Fw: Investor's Eye: Update - Cadila Healthcare (Taxotere approval a positive), IT (Benefit from currency movement to be marginal)

Investor's Eye [March 10, 2011]  Sharekhan www.sharekhan.com Summary of Contents STOCK UPDATE Cadila Healthcare  Cluster: Emerging Star Recommendation: Buy Price target: Rs861 Current market price: Rs767 Taxotere approval a positive Hospira has received the final approval to market the generic Taxotere in the USA. Taxotere is primarily used in treatment of breast, lung and other types of cancer and has a market size of $1.2 billion.  Cadila Healthcare had already started the supplies of Taxotere and Gemcitabine (another product under the agreement) to Hospira during Q3FY2011. The approval of Taxotere will result in a strong revenue growth while that for Gemcitabine (approval awaited) would ramp up the growth in the US market. Cadila plans to launch two to three products in the USA (still under registration) in FY2012 which would enable a rapid growth in the next few years. We expect the largest thrust to come in FY2012 with the beginning of supplies to the US market. We estimate the joint venture to report revenue compounded annual growth rate of 24% over FY2011-13.  The growth from the Hospira joint venture and the incremental income from the expanded Nycomed facility will provide further cushion to the growth. Moreover, the Abbott deal will also start contributing to the revenues in FY2012 and thus aid the growth. Cadila Healthcare plans to start filing for transdermal products in FY2012, in line with our expectations. This boosts our long-term confidence in the company. At the current market price of Rs767, the stock is available at valuations of 22.9x FY2011E, 18.8x FY2012E and 15.2x its FY2013E earnings. We maintain our Buy recommendation on the stock with a price target of Rs861. SECTOR UPDATE Information technology Benefit from currency movement to be marginal Over the last three months, the US dollar (USD) has appreciated against both the cross currencies ie the Euro and the British Pound (GBP). Against the Euro, the USD has appreciated by 5.1% reaching a spot rate of 1.3908 and against the GBP the US dollar has appreciated by 2.7% reaching a rate of 1.6202. However, a look at the average rates for the quarter till date (the exchange rate that is assumed for translation of cross currency transactions by information technology [IT] companies) and the average rates for the sequential quarter suggest the cross currency rates have remained flattish. The average Euro/USD rate for Q3FY2011 was 1.36 and for the current quarter ie Q4FY2011 till date it is the same at 1.36. As for GBP/USD, the rate has appreciated from 1.58 in Q3FY2011 to 1.60 for the current quarter. This would mean a minimal benefit for the IT companies on the cross currency front. Comparing the current quarter average rate with the exchange rate assumptions taken by Infosys Technologies and Wipro, we see a marginal benefit of the cross currency movement to the revenues of the two companies. The cross currencies have moved favourably for the IT industry. However, the benefit of the favourable movement would be minimal as companies generally book revenues on the quarter?s average rate which has remained flat sequentially till date. We continue to remain optimistic on the secular demand trend for the sector in FY2012 with a broad based demand uptick across the key industry verticals. On the other hand, discretionary spends are expected to gather momentum in the coming quarters with more transformational deals coming to the table. On the flip side, we expect margins to remain under pressure owing to higher people related costs as we expect wage hikes for FY2012 to be higher than wage hikes in the earlier years. We expect the IT sector to continue to enjoy a premium valuation over the market owing to strong earnings momentum, immunity to increase in interest rates (most of the companies are cash rich and are likely to benefits from increasing yield on investments) and strong corporate governance.   Click here to read report: Investor's Eye   Regards, The Sharekhan Research Team myaccount@sharekhan.com  Manage your newsletter subscriptions