Cipla to undeperform - Macquarie Research
Wednesday, December 24, 2008
Cipla employs a partnership model where it undertakes product development and manufacturing for international partners, without investing in building frontend presence. This will limit profit expansion over the long run. Nine out of the top 15 global players in 2001 have been acquired by now and ongoing consolidation appears inevitable. Cipla faces the risk of its partners getting acquired and the acquirer not being willing to source products. Also, given the fierce competition, its partners have substantial bargaining power.Cipla's Margins are Sensitive to HIV
Africa is the biggest export market for Cipla, constituting 34% of exports. With its growing HIV product portfolio, margins could come under pressure due to the low profitability of these products. Technology know/how income booked by Cipla is highly volatile and can cause wide swings in the EBITDA margins. In FY3/08A technology know-how income doubled to Rs1.5bn, impacting the margin by 300bp. The income is unlikely to sustain at these levels.
Domestic sales constitute 51.4% of overall sales and are the most lucrative segment due to superior profitability. Dominance in the respiratory segment is a key strength, as Cipla has ~70% market share of the anti-asthma therapy. However, we expect the domestic sales contribution to decline slowly to ~48% by FY 03/11E due to the larger contribution by exports, going forward.
The National Pharmaceutical Pricing Authority (NPPA) has charged Cipla for overcharging on some drugs that are under price control and has sent demand notices for payment of Rs10bn in penalties. Cipla is contesting the matter in courts and it is still sub-judice. Failure to win the lawsuit would be a double blow for Cipla, as it would require a reduction in the prices of these drugs along with the required cash outflow for the penalty imposed.
Cipla is expected to report an EPS of Rs 8.05 and Rs 10 for FY09 and FY 10 respectively. Macquarie maintains an UNDERPERFORM rating on the stock.
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Published by Webmaster @ 9:47 PM IST.
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Zee still has more shows in the Top100
Tuesday, December 23, 2008
Zee is third behind Colors in ratings but still has more shows in the Top100. Star Plus has regained the number 1 slot with 24% share of the Hindi GEC audience. While Colors continues to be number 2 at 20% share, Zee is close behind at 17% and actually has more shows in the Top100 than Colors.Sports business is a key part of Zee's bouquet strength; helping the company drive higher subscription revenues. Sports revenues have averaged 12.5% of Zee's total revenues in the past 8 quarters but EBITDA contribution has been marginally negative. With the sports business strategy revolving around cricket, securing exclusive telecasting rights remains key to its performance. Recently Ten Sports has won a 5-year local and global telecast rights deal of Pakistan cricket from 2009-13 for US$140.5m (US$45m paid in 2003) compared to US$612m paid for 4 years of only local Indian cricket rights by Neo Sports.
Dish TV Rights issue opend on 12th Dec - Success of the rights issue will serve to reduce investors concern on lending to group companies. Such issues notwithstanding, distribution led revenue growth will continue to provide stability to Zee's revenues. For FY09, Zee is expected to report an EPS of Rs 10 and grow 18% over the next 2 years.
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Published by Webmaster @ 9:28 PM IST.
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Reliance Infrastructure - Rosa Phase I- Construction
Monday, December 22, 2008
Rosa Phase I is the first of the 13 power plants being developed by Reliance Power. It will be a 600 MW (2x300 MW) plant, which, as per the agreement is likely to be commissioned by March 2010. The estimated cost of the plant is Rs27 bn and it is being funded in a debt:equity mix of 80:20. Until now, the company has spent approximately Rs12 bn on its construction. The power produced from the project will be sold to the Uttar Pradesh Electricity Regulatory Commission (UPERC) on a cost plus basis.Shanghai Electric Corporation (SEC) is the EPC contractor for the plant and is supplying the BTG equipment while the BOP works are subcontracted to various players in India. The fuel supply is secured from Central Coalfields; the company has also entered into a coal transportation agreement with the Indian railways to transport coal from the mines to the project site, a distance of approximately 870 km. The entire land required for the project is in place.
