Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs325
Current market price: Rs235
CRAMS to power revenues
Key points
- Several products of Nicholas Piramal India Ltd (NPIL) are amongst the top brands across various therapeutic segments. With its focus on building brands rather than merely launching new products and initiatives to expand and improve the productivity of its field force, NPIL expects to outgrow the domestic market in the coming years.
- With six contract-manufacturing deals under its belt, NPIL expects the custom manufacturing business to be its growth driver in the coming years. The company expects revenues of Rs60 crore in FY2007E and of Rs140 crore in FY2008E from this business.
- Acquired in December 2005, Avecia Pharmaceutical, UK has healthy gross margins but it is making losses due to its high fixed costs. NPIL is currently in the process of integrating Avecia into its operations and is undertaking several initiatives to derive cost synergies from Avecia. With these initiatives NPIL believes that Avecia will break even by the end of FY2007 and start contributing positively from FY2008.
- NPIL recently acquired one of Pfizer's facilities at Morpeth, UK. The Morpeth facility is currently being integrated with NPIL, following which NPIL plans to scale up production at the unit to make use of the idle capacity. The Morpeth unit current has EBIDTA margin of around 15.5% and is currently earnings accretive for NPIL. With a ramp-up in revenues, the management believes Morpeth's margins would improve with the increased operating leverage.
- With the Baddi facility going on stream, the increased operating leverage derived from the higher capacity utilisation at the Morpeth plant and the shift of manufacturing of the inhalation anaesthetics to India, NPIl expects its margins to improve significantly in the future.
- To account for the delay in the ramp-up of NPIL's contract-manufacturing business, the contribution from the recently acquired the Morpeth facility and the improved scenario in the domestic market, we are revising our revenue and earnings estimates for FY2007 and FY2008. Our revised earnings estimates stand at Rs10.7 per share for FY2007 and Rs16 per share for FY2008. At the current market price of Rs235, NPIL is discounting its FY2008 estimated earnings by 14.7x. Considering the strong revenue flows and enhanced profitability picture expected for the coming years, we maintain our Buy recommendation on the stock, with a price target of Rs325.
Aditya Birla Nuvo
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,280
Current market price: Rs1,100
A right(s) Idea
Key points
- Aditya Birla Nuvo (ABN) yesterday announced the ratio and the price of its proposed rights issue. The company plans to raise close to Rs780.0 crore through the rights issue.
- It will issue two equity shares for every 17 equity shares held. The pricing of the ssue is attractive as it is at a 28% discount to the stock's current market price of Rs1,100.
- Over the last one month the stock has run up by over 20% and breached our price target of Rs1,031.
- In view of the fact that ABN's leverage after the rights issue will come down to more comfortable levels and the continued stellar performance of the growth business, we are revising our estimates and price target for the stock.
- We continue to like ABN's strategy of having twin motors of value creation: the value business and the growth business. We believe that the cash flow from the value business is being invested profitably in growth areas, creating good value for the shareholders. We are revising our price target to Rs1,280 due to the higher valuation that we believe the telecom business ought to enjoy. In fact, the telecom and insurance businesses together contribute 78% of the old price target or roughly Rs1,018. This implies that the investor is getting all the value businesses, the business process outsourcing (BPO) and the garment business for zilch.
HDFC Bank
Cluster: Evergreen
Recommendation: Buy
Price target: Under review
Current market price: Rs1,105
Double advantage
Key points
- Leading banks caught in IPO scam: In order to penalise errant banks caught in the initial public offering (IPO) scam as well as to avoid such defaults in future, the Reserve Bank of India (RBI) had decided against granting fresh branch licences to the banks unless it was convinced that the processes and checks were in place.
- New branch licences a positive development for HDFC Bank: The RBI has granted HDFC Bank the permission to set up new branches and automated teller machines (ATMs). The bank's current network comprises 535 branches and 1,323 ATMs as on September 30, 2006. Though the exact number of new branches and ATM licences granted to the bank are not yet known, we expect the same to be in the range of 18-20% of its existing network.
- Branch licences remain crucial to sustain margins: Although HDFC Bank didn't face any significant pressure on its NIM due to the denial of new branch licences by the apex bank, yet going forward the absence of new branches and ATMs could have had a material impact.
- Business mix and asset growth maintained: HDFC Bank is predominantly a retail bank with 70% of its business mix generated through retail banking. Branch presence is crucial to execute retail banking and hence banks need to open new branches in potentially untapped areas to generate new business.
- Permission to open new demat accounts a positive: HDFC Bank is a major player in the capital market related business areas, be it loan against shares or demat facility and advisory services. The bank has a very high component of fee income in its total income and the SEBI's recent permission to open new demat accounts would help the bank to improve its fee income.
- Valuation: The RBI's permission to set up new branches and SEBI's consent to open new demat accounts are positive developments for the bank. Based on the current market price of Rs1,105 the stock trades at 23.1x FY2008E earnings per share (EPS), 9.4x FY2008E pre-provisioning profit (PPP) and 4.7x FY2008E book value. Currently the price target for the bank is under review.
VIEWPOINT
Siemens
Results review
Siemens has announced its fourth quarter and full year results for the financial year ended September 30, 2006. The company's consolidated sales grew by a strong 65.8% to Rs6,032 crore from Rs3,638 crore last year. The consolidated profits however grew at a lower rate of 26.4% to Rs392 crore from Rs310 crore last year. The profit growth was lower largely because of a high raw material cost, the investments done in the year in new ventures (such as transformers) and the subdued performance of its subsidiaries, Siemens Information Systems Ltd (SISL) and Siemens Public communication Networks Pvt Ltd (SPCNL).