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STOCK UPDATE Ipca Laboratories
Recommendation: Hold
Price target: Rs675
Current market price: Rs648 Price target revised to Rs675 Key points -
Marginal impact of DPCO 2013 for Ipca: As the notification under the Drug price Control Order (DPCO) 2013 has been issued for 150 drugs (out of 652 formulations meant to be brought under the price control), the pharmaceutical (pharma) industry is able to determine the net impact of the development on their revenues and profits. Going by the formula adopted in the notification to determine the ceiling price of the controlled drugs, most of the front-line players are set to experience a negative impact on their revenues and profits. However, we believe the incremental impact for Ipca Laboratories (Ipca) would be virtually neutralised, as price erosion in some of products would be materially compensated by the scope to increase the price of the other products (which are either not under the list of price control or do not command market leadership). However, a slow offtake by traders and stockists to clear old inventory would hamper sales in the domestic market for the next two to three months. The domestic formulation business contributes nearly 32% of the net revenues of Ipca. We expect the revenue from the company's domestic business to grow at a compounded annual growth rate (CAGR) of 15% over FY2013-15, mainly driven by improved productivity of the field force and new product launches in the key segments. -
Depreciating rupee to benefit exports; would materially limit forex loss on debts: A sharp depreciation in the Indian Rupee (INR) against the major other international currencies is set to affect the export-oriented players like Ipca which also have a substantial amount of foreign debts on their book. Exports constitute nearly 63% of the net revenues of Ipca and the company has a practice to cover 30-40% of receivables through forward contracts. As per the latest available information, Ipca has entered into forward contracts to cover part of its exports at Rs56.12 per US Dollar (USD), which is not significantly different from the prevailing rate of INR against the USD. Besides, the uncovered portion of exports is also naturally hedged partly by way of raw material imports, which constitute nearly 28% of the exports. However, as the company has nearly $70 million of foreign debts outstanding (which would trigger a marked-to-market foreign exchange [forex] loss) and $17 million of the same is payable in FY2014, forex loss is bound to accrue, though the same would be materially compensated by the gains on exports. -
We upgrade price target to Rs675 on roll-over of valuation: We expect Ipca to continue to show a strong performance in the coming quarters, despite a negative industry environment at home and inflating foreign repayment obligations due to a volatile local currency. Ipca is currently trading at a premium of 22% and 43% over its three-year and five-year historical price/earnings (P/E) multiples. We believe the re-rating is commensurate with the improvement in the company's performance and prospects. Owing to a better visibility on its earnings, we have rolled over our valuation to the earnings estimate for FY2015 (from 14x average earnings of FY2014 and FY2015 earlier). Accordingly, our price target stands revised up by 10% to Rs675 (14x FY2015E earnings per share). However, due to a limited upside to the stock price from the current level, we maintain our Hold rating on the stock.
SECTOR UPDATE Power Another positive regulatory action in support of ailing power sector Last Friday, the Cabinet Committee on Economic Affairs (CCEA) approved that imported coal could be a pass through for all domestic coal-based power projects commissioned by March 2015. However, we understand that this is applicable for power producers who are having domestic coal linkage and power purchase agreement (PPA) but due to shortage of domestic coal supply, they are forced to import coal and the consequent higher cost would be passed through the PPA by law.
We believe this is not new in the system, as NTPC has been importing coal to meet the supply gap and as a usual practice it is allowed to pass the additional cost on to the consumers. However, there was no established law or formula for the same. Previously, the regulated power producers used to take permission on an ad hoc basis from the state electricity boards (SEBs) and do the same. Hence, with the approval of the coal price pass-through mechanism, it would be by law and permission would not be required. In our view, it's another positive regulatory action in favour of the ailing power sector. Nevertheless, this development is not applicable for imported coal-based projects like Tata Power's ultra mega power project (UMPP) and Adani Power's Mundra power plant as a compensatory tariff for them was recommended by the Central Electricity Regulatory Commission (CERC) and a separate committee is working towards that.
Coal India Ltd (CIL) is expected to supply coal as per the revised fuel supply agreement (FSA) norms to the new power plants commissioned after 2009, which is to the extent of 65%, 65%, 67% and 75% of domestic coal for the remaining years (FY2014-17) respectively of the twelfth five year plan. However, given the scenario, it is apparent that it would be challenging for CIL to meet the increasing demand of coal and the higher import would remain as the obvious option with the power plants. We believe large independent power producers (IPPs) would be certainly looking at importing coal on their own and this development ensures them the cost would be passed on to the consumers; hence, eventually the productivity of power in the country should improve. We believe the major beneficiaries of the development would be the IPPs having regulated model. Companies like CESC, Lanco Infratech, Jaiprakash Power Ventures, Indiabulls Power, KSK Energy and GMR could be the beneficiaries.
CESC remains our top pick in the sector. We continue to maintain Hold rating on the stock with a price target of Rs385 (based on the sum-of-the-parts [SoTP] method). Telecommunications Incumbents report robust performance COAI May 2013 subscriber numbers: Incumbents continued with a robust subscriber addition trend, Vodafone was the highest gainer with 0.91 million subscribers, Idea and Bharti added 0.87 and 0.85 million subscribers respectively. The Cellular Operators' Association of India (COAI) released its subscriber base figures for May 2013. In May, the telecommunications (telecom) sector continued to witness decent subscriber additions with the top three operators, ie Bharti Airtel (Bharti), Idea Cellular (Idea) and Vodafone India (Vodafone) leading the pack in terms of subscriber additions. The top three operators have reported strong subscriber additions for the past three months, which reaffirms the fact that the top three operators are gaining in terms of the market share on account of a reduction in the competitive intensity and new norms such as stricter subscriber verification norms. Overall, the top three operators again gained in subscriber market share at the expense of the smaller operators. The cumulative subscriber market share of the top three operators increased marginally to 70.12% in May 2013 vs 70.05% in April 2013. Outlook and valuation -
The incumbents continued to gain market share in the current month. The top three operators cumulatively now account for more than 70% of the total subscriber market share. We believe that the Indian mobile telephony space is definitely consolidating in favour of these three operators. The data uptake has also seen a substantial improvement in the recent months, and the operators in their commentary sounded very positive on the growth opportunity for this segment and believe that the data would drive the next big growth wave for the telecom players. Though the outcomes of a lot of regulatory issues remain ambiguous and are being contested in the court of law, we believe that the tepid response to the last two 1800Mhz spectrum auctions would result in the lowering of the spectrum prices as and when the licence comes for approval, bringing some sanity to the system. -
The environment is thus gradually turning favourable for the telecom companies with receding competitive intensity and visible signs of return of pricing power. We continue to maintain our cautiously optimistic view of the telecom sector and maintain our positive bias for Bharti (rated: Hold; price target: Rs340) and Idea.
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