The company has achieved an overall progress of 56.4% as against a target progress of 44%. The company aims to commission the project in 27 months (as against the agreed period of 33 months), six months ahead of schedule. The Boiler area is fully under construction while the foundations for the Turbine and Generator have been laid. Construction of the coal-handling terminal, cooling towers, water reservoir, ash handling system, ESP and DM building, and the transmission line is underway.
Finally, we are seeing something in Anil Ambani worth while :-)
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Published by Webmaster @ 9:15 PM IST.
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Jain Irrigation Systems - Review
Thursday, December 18, 2008
Polymer costs for JISL have declined by around 25% over the past three months which includes cut in excise duty, this implies a margin expansion of ~700 bps. JISL has wound down its capex plans for F09 and now plans to invest around Rs2.0 bn (Rs3.0 bn earlier). Certain corporate capital expenditure has been deferred, and the company plans to outsource non-critical MIS component manufacturing.JISL intends to reduce its working capital requirement by around 30%. This reduction will be driven by a combination of lower polymer cost, low raw material inventory, and de-bottlenecking.
The minimum support prices for key crops in India are up around 20-60% through F2007-09. This assumes significance as the cost benefit for adoption of Micro Irrigation Systems - MIS improves for the farmers, reducing their payback period. Micro Irrigation is now a proven technology for improving agricultural productivity and reducing water utilization and incidence of disease/pests.
Although investors were laser-focused on polymer prices as they rose over the past few months, they now seem less enthusiastic about the possibility for higher margins because of falling raw material prices.
Jain Irrigation is expected to report an EPS of Rs 26 for FY09 and Rs 36 for FY10 respectively. Dividend yield will be approximately 2%.
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Published by Sunil K @ 1:40 PM IST.
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Kansai Nerolac Paints - Review
Wednesday, December 17, 2008
Kansai Nerolac Paints Ltd - KNPL is the 2nd largest paints company in India with a market share of approximately 21%. It is the largest in the industrial paint segment with a 45% market share and has a substantial market share of 14% in the decorative segment. Sales contribution from both the segments for KNPL is almost equal.
For Q2 FY09, Net Sales grew 12% to Rs.390cr - another quarter of weak performance given the impact of high raw material costs and subdued demand from the crucial housing and automobile sectors. There was a 5% growth in volumes and 5% growth in prices of the paints. Margin contraction too continued with operating margins declining by around 390bps to 12.6% from the 14% levels to Rs. 49.37cr. Similar margin contraction was seen at the net level.
A substantial part of the 12% growth in the top-line has come from increased volumes in the decorative segment and product price rise in the same. On the industrial segment front, volumes as well as realizations continue to be subdued because of the sluggishness in the automobile sector.
KNPL has also witnessed a slowdown over the last few quarters. Competition in the industrial segment would also make it difficult to pass on any price increases – usually fixed price contracts. With respect to the decorative segment, even though the company currently gets 45% of revenues, it still has a lower percentage of its sales coming from the high growth emulsions segment.
KNPL is expected to report an EPS of Rs 44 for FY09.
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Published by Komal M @ 1:23 PM IST.
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Lakshmi Machine Works - Review
Monday, December 15, 2008
Lakshmi Machine Works - LMW, is today a global player and among the top three manufacturers of the entire range of textile machinery in the world. The company currently has 60% market share in the domestic Textile Spinning Machinery Industry. LMW has diversified into CNC machine tools and is a brand leader in manufacturing customized products.
For Q2 FY09, Textile machinery division's revenues were down 24% while the foundry division's revenues declined 22%.Operating profit for the quarter was down by 33.7% to Rs.91.93cr despite a decline in overall expenditure costs - because of lower sales and other income. Both the segments under operation were under pressure because of sluggishness in the overall macro business environment and the problems being faced by the textile industry in particular given the recessionary trends in key markets like US and Europe.
