ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs168
Expansion plans on the board
Key points
- ITC has purchased five acres of land in Hyderabad for its hotel project. The cost of acquisition of land was Rs127.5 crore. The plan for the hotel rooms has not yet been finalised but the management has indicated that depending on the plan the number of rooms could vary from 300-500.
- The paperboards and specialty papers division of ITC has decided to invest Rs35 crore by the year-end to increase the capacity at its Bolaram facility. Post expansion, the capacity of the facility would go up to 42,000 tonne a year from the present 18,000 tonne a year.
- At the current market price of Rs168, the stock is attractively quoting at 20x its FY2008E earnings per share (EPS) and 12.6x FY2008E enterprise value (EV)/ earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on ITC with a target price of Rs200.
Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs326
Current market price: Rs253
Demerger of discovery R&D to unlock value
Key points
- Nicholas Piramal India Ltd (NPIL) is planning to restructure its research and development (R&D) division by spinning off its new chemical entity (NCE) research unit into a separate entity. The company is holding a board meeting on August 31, 2007 to consider the proposal.
- NPIL currently spends around 5-6% of its turnover on discovery R&D. With a focus on the therapeutic segments of oncology, diabetes, inflammation and infectious diseases, NPIL has a pipeline of one new NCE and two phytopharmaceutical products in the clinics. Additionally, five of its NCEs and one phytopharmaceutical product is scheduled to enter the clinics in 2007, which would make it one of the largest clinical development pipelines among the Indian players.
- We have attempted to value the demerged discovery R&D entity of NPIL in line with Sun Pharma Advanced Research Company (SPARC-which is the demerged innovative R&D unit of Sun Pharmaceuticals). We estimate the value of the demerged R&D company at Rs2,369.1 crore, which translates into a value of Rs113.4 per share.
- Assuming that the demerger is effective from April 1, 2007, the same would provide some relief to the base business in terms of the reduction in R&D expenses and the associated loss of the tax shield. We estimate that the demerger would result in Rs55.3 crore and Rs67.9 crore of incremental net profit for the base business, which adds an additional Rs2.6 and Rs3.2 to the earnings per share (EPS) of FY2008E and FY2009E respectively.
SECTOR UPDATE
Automobiles
Don't throw caution to the winds yet
Key points
- The automobile sector has been underperforming the market since the last six months on account of low demand due to higher interest rates, low availability of finance, the monsoons and the higher base of last year. The medium and heavy commercial vehicle (M&HCV) and the motorcycle segments have been the worst affected, while the passenger car segment has outperformed the industry on the back of a number of new launches.
- Even though most of the companies are expecting a revival during the forthcoming festive season, the slowdown in the first four months of FY2008 has been higher than anticipated. The revival is also expected to be delayed in view of the late festive season this year. Hence we continue to remain cautious on the industry and need to keenly monitor the next two months.
- Our channel checks indicate mixed outlook. The commercial vehicle (CV) segment is witnessing some pick up in demand. The two-wheeler industry is also witnessing a bit of revival, but lack of any powerful new launch and tight funding may continue to de-grow the industry for the next three-four months. The passenger car segment is witnessing a double-digit growth, but increasing inventory levels and competition are forcing the players to offer huge discounts.
- We have given our estimates for Q2FY2008. For our large cap auto universe we expect the sales to be down by 10.6%, whereas profit after tax (PAT) is expected to decline by 28.1%. The performance in Q2FY2008 could show significant quarter on quarter (q-o-q) and year on year (y-o-y) decline in profits and the reported profits could also be impacted due to foreign exchange (forex) loss arising out of weakening of the rupee.
- In view of the above-mentioned factors, we are revising our estimates on these companies. We are reducing our volumes as well as earnings estimates for Tata Motors by 0.5% (due to better performance of subsidiaries), Ashok Leyland by 10.9%, Maruti Suzuki by 2.5% and Bajaj Auto by 5.7%. Maruti Suzuki is our top pick in the sector.