Wednesday, October 04, 2006
Cluster: Ugly Duckling
Price target: Rs552
Current market price: Rs402
Pinewood comes at a fair price
- Wockhardt has acquired a 100% stake in Pinewood Laboratories, in an all cash-deal worth $150 million. Pinewood is the largest and fastest growing branded generic pharmaceutical company in Ireland.
- Pinewood has recorded revenues of $70 million, earnings before interest, depreciation, tax and amortisation (EBITDA) margins in the range of 23-25% for the year ended June 2006. It has been growing at a compounded annual growth rate (CAGR) in excess of 20% over the last five years.
- The Pinewood acquisition will enable Wockhardt to increase its footprint in the European markets of the UK, Ireland and Germany. Contribution from Pinewood would increase Wockhardt’s European business to over $200 million.
- The acquisition price for Pinewood seems reasonable at a price/sales ratio of 2.1x when compared with similar deals with price/sales ratios in the range of 2.9-4.2x. The valuation of Pinewood seems fair even when evaluated on an enterprise value (EV)/EBITDA basis.
- Based on back-of-the-envelope calculations, we believe that Pinewood would generate incremental earnings of Rs0.24 for Wockhardt. The contribution to earnings is likely to improve as the integration of Pinewood with Wockhardt progresses and Wockhardt starts deriving manufacturing and cost synergies from the acquisition.
- At the current market price of Rs402, Wockhardt is quoting at 14.5x its CY2007E estimated earnings, on a fully diluted basis. We maintain our Buy recommendation on Wockhardt, with a price target of Rs552.
Smart bounce back
In line with our expectation, for the month of September the cement majors (Gujarat Ambuja, ACC and the AV Birla group) have reported a very healthy growth in their dispatch numbers. Cumulatively these majors have reported a strong growth of 16% in their cement dispatch numbers. This is a bounce back after a subdued dispatch growth in the month of August 2006, which was affected by heavy rains in most parts of the country.
- Satyam Computer Services, which announced the launch of a global innovation hub in Singapore, ended in the red.
- Welspun-Gujarat Stahl Rohren dropped even as the company announced the signing of a MoU with Volzhsky Pipe Plant of Russia.
- Ceat, which raised $10 million through the ECB route, closed in negative territory.
- ACC slipped despite reporting higher cement production and sales figures for the month of September.
- Birla Power Solutions dipped marginally despite announcing the signing of an advertising deal with BCCL.
- Goldiam International inched lower despite signing a MoU with Cinemax multiplexes to sell its silver fashion jewellery.
Buy HT Media with a stop loss of Rs 570 for a target of Rs 750
Sell Hindustan Lever above Rs 249 with stop loss of Rs 253.50. This is a day-trading recommendation.
Buy IDBI below Rs 85 with a stop loss of Rs 84. This is a day-trading recommendation.
- Visualsoft Technologies flared up on getting the board's
nod to merge Megasoft with itself.
- Dabur Pharma surged on reports that its UK arm has got the USFDA nod for the Carboplatin molecule.
- Jyoti Structures advanced on winning a consortium order worth Rs180.27 crore from Dubai Electricity and Water Authority.
- Saksoft hit the upper circuit breaker of 5% after the company announced the acquisition of Acuma for $17 million.
- Petron Engineering Construction was frozen at the upper limit of 5% on bagging an order worth Rs12.43 crore from Madras Cements.
- Rasandik Engineering inched lower on reports that the company has invested Rs98 lakh in its subsidiary RACPL.
- i-flex Solutions, which completed the acquisition of Mantas in an all-cash deal for $122.5 million, ended flat.
Cluster: Ugly Duckling
Price target: Rs179
Current market price: Rs109
Ready with new power
- The management of the company sounded very upbeat on the growth prospects of the cable industry in general and that of Universal Cables Limited (UCL) in particular.
- The power, instrumentation and control cables industry is likely to see a huge continued growth in demand backed by the government's thrust on the power generation sector and capital expansion plans of India Inc.
- To take advantage of the same, UCL is implementing a capital expansion plan of Rs64 crore, wherein it will double its capacity of medium tension (MT) cables and put up a new capacity of extra high tension (EHT) cables (>220 KV).
- UCL will be the only player in India to produce EHT cables after Cable Corporation of India. UCL will slowly reduce its focus on the low-tension cable segment (<11>
- During FY2006, UCL merged one of its associate companies, Optic Fibre Goa Limited (OFGL) with itself. The implied consideration of the deal works out to Rs37 crore. UCL is confident about extracting a good return on the investment from this deal.
- We expect substantial improvement in UCL's operating profit margins and return ratios as it moves towards higher end products and OFGL turns profitable.
- At the current market price of Rs109, the stock is quoting at 8.3x its FY2008E earnings per share and 4.4x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a revised price target of Rs179. The reduction in the price target is on account of the equity dilution due to the amalgamation of OFGL where there is not much clarity on the returns on the investment made.
Revving up yet again
- Bajaj Auto delivered a powerful performance in September recording an overall growth of 37.5% year on year (yoy), mainly driven by strong motorcycle sales.
- TVS Motors reported another month of strong performance as the overall sales marked an increase of 33.9% to 162,200 vehicles during September.
- Maruti Udyog sold 59,420 vehicles in September 2006, marking a growth of 20.6%. The company sold 56,606 vehicles in the domestic market while the exports for the month stood at 2,814 vehicles.
- Tata Motors reported a 23.8% growth in its overall sales (including exports) to 49,157 vehicles for the month of September 2006.
- M&M's utility vehicle (UV) sales were up by 5.8%, and the sales of the new Scorpio stood at 3,368, rising by 6.4% yoy.