Order book at the quarter end stands at Rs.3600 Crs, as against Rs 5327Crs for the corresponding period in last year. This deceleration in order book is on the back of compression of delivery-period, coupled with slower order inflow from the user industry.
The company has announced plans to set up a greenfield textiles machinery unit in China through a wholly-owned subsidiary. With the Chinese market comprising 52% of spinning capacity additions in the world, the Chinese venture could be viewed as a positive step, as China offers a vast opportunity to quality and value players like LMW.
LMW healthy cash on its books, Rs.417/ share (73% of the market capitalization), would provide cushion from any downside. LMW is expected to report an EPS of Rs 174 for FY09.
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Published by Komal M @ 1:10 PM IST.
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IT Services Companies - Slow Spend + Deteriorating Pricing
Friday, December 12, 2008
The news is not at all good for the Indian IT companies. Citi conducted a survey and the outcome is Negative - IT budgets down 10%-20%, marking a rapid deterioration from past survey of 200 CIOs in Sep-08, which indicated weak 1% growth. IT buyers may defer spending until 2H09 to protect against further budget cuts. Large banks are asking for a ~15% cut, in return for increased volumes. If the top 10%-15% of customers get 10%-12% discounts and the remaining 85%-90% with less purchasing power may get discounts approaching 3%-6%.Goldman Sachs has revised estimates for FY2010 put us as at an average EPS growth of 1% in INR terms and -3% in USD terms (vs. 10% and 9% previously). On a market-cap weighted average basis, we now forecast IT Services revenue growth of 3.2%, operating profit growth of -4.8%, and net income growth of -1.2%, in USD terms. Additionally, expect - A more muted IT spending environment, Reduced pricing leverage, Margin compression due to pricing declines, and Incremental FX impact.
HSBC said it may be too early to turn positive just yet, as we think
downward revisions have yet to run their full course. The risk of further negative news flow could lead to near-term share-price volatility, and hence are cautious on the sector.
Earnings Estimates for Tier-I IT Companies:
Infosys Technologies:
HSBC and Goldman Sachs expects Infy to report an EPS of Rs 101 for FY09 and Rs 114 for FY10. Citi expects Rs 110 for FY10 under current market scenario.
TCS:
HSBC expects TCS to report an EPS of Rs 55 and Rs 60 for FY09 and FY10. Goldman Sachs is bullish on TCS with EPS expectations of Rs 57 for FY09.
Satyam Computer Services:
HSBC's revised EPS estimates are Rs 33.5 and Rs 37.3 for FY09 and FY10 respectively. Goldman Sachs expects Rs 35 EPS for FY09.
Wipro Technologies:
Goldman expects Wipro's consolidated EPS to be Rs 29 for FY09. HSBC expects it to be Rs 27 for FY09 and Rs 29 for FY10.
HCL Technologies:
Post Axon deal, HSBC expects HCL's EPS to be Rs 21.9 for June-10 and Rs 24.65 for June-11. Goldman expects HCLT to report an EPS of Rs 20.9 for June-10.
We are working on publishing Earnings estimates from various research orgs. on all of the BSE-200 companies so it becomes easier for you to decide weighing the fundamentals and bottomline.
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Published by Komal M @ 7:20 PM IST.
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Navneet Publications - Review
Wednesday, December 10, 2008
Navneet Publications business has been affected by the sudden entry of state governments into the study material market. Government has started distributing workbooks free of cost (Gujarat and Maharashtra). The government with its social objectives could severely hamper private companies in the education market, we believe this could be restricted to the retail segment - which is currently very small for the major education companies. Further, after a brief disruption, students could return to the products of private companies in order to maintain an edge over others.A favourable currency movement has helped Navneet's stationery export business grow strongly, making up for the loss in the publications business.
