Monday, October 23, 2006
- Geojit Financial Services hit the upper circuit breaker of 10% on reports that the company will issue 7.96 crore shares on a preferential basis to BNP Paribas.
- Sona Koyo Steering Systems gained on capital expenditure plans of Rs400 crore over the next 35 months.
- Infosys, which has implemented SAP solutions for RFID for Chep's global track and trace system, ended with steep losses.
- Ranbaxy slipped despite signing a marketing deal with the Debiopharm group of Switzerland.
- Four Soft declined despite its UK subsidiary's proposal to acquire the freight and shipping business of FWL Technologies.
IT WAS THE KIND OF CALL THAT makes a young man grow up fast. On Aug. 11, 1966, Azim H. Premji was a senior at Stanford University in Palo Alto, Calif., studying for finals after summer school. When the phone rang, his mother was on the line from India with devastating news: His father, M.H. Premji, had died of a heart attack at the age of 51. The younger Premji quickly booked a flight and left for the funeral, expecting to be back at Stanford in time for the fall semester. Instead, his father's death marked a fateful change of direction for the 21-year-old. Rather than pursuing his dream of bringing aid to the developing world as a policymaker at the World Bank, he found himself thrust into the nitty-gritty details of saving a failing company in a backwater economy.
Fortunately, entrepreneurship runs in his blood. Premji's grandfather was founder of one of the largest rice-trading companies in India. Then, in 1945, M.H. Premji launched a cooking oil company called Western India Vegetable Products. But when the young Azim Premji arrived home he found the operation in shambles. And to his dismay, he discovered that his father had selected him to run it, a duty he felt he couldn't shirk. ``It's like being thrown into a swimming pool,'' says Premji, who finally got his Stanford degree six years ago. ``To avoid drowning, you learn to swim quickly.''
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Our valuation is based on our EVA-based methodology, which values HDFC
Bank at Rs955. Our EVA value is based on an 8% risk-free rate, higher-than industry margins (275bps vs 230bps average) and higher capital ratio (6.75%
vs 6% average).
Our target price is also benchmarked off a 4x one-year forward P/BV, which
corresponds to a fair value of Rs891. The basis for our target multiple - a
distinct premium to all other Indian commercial banks - is HDBK's structurally
higher margin, de-risked earnings and balance sheet mix, and gains in the
consumer-lending franchise. Our target multiple is at a significant premium to
the Indian banking average. We believe a re-rating from these levels would be
Investors can take exposure to the stock of Ipca Laboratories, a Mumbai-based player in both the bulk drugs and formulations space. At the current price of about Rs 440, the stock trades at 11-12 times its expected per-share earnings for FY-07. In the light of the likely growth prospects over the next couple of years, we believe that the valuation is attractive vis-à-vis its peers and provides scope for further upside. The stock has also moved up sharply in the recent past and, hence, investors can buy into the stock with modest return expectations.
Ipca derives about 65 per cent of its revenues from the formulations business; bulk drugs chip in with the rest. Exports-to-domestic market composition stand at 55:45. In the bulk arena, Ipca is among the largest manufactures of drugs in the anti-hypertensive and -malarial areas. The domestic formulations business accounts for as much as 40 per cent of the overall revenues.
The topline continues to exhibit strong growth trends with sales up by 25 per cent and 16 per cent on a quarterly and half-yearly basis respectively (compared to the year-ago period). Margins too are on the rise; at 23.7 per cent for the latest quarter; operating margins are up by more than 500 basis points compared to the year-ago period. For the quarter, earnings have doubled to Rs 35.4 crore; earnings growth for the half year is slightly below 40 per cent
After a lacklustre performance in FY-06, when Ipca's exports were strained largely because of pricing pressure in its key UK market, the overall business now appears back on track, if the first half of the year is any indication. The company's domestic business appears to be the principal driver behind the sharp margin improvement and earnings delivery for the latest quarter. With a clutch of launches addressing chronic therapy areas, this business posted an impressive growth of close to 40 per cent in FY-06. With the sales force being organised into divisions for specific therapy focus, sales growth is expected to be brisk, backed by product launches.
Ipca has also commenced production from its new Dehradun facility since May. The plant entails tax benefits, that should lead to a moderation of tax outgo and prop up earnings.
On the exports front, Ipca follows a differentiated tack by targeting branded generic markets such as CIS countries and Africa. Most Indian companies have targeted the huge generic opportunity opening up in the US; this has also exposed them to a highly competitive pricing environment that provides for wafer-thin margins.
On the contrary, the branded generics business should result in better margins and we expect to see meaningful growth in Ipca's key markets; the UK market is facing pricing erosion, but Ipca is addressing the issue through product launches. With a rising contribution from other markets, the importance of the UK market would diminish, which would be a positive if the pricing environment there continues to remain challenging.
The focus on markets for branded generics has not meant that Ipca has decided not to address the US market either. Though a product launch there could still be a couple of years away, we expect to Ipca to be competitive, as its abbreviated new drug applications would be backed by its own active ingredients, given the integrated nature of its business.
In the interim, Ipca has also sewn up an agreement with Ranbaxy for the US market; generics manufactured by Ipca will be marketed by the latter. This arrangement would give Ipca the advantage of a presence in a key geography without the associated front-end costs.
Valuation and view
With prospects encouraging, a valuation of 11-12 times forward earnings appears reasonable. Also, a market cap-to-sales ratio of 1.25 (reckoned on expected FY-07 sales of Rs 900 crore and current market price) offers scope for expansion, in our view, as the revenue profile improves further in favour of formulations. The principal risk to our recommendation would be if the proposed new pharma policy seeks to bring under its ambit a much wider scope of drugs.
Buy Subex Azure with a stop loss of Rs 520 for a target of Rs 650
Buy Kesoram Ind with a stop loss of Rs 445 for a target of Rs 600
Sell Hindustan Lever above Rs 231.50 with a stop loss of Rs 234. This is a day trading recommendation.
Buy Gitanjali Gems below Rs 225 with a stop loss of Rs 221. This is a day trading recommendation.
Buy Bombay Dyeing (Rs 702.60) with a stop loss below Rs 697.50 for a target of Rs 712.
Buy Action Construction (Rs 235.10) with a stop below Rs 230.80 for a target of Rs 246–249.
Investment calls for this year from wow team Greenply, Bharat Fertilisers, United phosphorus, Apollo Tyres, Zee Telefilms, Karuturi, Zen Technology, Subex Azure, Astra Micro
Concept stocks for positives with multibagger possibilities... Northgate, Educomp, VIP and ION Exchange, Financial Technologies.
Strong operating performance but modest 2Q earnings rise
Reliance (RIL) has achieved yet another strong operating performance in 2Q as reflected in the 23% YoY jump in EBITDA and 18% YoY rise in EBIT. The strong operating performance has been driven mainly by a 38% YoY jump in petrochemical EBIT. Strong petrochemical margins and volume growth boosted EBIT. Despite strong operating performance, 2Q net profit was up just 9% YoY due to a steep decline in other income and a sharp rise in depreciation, interest and income tax.
2Q earnings higher than MLe; surprise mainly in refining
RIL’s 2Q net profit growth at 9% YoY is higher than MLe and consensus by 5%. The earnings surprise is mainly attributable to refining EBIT being higher than expected. RIL has not accounted discount on sale of LPG and kerosene to oil PSUs of Rs2.0bn in 2Q as expected by us, which explains the higher EBIT.