Saturday, March 10, 2007
Mahindra & Mahindra
Cluster: Apple Green
Price target: Rs1,050
Current market price: Rs732
M&M to buy 43.5% stake in PTL
- Mahindra & Mahindra (M&M) has won the bid to acquire a 43.5% stake in Punjab Tractors Ltd (PTL) at Rs360 a share in an all-cash deal. Private equity fund Actis and the Burman family are selling their respective stakes of 29% and 14.5% in PTL.
- PTL has an installed capacity to manufacture 60,000 tractors and enjoys a market share of 10% in the domestic tractor market. The acquisition would give M&M a dominant status in the Indian tractor industry, taking its market share from 30% to 40%.
- We believe that M&M was the best suitor to acquire PTL and would be best placed to streamline its operations. Acquiring PTL makes a good strategic sense for M&M as it would help consolidate its presence in the 31-40 horse power (HP) category and help it to acquire a dominant status in the >51HP category. This would be a huge positive as a strong growth is expected in the higher-end tractor segment.
- We also believe that M&M can take advantage of the strong brand equity of PTL’s Swaraj and its distribution network. The deal also gives M&M a stake in companies like Swaraj Mazda and Swaraj Engines.
- At Rs360 per share, the deal would cost M&M about Rs1,424 crore (including the cost of the open offer in both PTL and Swaraj Engines). Though the valuations appear to be stretched, we expect the acquisition to yield substantial long-term benefits to M&M.
- At the current levels of Rs732, M&M trades at 11x its FY2008E consolidated earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,050.
Cluster: Emerging Star
Price target: Rs425
Current market price: Rs311
Remains strong and stout
- Cadila Healthcare aims to become a $1 billion company by December 2010 (FY2011), of which $800 million will come through organic growth and the remaining $200 million from inorganic initiatives. From estimated sales of approximately $400 million in FY2007E, this implies a doubling of the organic revenues over the next 4 years. The key drivers of this growth will be the growing revenues of the US and French businesses, a rebound in the growth of the domestic business and steady contributions from its joint ventures.
- Cadila has selected a basket of 60 products for the US market, which include existing generics, would-be generics (including certain blockbusters) and NDDS-based products. The company plans to file 20-25 abbreviated new drug applications (ANDAs) every year and launch 6-7 new products per year in the USA. With a strong pipeline of products and good marketing reach, we believe Cadila's US business is set to grow at a compounded annual growth rate (CAGR) of 65% from $11 million in FY2006 to over $50 million in FY2009E.
- Through a stream of new launches and an increasing market share (through Evolupharm's network of pharmacies), we believe Cadila's French business will grow at a CAGR of 43.5% from 10 million euros in FY2006 to over 31 million euros in FY2009E. Further, with an improving top line and a shift of manufacturing to India, the margins should also improve. The management has guided towards a H2FY2008 turnaround in the French operations.
- Cadila is ranked fifth in the domestic formulation market. Even though the domestic formulation business has been slow in recent times, we believe the worst is over. With the benefits of the restructuring programme flowing in, an increased thrust on rural areas, a continued focus on the lifestyle segments and a target of 35+ new launches per year, we expect Cadila's domestic formulation business to grow at a CAGR of 10.4% from Rs979 crore in FY2006 to Rs1,317 crore in FY2009E.
- Cadila has formed 50:50 joint ventures (JVs) with three companies in order to exploit specific opportunities, namely with Altana, Hospira/Mayne and Bharat Serums. We expect marginal growth in the contributions from Altana as Altana is already sourcing 60-70% of its requirement from Cadila. Upon expiry of the Pantoprazole patent, the loss in revenues and profits from the Altana JV is likely to be compensated for by the Mayne JV, the revenues from which should start flowing in by FY2009E.
- We are introducing our FY2009E estimates for Cadila. We estimate the sales to grow at a CAGR of 18.5% over FY2006-09E to Rs2,471.5 crore in FY2009. The growth will largely be driven by a 12.2% CAGR in the domestic business and a 35% CAGR in the exports. A growing top line and expanding margins will cause Cadila's net profit to grow at a CAGR of 26.7% to Rs335 crore in FY2009E, translating into earnings of Rs26.7 per share.
- At the current market price of Rs311, Cadila is trading at 14.1x its estimated FY2008E earnings and at 11.7x its estimated FY2009E earnings. The stock has underperformed the market in recent times, but we believe that as Cadila's international efforts start translating into gains, the stock's performance should improve. At these levels, the stock is available at near its 52-week low level. Considering the strong growth momentum of the company, we view this as a strong buying opportunity and hence maintain our Buy recommendation on the stock with a price target of Rs425.