The publishing business forms around 65% of sales for Navneet, with around 28-30% EBITDA margins. A couple of quarters ago, management indicated an expectation of over 10% yoy growth in this business in FY3/09. The remaining 35% of revenues for Navneet are derived from sales of stationery products like notebooks, writing pads, writing materials, etc. Stationery exports have traditionally been a very small component of overall sales for Navneet (~5%).
Navneet's e-learning initiative launched around six months ago has registered 475 schools in these two states and management targets 600 schools by March 2009. The company has also followed this up with the launch of a home-learning package for students.
Navneet has been consistently paying 45% dividend and is trading at a forward P/E of 7 on its expected earnings of Rs 5.7 for FY09. It is very likely that the management may postpone payment of dividend due to the current liquidity crunch.
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Published by Webmaster @ 11:45 AM IST.
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Larsen & Toubro - Hold Citi
Tuesday, December 09, 2008
Citigroup has downgraded Larsen & Toubro from BUY to Hold due to changing macro environment that is likely to affect the best in the Capital Goods class. Adding to L&T's woes is the availability of capital has reduced and the cost of the same has increased, growth in capital formation is likely to come in at low single digits vs. the 17% CAGR seen during FY03-FY08. Capex cycle is far healthier than the one in the 1990s, incrementally things will only get worse before getting better with the FY10E elections.
Slowdown in Gulf - GCC has gone from excessive credit growth/demand-driven inflation to tight liquidity/concerns over the growth. Falling oil prices have added to the problems. GCC oil & gas/real estate projects are getting delayed/ cancelled.
Without any doubt, L&T is best in class given its strong skill sets/track record/corporate governance. However, order inflow growth could slow to 5% (from 20% earlier) in FY10E. If things don't improve in the near future by GoI pumping into infrastructure building, L&T may also register a de-growth and prompt the company to bid aggressively on smaller projects thus eroding margins.
Taking the current stress into account, L&T is expected to report a consolidated EPS of Rs 53 for FY09 and Rs 62 for FY10. Citi values the L&T business at a mere 14 forward P/E and values it at Rs 683, while the subsidiaries including L&T Infotech are valued at Rs 105 thus setting a target of Rs 788 with a HOLD recommendation.
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Published by Komal M @ 1:15 AM IST.
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Ruchi Soya Industries - Review
Friday, December 05, 2008
Ruchi Soya and Industries Ltd. (RSIL) is largest producer and supplier of vegetable oil and soya foods in India with an annual seed crushing capacity of over 2.9 million MT. RSIL is also a largest player in branded edible oil category accounting for ~19% of Indian market (Nutrela, the biggest Soya foods brand in the country, enjoys more than 50% of the market share).The branded category of edible oil for the company has grown over 30 percent CAGR since last 8 years from Rs500 crore to over Rs3000 crore in FY08 whereas the share of branded sale to total sales has increased from 19 percent in FY01 to 30 percent in FY08. We expect the recent tie-ups with leading retailers like pantaloon; Subhiksha would further enhance the share of branded sales.
The Company has forayed into high margin mustered oil segment and is expected to achieve the leadership position in next 2-3 years. RSIL has acquired a plant with 300 MT / day crushing capacity in Ganganagar and has further planned to ramp up the capacity to 1000 MT / day by 2009E.
The company over the years has transformed it self from low margin trading activity to high margin manufacturing of branded products. The share of manufactured products has increased from 46% to 75% in last 5 years.
At current market price of Rs23 the stock is trading at 1.9x and 1.4x of FY09E and FY10E earnings respectively. It is expected to report an EPS of Rs 12 for FY 09 and Rs 16.2 for FY 10. The stock is considerably down from its peak [Rs 150] which provides value buying opportunity at current level, in addition, the stock is trading at lower valuation compared to its peers.
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Published by Komal M @ 1:51 PM IST.
