. The clients are from diverse industry domains and geographies. -
Boosting the Chinese operations: TCS has secured a $100-million order from the Bank of China, which is one of the largest outsourcing deals from China to an Indian vendor. Moreover, the induction of the global technology major Microsoft Corporation as a strategic investor with a 10% stake in its Chinese subsidiary, TCS China, also augurs well for the company's growth plans in China. -
Maintain Buy call: At the current market price the stock trades at 29.3x FY2007 and 23.3x FY2008 estimated earnings. We maintain our Buy call on the stock with price target of Rs1,325. Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,004
Current market price: Rs863 All set for its Thai foray Key points -
Tata Motors has announced that it is setting up a joint venture with a Thailand-based company, Thonburi, to manufacture, assemble and market pick-up trucks. -
We believe that such a joint venture would be a win-win situation for both Tata Motors and Thonburi. The venture provides Tata Motors an entry into the Thai market, which is the world's second largest pick-up vehicle market. The market size for pick-ups in Thailand currently stands at 450,000 units and is expected to grow at a good pace going forward too. Tata Motors is targeting to sell 30,000 vehicles a year over three years. -
Tata Motors is specially developing a pick-up vehicle for the Thai market with a 3.0-litre Dicor engine and is looking to price the model competitively. The vehicle would have an initial local content of 50% which shall be later scaled up to 80%. -
Separately, Tata Motors and Fiat Auto have announced an agreement for the formation of a joint venture. The two companies would invest Rs4,000 crore to set up a facility in Ranjangaon to manufacture 100,000 cars and 200,000 engines and transmissions per annum. Fiat Auto would introduce its two vehicles in the B and C segments, and would also manufacture its "Fire" family engines through the venture. -
Tata Motors would also benefit from the joint venture with the Italian company, as the same would provide it access to Fiat Auto's world-class powertrain technology. The engines produced through the joint venture may also be used for forthcoming models of Tata Motors, resulting in both time and money savings for the Tata group company. -
At the current market price of Rs863, the stock trades at 12.8x its FY2008 earnings and 8x its enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,004. Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs262 Niche Generics to have marginal impact Key points -
Unichem Laboratories Ltd has acquired the balance 40% stake in its subsidiary, incorporated in the United Kingdom, Niche Generics Ltd, from a group of managers of Niche Generics. -
Prior to this acquisition, Unichem held a 60% majority stake in the said Niche Generics. -
Niche Generics, UK, is engaged in the business of product development, dossier filing and manufacturing pharmaceutical formulations for the European markets. -
Niche recorded revenues of GBP12.3 million (approximately Rs108.2 crore) in FY2006, with profits of GBP0.1 million (approximately Rs0.9 crore). The performance of the company has been poor largely due to the severe pricing pressures being witnessed in the UK generics market. -
We do not expect the acquisition to impact the profitability of Unichem significantly. However, strategically the company may exploit the strengths like product development, dossier filing and manufacturing of the wholly-owned subsidiary and may accelerate its fillings in the European region, leading to an expansion of its footprint across Europe. -
At the current market price of Rs262, the stock is trading at 9.2x its estimated FY2008E earnings. We maintain our Buy recommendation on the company with a price target of Rs360.
SHAREKHAN SPECIAL Tamil Nadu joins the VAT club VAT, or the value-added tax as it is popularly known, is clearly gaining ground, with Tamil Nadu state government also deciding to implement the new taxation system in the state from the first day of the next year. VAT, which seeks to simplify the tax structure and create a uniform common market within the country, replaced the sales tax in India on January 4, 2005. It was adopted by all but three states though: Tamil Nadu, Pondicherry and Uttar Pradesh. Now even Tamil Nadu has jumped on the VAT bandwagon. The development calls for a relook at the new taxation system. Ultra mega power projects under way The bids for two ultra mega power projects (UMPPs) at Sasan and Mundra were opened today. A total of 16 bids were received for the two projects. Ten companies had bid for the Sasan project, which will be based on pithead coal, and six had bid for the Mundra project, which will be based on imported coal. The investment per project will be in the range of Rs16,000-20,000 crore. Hyderabad-based Lanco Infratech, in association with the Singapore-based Globeleq, has won the bid for the country's first UMPP coming up at Sasan in Madhya Pradesh.
