Fw: Investor's Eye: Pulse - Inflation for June 2012 at 7.25%; Thematic Report - (Closure of switch call from BoI to PNB with 14.3% returns); Update - Glenmark Pharmaceuticals (Price target revised to Rs468)

 

 

Investor's Eye [July 16, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK Inflation for June 2012 at 7.25% The Wholesale Price Index (WPI)-based inflation for June 2012 came in at 7.25% as against 7.55% in May 2012. The same was slightly below the market's expectation. However, the inflation rate for April 2012 has been revised upwards sharply to 7.5% from the provisional figure of 7.23% led by an upward revision in the fuel segment.  Outlook While the inflation rate for June has come in slightly below the expectation, it remains higher than the comfort level of the RBI. In addition, the inflation rate is being revised upwards for the previous months which points to a sustained pressure. Meanwhile, the core inflation has stabilised at 5% levels which gives some comfort. However, high food inflation and deficient rainfall coupled with the possibility of a fuel price hike will affect the outlook on inflation. This time around the market's expectation of a rate cut by the RBI is not significant but if the government takes any major action on the diesel pricing front the RBI may surprise with a 25-basis-point reduction in the CRR/repo rates.  THEMATIC REPORT Closure of switch call from BoI to PNB with 14.3% returns Switch call generates 14.3% absolute returns within five weeks: We had initiated the switch call in a report dated 8 June 2012, whereby we had recommended a switch from Bank of India (BoI; Rs353) to Punjab National Bank (PNB; Rs782). Since then, BoI has declined by 5.3% whereas PNB has appreciated by 9%, thereby generating an absolute return of 14.3% within a period of five weeks. The 14.3% return also compares favourably with the return of 2.7% given by the benchmark index (Sensex) and 5.5% given by the BSE Bankex over the same period.   Rationale for closing the switch call Valuation anomaly corrected; PNB at premium to BoI again: After the appreciation in PNB and the decline in BoI, the valuation anomaly has corrected substantially and PNB has moved back to commanding a premium over BoI now.   Quarterly results and RBI's policy could affect valuation: In the near term the Q1FY2013 numbers and the RBI's policy review will influence the stock prices. A firm inflation trend and a weak monsoon could deter the RBI from easing the rates which could negatively affect the bank stocks. The quarterly results may optically look good in terms of earnings growth (a 54% year-on-year growth for BoI and an 18% Y-o-Y growth for PNB) but the same may be affected by headwinds such as a rise in slippages/restructured loans, and a decline in the margins and business volumes going ahead.   Close the switch call: The strong outperformance of PNB over BoI, has given a handsome return of 14.3% in barely five weeks. However, in view of the fundamentals, we maintain our Buy rating on PNB and Hold rating on BoI.    STOCK UPDATE Glenmark Pharmaceuticals Cluster: Apple Green Recommendation: Buy Price target: Rs468 Current market price: Rs381 Price target revised to Rs468 Key points Click here to read report: Investor's Eye   Strong revival in FY2012: Glenmark Pharmaceuticals (Glenmark) reported a significant improvement in its performance in FY2012, which was marked by the launch of two exclusivity products in the USA and an out-licencing deal worth $613 million for its novel biological entity. In the same fiscal the company also recorded a healthy growth of 19% in the domestic market on the back of 20 new product launches in niche segments. The international business jumped by 43% on a higher licencing income and an exclusivity-led growth in the generics business. An out-licencing deal struck; a strong ANDA pipeline: Glenmark out-licenced another new biological entity (NBE) to Sanofi for an expected deal value of $613 million during the year, generating $50 million as an upfront payment. Its in-licenced molecule Crofelmer reached an advanced stage of clinical trials (passed the Phase-III trials) for HIV-related diarrhoea while it is undergoing Phase-III trials for another indication called "adult acute infections related diarrhoea". In all, of the seven new molecules in its pipeline, one completed Phase-III clinical trials while two molecules progressed to Phase-II clinical trials during the year. On the generic front, it got approvals for 14 abbreviated new drug applications (ANDAs) during the year. Cumulatively, it has 39 ANDAs pending approval from the US Food and Drug Administration (USFDA; including 17 para-IV filings) as of March 31, 2012. The company has focused on niche segments like oral contraceptives, dermatology and oncology. Cumulatively, it has a portfolio of 19 dermatology and 10 oral contraceptive products authorised for distribution in the USA by the end of this year. These products are also being launched in the other geographies. Impressive improvement in working capital management and return ratios: During the year, the company's working capital cycle contracted to 157 days (based on core revenues) from 225 days in FY2011, on tighter debtors and inventory management. This resulted in the unblocking of Rs213 crore of cash from the working capital. Besides, its return on equity (RoE) jumped to 28.5% in FY2012 from 18% in FY2011, partially due to the out-licensing income. The management has also stated that it does not have any major capital expenditure (capex) or acquisition plans over the next couple of years and would utilise the internal accruals to reduce debt. Forex, competition and R&D related uncertainty remain the key risks: A substantial exposure to the international market (accounts for 75% of revenue) and debts (80% of the debts are dollar-denominated) exposes the company to currency risk. Moreover, the long gestation period involved in the research and development (R&D) projects and the thin probability of success are the key concerns for the company. The company has a history of four out-licenced molecules dropping prematurely due to an inadequate outcome. The growing competition in some of the niche segments like dermatology and oral contraceptives may pose a threat to the profitability in these segments. Besides, the company is fighting a patent litigation over the generic launch of Tarka (Sanofi-Aventis' product) and an unfavourable decision may cause damage to the extent of $16 million.  Maintain Buy; revise price target to Rs468: We revised our R&D pipeline valuation from Rs65 to Rs88, mainly due to the improved visibility of part of its R&D pipeline (a higher probability factor). Also, our core business value stands increased by 9% to Rs380 (implies 15x FY2014E earnings) due to the roll-over of our valuation base to FY2014E earnings (from an average earnings of FY2013-14). Therefore, we set a price target of Rs468 and maintain our Buy rating on the stock. Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.