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Tata Steel - Good Times behind us
Thursday, December 04, 2008
The Tata Steel group delivered strong results in 1HFY09, due to stronger price realizations across all geographies, higher volumes in India and Southeast Asia, and performance improvements. Tata Steel consolidated PAT for 2QFY09 was Rs48bn. Adjusting for extraordinary items, PAT would be Rs51bn, +180% yoy. EBITDA margins rose 440bps to 18.9% and EBITDA grew 78% to Rs83bn. 2Q also benefited from a 40% decline in interest expense and strong operational performance across regions. Group total volumes were flat yoy at 7.9m tonnes.From their peaks in July 2008, global steel prices have corrected as much as 50%, with much of the decline occurring in the past two months. Prices have fallen further and faster than we expected (our forecasts were for a 25% decline through calendar 1Q09), and we have lowered our price expectations for FY09-11 by 7-23%.
Across the board Analysts are expecting Tata Steel to report an EPS of Rs 140 for FY09 which will decline to Rs 36 to Rs 38 in FY10 due to softening Steel prices across the World.
Citi has a Sell/High Risk (3H) recommendation to factor in an extended global slowdown, weaker steel prices in Europe and India, lower volumes and weaker margins. Citi has set a Target price of Rs 130 while RBS has set a target price of Rs 115. JP Morgan has a target price of Rs 155. Any fresh exposure should be avoided.
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Published by Webmaster @ 1:17 PM IST.
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JP Associates - Wins Profitable Power Project
Wednesday, December 03, 2008
Jaiprakash Associates [JP] has emerged as the lowest bidder for 1.32GW Karchana project with tariff of Rs2.97/kWh beating Adani Power by just 1 paise. JP's levelised tariff is healthy – Rs2.97 (plus tax) v/s two earlier lowest bids rejected by the UPPCL in April (Lanco Rs2.83) and Jun ’08 (Reliance 2.64).As the project is won through competitive bidding under case-2 guidelines of the Govt. of India, Sangam Thermal Power Project (STPP) at Karchana will have support to secure land, environment and water clearances. STPP has secured low cost coal (US$26/tn) linkage of 4.68MTPA for 1.32GW
UP is the 3rd most power deficit state in India with shortage of 2.5GW in FY08A. Five discoms of UP have committed to buy 90% capacity and to enable JP to avail benefits of mega power policy.
Commissioning schedule for STPP is 59 months from LoI. MLe that majority of Rs30bn (70:30 D/E) equity will be needed during FY11-14E. If successful, this project adds Rs13 to SOTP and takes JP’s power capacity +28% to 9GW (7GW equity). Given RoE of 23.5%, we believe funding should be feasible.
One must also note that the DareDevil Promoter Family - Jaiprakash Gaur has exercised warrants at Rs 397 / share when the market price was mere Rs 80. They still have more warrants to be exercised and if they do, investors can consider adding JP Associated to their portfolio as its Sum of the Parts Valuation is around Rs 300.
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Published by Webmaster @ 1:53 PM IST.
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Havells India Outlook- Edelweiss
Tuesday, December 02, 2008
Havells India's (Havells) management indicated that growth in Sylvania could become challenging, especially in Europe that accounts for over 70% of revenues. Further, the domestic business is likely to be negatively impacted by slowdown in construction activities and industrial capex.
Sylvania is witnessing troubled times with 6% contraction in its European revenues in Q2FY09. Other geographies such as Latin America and Asia, which offered Sylvania revenue growth rates of 14% and 6% in the quarter, respectively, have also started showing signs of slowdown.
The company is focused on cutting non-essential expenses and rationalising distribution and administrative costs. Havells is also working to improve working capital cycle in Sylvania. In the domestic business, the company is expected to write down its cables and wire inventory by ~INR 300 mn by Q3FY09 due to fluctuations in metal prices.
The company is aggressively cutting costs and striving to improve operating efficiencies in both domestic and international businesses. FY09 EPS is expected to take a knock and fall by 11% YoY to Rs 24.6 and expectations for FY10 is Rs 27.8 the same as that for FY08, mostly in-line with other industries.
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Published by Webmaster @ 11:30 PM IST.
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