Lanco Infratech beat Tata Power, Reliance Energy and NTPC by offering a price of Rs1.19 per unit. The power ministry had set a benchmark of Rs1.60 per unit.
Tata Power with a development agreement with Siemens Project Ventures has emerged as the lowest bidder for the 4,000MW Mundra UMPP with a tariff of Rs2.26 per unit.
MUTUAL GAINS Sharekhan's top equity fund picks We have identified the best equity-oriented schemes available in the market today based on the following parameters: the past performance as indicated by the returns, the Sharpe ratio and Fama (net selectivity). The past performance is measured by the returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.
SECTOR UPDATE Banking CRR hike—negative for banks
The Reserve Bank of India (RBI) has surprised the market with a 50-basis-point hike in the cash reserve ratio (CRR), which is a percentage of the cash balances that the banks need to maintain with the central bank. The CRR has been raised from 5% in two stages of 25 basis points each (from December 23, 2006 and from January 6, 2007) to 5.5%. The hike is expected to absorb Rs13,500 crore of liquidity from the banking system. Cement Concrete road ahead Key points -
Continuing with the growth momentum of the past few months, the cement dispatches for November grew by a strong 13% year on year (yoy) to 12.4 million tonne against a marginal growth of 5% in the same month last year. The cement prices followed suit, surging by 25-30% yoy to the levels of Rs205-210 per 50-kilogram bag for the month. -
The southern region witnessed the highest year-on-year (y-o-y) growth in dispatches in the month at 18%. -
With all the three demand drivers, ie the housing, industry and infrastructure sectors, showing strong signs of growth, the consumption of cement is expected to grow at a compounded annual growth rate (CAGR) of 10-10.5% for the next three years. -
In such a scenario, we expect the cement prices to sustain at the current levels for as long as beyond FY2009. That the industry shares our expectations is evident from Sanghi Industries' recently-announced plan to scale up its cement capacity by 5.7 million tonne over the next two to three years. Even the cash-rich companies including Shree Cement (which is already raising its capacity from 4.5 million metric tonne [MMT] to 10MMT) are looking to expand further and this only reinforces our view that cement prices will remain buoyant for the next two to three years. -
Tamil Nadu will implement the value-added tax (VAT) with effect from January 1, 2007, migrating to a sales tax rate of 12.5% from 14.5% currently. This will spell good news for the south-based cement companies, namely India Cements and Madras Cement. -
Recently, Holcim upped its stake in Gujarat Ambuja Cement Ltd (GACL) by 3.7% to 18.67% for a price of Rs690 crore. This translates into a mammoth enterprise value (EV) of USD270 per tonne. We believe the stake hike would provide a fresh trigger for the cement stocks that have under-performed the Sensex in the last three months. -
We maintain our positive view on the cement sector and believe that the companies that have taken a lead in announcing capacity expansions, such as Grasim Industries, Shree Cement, Jaiprakash Associates, UltraTech Cement and Madras Cement, will benefit the most in a scenario of buoyant prices. We rate Grasim Industries, UltraTech Cement and India Cements as our top large-cap picks in the sector. Among the mid-caps we like Shree Cement and Madras Cement. We also like Orient Paper and Industries and JK Cement on account of their compelling valuations, which are much less than the sector average. Information Technology A technical snag
It is a tough quarter for the domestic information technology (IT) service companies. The performance in the third quarter would be severely dented by the double impact of lower number of working days and the appreciation of the rupee.
VIEWPOINT Glenmark Pharmaceuticals Flying high on milestone receipts
Glenmark's base business has been maintaining a steady growth on the back of the strong growth in the Latin American markets and the expanding product basket in the US market. On the other hand, the anticipated milestone payments from the out-licenced and potential out-licenced molecules enhance the earning visibility for the stock. We maintain our confidence in Glenmark. At the current market price of Rs579, the stock discount the consensus FY2007 and FY2008 earnings per share by 26.7x and 19.7x respectively.
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