Fw: Investor's Eye: Pulse - (IIP growth remains tepid); Update - Apollo Tyres (Price target revised to Rs105), Cadila Healthcare (Price target revised to Rs1,064)

 

 

Investor's Eye [September 12, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK IIP growth remains tepid In July 2012 the Index of Industrial Production (IIP) grew by 0.1% after showing a decline of 1.8% in June 2012. The lower than expected growth in July IIP was mainly due to degrowth in the manufacturing and mining segments. Based on three monthly moving average's also the IIP growth is 0.3% vs 6.5% in July 2011. The manufacturing sector saw a decline of 0.2% year on year (YoY) as against a decline of 3.1% YoY seen in June 2012. The mining output declined by 0.7% as against growing by 0.2% in June 2012 whereas the electricity output grew by 2.8% vs an 8.8% growth in June 2012. In the use-based category, the consumer goods grew by 0.7% YoY driven by a 1.4% growth in the durable consumer goods. The production of capital goods reported a decline of 5% vs a decline of 28% in June 2012.  On a sequential basis (month on month [MoM]) the IIP declined by 0.7% in July 2012 to an absolute figure of 167.3 (168.4 in June 2012). The manufacturing segment declined by 0.7% MoM led by a 1.7% month-on-month (M-o-M) decline in the consumer goods segment. The mining segment reported a decline of 0.5% MoM followed by a 0.4% M-o-M decline in the electricity segment.  Growing risk of prolonged growth shock but RBI unlikely to cut policy rates: The highlight of the July IIP figures was the sharp deceleration in the consumer segments (on yearly and sequential bases) and contraction in almost 14 industry groups (out of the total 22 groups) of the manufacturing segment. But in spite of the growing risk of a deeper and more prolonged growth shock, the RBI is unlikely to reduce the policy rates in the forthcoming review meet due to the persistently high fiscal deficit and the inability of the government to take bold policy decisions.   STOCK UPDATE   Apollo Tyres Cluster: Apple Green Recommendation: Hold Price target: Rs105 Current market price: Rs100 Price target revised to Rs105  Natural rubber prices rebound following global stimulus but may remain in a range as we approach the peak tapping season Rubber prices have increased by 6-9% in the last two weeks following the large liquidity enhancement programmes announced by China and Europe. However, we expect the revival to remain capped as we approach the peak tapping season of October-January. The current conditions are indicating a range-bound movement in natural rubber prices or stability at the current levels.  Apollo Tyres' margin in a sweet spot on improved fundamentals We believe Apollo Tyres is currently in a sweet spot in terms of margins. The combined effect of a better replacement mix, an improved radial mix, firm pricing and lower raw material cost would result in a margin surprise on the upside for the stand-alone operations. The operating profit margin (OPM) touched a low of 6.8% in Q2FY2012 and thereafter improved to 10.3% in Q1FY2013. We are now building in an 11% OPM expectation for the stand-alone operations for FY2013 against 10.3% estimated earlier.  Valuation: upgrading EPS estimates but retaining Hold recommendation We are upgrading the stand-alone earnings estimates as we assume a 70-basis-point margin improvement in FY2013 as compared with our previous estimates. Owing to the expectation of improved stand-alone earnings, our consolidated earnings per share (EPS) estimates for FY2013 and FY2014 stand revised upwards by 6.4% and 6.8% respectively.  The margin expansion expectations over the next two quarters are partially priced in the stock. The medium-term concerns of natural rubber prices hardening again and crude-linked raw materials firming up further have not receded. The probable ruling of the Competition Commission of India (CCI) against tyre companies is expected to be contested but the development may limit the pricing power of the industry. We now turn conservative and recommend Hold on Apollo Tyres with a price target of Rs105 per share. Cadila Healthcare Cluster: Emerging Star Recommendation: Buy Price target: Rs1,064 Current market price: Rs936 Price target revised to Rs1,064  Year of acquisitions, restructuring and rejuvenation: Year 2012 witnessed a series of acquisitions, commencement of supply of new products under joint ventures, increased focus on domestic markets and entry into newer business areas for Cadila Healthcare (Cadila). The company entered into the $7-billion controlled substance product market through the acquisition of Nesher Pharma Inc in the USA. It expanded its footprint in the global animal health product market through the acquisition of Bremer Pharma GmbH, Germany as well as expanded its presence in the Indian branded formulation market through the acquisition of Biochem Pharma in India. Growth tapered in FY2012; expect better performance ahead: Despite contributions from three newly acquired entities, the net revenue of the company increased by 14% to Rs5,090 crore in FY2012, which is the slowest in seven years. Excluding the contribution from the newly acquired entities, the growth would have been even lower at 12.5%. The slower growth is mainly attributed to weaker revenues from the consumer business in India and the generic business in the US and emerging markets. The net profit declined by 8% to Rs652.5 crore due to a decline in the operating profit margin (OPM), a rise in the effective tax rate and a foreign exchange (forex) loss of Rs118 crore. The adjusted net profit (excluding forex loss) jumped by 10.6% to Rs770 crore in FY2012. We expect the growth to pick up from FY2013 onwards on better traction in the business and newer streams of revenues.  Multiple growth factors: There are multiple factors that should lead to a pick-up in the revenue and profit growth during FY2013 and FY2014: (1) the US business would see better traction owing to ramp-up in abbreviated new drug application (ANDA) filings after the clearance of the Moraiya facility by the US Food and Drug Administration (USFDA); (2) the contribution from Nesher Pharma (only one quarter's revenues captured in FY2012) would increase; (3) revenues from joint ventures will increase due to additional products and geographical expansions; (4) the Mexican business, which got its organisational set-up in place during FY2012, shall start contributing; (5) better traction in the consumer business; and (6) Bremer Pharma (the animal healthcare business) to start contributing to the global business.  We revise upwards earnings estimates and price target: We have revised our earnings estimates up by 3% and 5% for FY2013 and FY2014 respectively to factor in the new approvals in the USA and the other markets. We believe the stock will be re-rated as most of the concerns of the company have been addressed during the past few months and it is set to grow at a sustainable rate over a long period. We revise our price target up by 12% to Rs1,064 (implies 17x FY2014E earnings, a 10% discount to Lupin). Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.