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.
Grasim Industries Cluster: Apple Green Recommendation: Hold Price target: Rs2,500 Current market price: Rs2,307
VSF price hiked by Rs6 per kg
Grasim Industries has increased the price of viscose staple fibre (VSF) by Rs6 per kg from the beginning of March 2011. This is the second price hike implemented by the company during the ongoing quarter (ie Q4FY2011) so far and with this the realisation of the company now stands at around Rs135 per kg. The present level of realisation is at an historic high due to the strong demand for VSF products in both the domestic and the global market. The demand for VSF is supported by the high price of competing fibres like cotton.
Given the improvement in the global demand environment for VSF, the performance of the division continues to shine in terms of volume as well as realisation. Going ahead, we believe the profitability of the division will remain healthy due to the rising price of the competing fibres. However, its cement division is under pressure due to poor cement offtake and unfavorable demand-supply scenario. Further, cost inflation in terms of the rising price of imported coal remains a key concern as the company procurers about 35% of its total requirement through imports. On the valuation front we continue to value the stock using the sum-of-the-parts valuation methodology and maintain our price target at Rs2,500. We also maintain our Hold rating on the stock. At the current market price the stock trades at a price/earnings ratio of 8.8x discounting its FY2012 estimated EPS.
United Phosphorus Cluster: Ugly Duckling Recommendation: Buy Price target: Rs218 Current market price: Rs137
Acquisition presents opportunity to tap Brazilian market
Untied Phosphorus Ltd (UPL) has entered into an agreement to acquire a 50% stake in Sipcam Isagro Brazil (SIB) from Isagro. SIB is a 50:50 joint venture (JV) between Sipcam ? Oxon Group and Isagro. The deal will go through by Isagro exiting the JV completely via a stake sale to UPL. Post the deal UPL and Sipcam will hold 50% each in the JV.
We view the acquisition as a positive step in making UPL a truly global agrichemical player. It would enable UPL to enter the high-growth Brazilian market adding US$55 million (as per Isagro?s latest annual report, the JV posted a top line of $109 million for CY2009) to its top line. Further, though the details are not available, looking at UPL?s historical track record and its acquisition target of achieving payback in less than five years, we believe that this acquisition would also have qualified the same criterion. In view of the impending deal closure (expected to close in one month?s time frame), we keep our estimates unchanged and continue to have a bullish view on the stock with a Buy recommendation and a target price of Rs218. At the current market price, the stock trades at 7.5x its FY2012E earnings.
HDFC Bank Cluster: Evergreen Recommendation: Hold Price target: Rs2,240 Current market price: Rs2,177
Valuation remains on the higher side We recently interacted with the management of HDFC Bank to get a view on the bank?s growth prospects in the emerging environment. We believe the bank will continue to grow its advances by 25-26%, led by a strong uptick in credit demand from the retail segments. With a capital adequacy ratio (CAR) of 16.3% and tier-I CAR of 12.1%, the bank is adequately capitalised to support its strong growth targets. However, the premium valuation (3.5x FY2012 book value) factors the positives leaving little room for upside. We, therefore, maintain our Hold recommendation on the bank with a price target of Rs2,240.
SECTOR UPDATE
Construction
Is the worst behind us?
Key points
Problems persist at both ends?lack of new orders and slowdown in execution: Order slowdown, delay in execution, rising input costs and rising interest rates are the key concerns playing a havoc in the infrastructure sector since the start of the fiscal.
Slowdown in award of projects: Poor macro fundamentals (high fiscal deficit and inflation) along with various scams hitting the government have adversely impacted the announcement and awarding of new projects. The problems at the UPA government?s end are getting complicated day by day and are having direct repercussions on the infrastructure spending. The project awarding activity has been continuously declining since the last three quarters. The fourth quarter until now has been no different. Further, five states are likely to go for state assembly elections in Q1FY2011. Thus the order slowdown is likely to continue over the next three-six months.
Execution delays: To make matter worse, companies faced various execution hurdles on their existing projects, which resulted in time and cost overruns. Delays in execution were caused by delays in land acquisition, delays in getting environmental clearances and delays in getting other procedural approvals. This can be corrected only by changing and strengthening various government policies, which looks unlikely to happen in the short term given the current macro environment. Thus problems persist at both ends, thereby hampering the growth of the companies and blurring future visibility. A pick-up in order inflow and execution remain the key monitorables for a re-rating of the infrastructure stocks.
However, we see positive signals amidst negative environment
Land acquisition?states show the way: Though land acquisition has been one of the key reasons for delay in execution of projects, state governments are coming up with innovative ideas which are likely to speed up the land acquisition process. The Haryana government was the first one to come out with a policy wherein it offers annuity for 33 years in addition to upfront market-rate-based compensation for the land acquired by the state. This has been implemented by some other state governments as well and the central government is also considering to implement it at the national level.
Softening stance of MoEF?clearances have started coming in: The environment minister Jairam Ramesh is softening his earlier hard stance by lifting the moratorium on development projects in 25 areas of the 43 areas in order to strike a balance between economic growth and environment. In the recent few weeks, a few key large projects have been given environmental clearances. Further he is planning to raise the comprehensive environment pollution index (CEPI) threshold score from 70 to 75 which will result in 16 coal projects getting approval.
23% higher allocation towards infrastructure spending?shows the intent of the government: As the broader growth gets constrained due to lack of infrastructure in the country, the budget has increased the allocation for the infrastructure sector by 23% to Rs2.14 lakh crore as compared to an overall increase of just 3.4% in total spending. This shows the supportive intent of the government towards the sector as a whole. Further FY2012 being the last year of the XIth Plan, infrastructure spending is expected to pick up which will improve the order inflows for the sector. Further, a recovery has been witnessed in foreign direct investment (FDI) which will have a trickledown effect on the new projects getting announced. In addition, the easing of the foreign institutional investor (FII) limit in the budget too is a positive step towards increasing the investment in the infrastructure segment as it will fuel growth in the medium to long term time horizon.
Attractive entry point for long term investors
Given the above mentioned concerns, the whole sector has underperformed significantly and corrected by 30-40% in the past three months. Further they have corrected by ~50% year till date (YTD) as compared to 3% upside witnessed by the sensex. Infact the stocks are down 70-80% from their peaks witnessed in January 2008 vis-?-vis a 14% fall witnessed by the Sensex for the commensurate period. After the steep correction, the valuations have turned attractive and most of these stocks are trading at a 30-40% discount to their long-term average valuation. The sharp correction and the on-going underperformance in the infrastructure stocks offer very attractive entry points for the long term investors with a horizon of one to two years.
We like IL&FS Transportation Networks (India) Limited (ITNL) and IRB Infrastructure among the larger players as new project awarding activity is likely to pick up from the NHAI end. Further we like Pratibha Industries among the smaller players, given its strong order inflow in FY2011 so far compared to other players and its strong financials.
