Biocon, KPIT Cummins, Reliance Energy, Dish TV

SSKI on Biocon

Biocon’s Q1’08 profits are in line with expectations with 35.9% yoy growth in net profits at Rs530m. In a positive move, Biocon has also sold its relatively sluggish enzyme business to Novozyme for $115m, at an attractive valuation of ~4.8x sales which is clearly indicative of the intrinsic value of Biocon’s biotechnology based businesses. The proceeds will enable Biocon to pursue strategic acquisitions to further strengthen its innovation business. Key positives are strong growth momentum in biopharma business with 28% yoy growth and continued progress in biosimilars programme as exhibited through the new licensing deals for GCSF and Insulin. Biocon is clearly amongst the leaders in the Biosimilars space in India and the developments in US / EU to accelerate biosimilars entry bode well for the company. Contract research services business continues to grow strongly and discovery R&D projects are looking promising. The only concern is the sharp appreciation in rupee which is significantly impacting Biocon’s margins given that ~60% of its sales are denominated in dollars and pricing revisions are slow to come through. In reflection Q1FY08 margins at 28% are 120bps below our estimates despite a much higher component of licensing income (Rs160m against Rs20m expectation). To adjust for the enzyme business divestment and lower operating margins, we are reducing our FY08 and FY09 earning estimates by 8% and 10% respectively. Maintain Outperformer with a price target of Rs546 (23.8xFY08E and 19xFY09E earning estimates). Unlocking of discovery R&D assets and acceleration in licensing revenue growth will be upsides to our estimates.

SSKI on Reliance Energy

REL's 1QFY08 results were above our estimates at Rs3.04bn led by sharply higher than expected other income of Rs3.6bn (forex gain of Rs1.9bn). Revenues grew by 41% yoy to Rs16.2bn during the quarter led by sharp jump in EPC division (faster execution of projects) coupled with 42% yoy increase in power revenues (14% growth in volumes and 25% jump in realizations). However, margins of EPC fell by 110bps to 5.1% led by execution of lower margin components of the order backlog, while energy business EBIT margins fell by 100bps to 13.2% led higher purchased power cost. Despite, the poor operating performance during the quarter, we have upgraded our FY08 and FY09 earnings estimates by 10% and 8.5% respectively to reflect the higher other income. REL is currently trading at 13.3x FY09 earnings. Despite being bullish on REL’s business model of backward integrating the distribution business through own generation, we believe valuations adequately factor in the medium term upsides. Moreover, the gas pricing uncertainty for the Dadri power plant is delaying the big value trigger for the stock. We maintain our Neutral rating on the stock.

SSKI on Dish TV

Mapping our estimates, Dish TV has reported revenue growth of 35%qoq at Rs893m in Q1FY08 with subscriber reach of 2.1m (0.18m subscribers added during the quarter). High content cost (65%); subscriber acquisition costs and Set Top Box subsidies have led to operating loss of Rs488m and net loss of Rs898m.

Unlike cable, DTH is a more organized and less regulated business. With heavyweights like Reliance ADAG, Bharti, Tata Sky, Dish TV and Sun TV foraying into the space, we expect DTH to outpace digital cable in near term and become a 14m home market by FY10. However, intense competition would also mean increasing subscriber acquisition cost and subsidization (from 4-6 months of ARPU now to 8-10months of ARPU), given the fact that there is no content differentiation. We have already witnessed the early signs, with customer acquisition cost for Dish TV more than doubling since the entry of Tata Sky. As competition is more funded and aggressive, we believe that Dish TV’s share of incremental market would drop and its market share would reach 32% by FY10E from 75% now. Intensifying competition, increasing bleed period and impending dilution to fund Rs7-8bn of capex leaves limited value for the investors. Reiterate Neutral.

SSKI on KPIT Cummins

In Q1FY08, KPIT’s revenue grew 3.8% qoq to Rs1.35bn (+5.4% in $ terms) – higher than our expectations of Rs1.32bn. However the company books forex gains / (losses) on hedges in revenues as well as in G&A. The average exchange rate realization for the company was Rs43.64/$ compared to average exchange rate of Rs41.3/$ during the quarter. As per our estimates the revenues would have included forex gains of Rs73m. The management has not provided clarity on volume growth and pricing increase during the quarter. Despite wage hike (17% offshore and 6% onsite) the EBITDA margins improved by 10bp primarily on account of booking of forex gains in revenues and lower S&M (-10% qoq in absolute terms) on getting benefit of rupee appreciation on $ terms costs and absence of variable salary paid during Q4FY07. PAT declined 9.8% qoq to Rs127m (we expected Rs120m) despite 4.4% increase in EBITDA on higher depreciation and interest expenses. The company has entered into partnership with Cummins to provide F&A BPO work (potential size of $55m over 5 years) but KPIT will be paying $5m upfront of which $4.5m have been raised through equity dilution to Cargill (2% dilution) and additional $5m towards end of 5 years based on certain performance parameters. The company has cut rupee terms PAT guidance by 6.8-10% on account of rupee appreciation – though it has raised $ terms revenue guidance by 1.4-3%. We expect 19% earning CAGR over FY07-09E – at Rs135 the stock trades at 17x FY08E and 14x FY09E – maintain Neutral.