Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs338
Three product approvals in succession
Key points
- Cadila Healthcare (Cadila) has received three product approvals from the US Food and Drug Administration (USFDA) in quick succession. These are the final approvals for Benzonatate tablets, and Naproxen tablets and the tentative approval for Amlodipine Besylate.
- Benzonatate and Naproxen are already off patent products and have market sizes of $143 million and $53 million respectively. On the other hand, Amlodipine is current under exclusivity, which is set to expire in September 2007. The annual market size for amlodipine stands at $2.7 billion.
- Based on our calculations, we believe the three products together would generate combined revenues and profits of $18.5 million and $3.7 million respectively for Cadila in FY2009, translating into incremental earnings of Rs1.2 per share.
- At the current market price of Rs338, the stock discounts its FY2009E earnings by 12.7x. With a strong momentum in the US generic market, a ramp-up in the contract manufacturing business and the turn-around of the French business, we believe Cadila has a bright future and hence maintain our Buy recommendation on the stock, with a price target of Rs425.
Aurobindo Pharma
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs914
Current market price: Rs728
Denies any stake sale plan
Reacting to a media report that said Aurobindo Pharma is open to a partial stake sale, the management of the company has clarified that the company has no such plans. On the other hand, the management has indicated that the company is doing well in all its business segments including formulation exports, anti-retroviral (ARV) business and bulk business.
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,173
Current market price: Rs913
Valuation of key subsidiaries above market estimates
Key points
- India's largest private sector lender ICICI Bank has announced plans to raise Rs20,000 crore ($5 billion) through a follow-on public offer (FPO). The FPO is likely to be equally distributed in the domestic and foreign markets. It is expected to open in the third week of this month. The price band and other issue details are awaited.
- The bank's management has indicated that the pace of growth in the economy as well as the bank's business in the past few years is unprecedented and the FPO tries to address the increased capital requirements of the bank for the next three years.
- The life insurance sector has been growing at a scorching pace for the past few years and ICICI Prudential Life Insurance is the private sector leader with a 30% market share among the private players and a 10% market share in the overall insurance market. The insurance sector is considered to be a sunrise sector and currently there are no listed insurance companies to play on the boom in the insurance sector. Hence, ICICI Bank, which has a 74% stake in ICICI Prudential Life Insurance, remains our preferred choice to play on the insurance story.
- In the past the bank has had to divert a significant amount of the capital raised through its earlier issues to fund its insurance subsidiaries. However this time we feel the difference is that ICICI Bank has already made arrangements for continuous funding of its insurance businesses. Thus with the funding of the insurance businesses taken care of, we feel, there will be more capital available to the bank to grow its core banking business without frequent dilutions in future. However, the huge FPO would take its toll on the return on equity (RoE), which is expected to come down to 10.3% and 10.5% in FY2008 and FY2009 respectively from 13.3% in FY2007.
- We feel one of the concerns pertaining to the bank remains in the form of the delay in obtaining the regulatory approval for the entire ICICI Financial Services (IFS) deal. The fact that the valuation of IFS is much higher than market estimates is a positive development. However the regulatory approval is very important, as it will set the precedence based on which the market would assign improved valuation to the bank. An uptick in the non-performing assets (NPAs) and related provisions remains the other concern.
- We feel the stock will continue to consolidate around the current levels, as has been the case in the past after the announcement of any equity issuance. This provides a good opportunity to buy the stock. At the current market price of Rs913, the stock is quoting at 20.2x its FY2009E earnings per share (EPS), 9x its pre-provision profits (PPP) and 2.1x FY2009E book value (BV). We maintain our Buy recommendation on the stock with the price target of Rs1,173.
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