Sharekhan Investor's Eye dated April 22, 2008

 

Investor's Eye [April 22, 2008] Please see the attachment for details Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Ranbaxy Laboratories  Cluster: Apple Green Recommendation: Buy Price target: Rs625 Current market price: Rs487 Q1CY2008 results: First-cut analysis Result highlights For Q1CY2008 Ranbaxy Laboratories (Ranbaxy) has reported a 3.9% growth in its consolidated revenues to Rs1,613.7 crore against our expectation of Rs1,777.1 crore. As expected, the revenue growth was affected by the appreciation in the rupee, as the growth in dollar terms was more robust at 15%.  The revenue growth was driven by a 12% growth in the sales to the emerging markets and a 17% rise in the sales to the developed markets. The US business grew by 16% to $99 million during the quarter, while sales in Europe declined by 11% to $83 million. The growth in the emerging markets was led by India, the Commonwealth of Independent States and other countries in the Asia-Pacific region. The Romanian business reported a decline of 29% due to uncertanity in the regulatory scenario. The company expects the performance in Romania to improve in the coming quarters due to the regulatory changes which have been introduced from April 01, 2008. The reported operating profit margin (OPM) improved by 350 basis points year on year (yoy) to 15.8%. The margin improvement was due to a reduction in the raw material cost. On excluding the new drug discovery research (NDDR) related R&D expenses the OPM would have been 17%, up by 350 basis points yoy. Consequently, the reported operating profit of the company grew by 33.8% yoy to Rs255.20 crore.  The reported net profit of the company stood at Rs136.5 crore, up by 6.3% yoy. The net profit was dragged down by a foreign exchange (forex) loss of Rs79.8 crore (as compared with a forex gain of Rs55.9 crore in Q1CY2007), it was boosted by an extraordinary income of Rs89.5 crore during the quarter on account of sale of land & buildings. The pre-exceptional net profit excluding the forex loss stood at Rs119.6 crore, up by 15% yoy. Further the net profit after adjusting for NDDR related R&D cost stood at Rs153 crore, up by 7% yoy. The process for the demerger and the subsequent listing of the NDDR division are on track, with the expected date of listing at the end of Q3CY2008. The effective date of the de-merger, however, remains January 1, 2008. The company is working on a research and development (R&D) deal for its NDDR business and is likely to make an announcement on the same in the next few weeks.  The management has re-affirmed its guidance of an 18-20% growth in the top line in US Dollar terms and stated that it expects to ramp up growth in the coming quarters in order to achieve the said guidance.  Pursuant to the acquisition of a 14.7% stake in Orchid Chemicals, Ranbaxy has entered into a strategic business alliance with the former. The alliance involves multiple geographies and therapies for both finished dosage formulations and active pharmaceutical ingredients. The company will disclose further details of the alliance over the next few weeks. We believe this alliance would be a win-win arrangement for both the companies. Ranbaxy would benefit from Orchid Chemicals' niche product portfolio, particularly in the sterile injectables space, and state-of-the-art manufacturing capabilities. On the other hand, Orchid Chemicals would gain from Ranbaxy's global scale and market reach.  At the current market price of Rs487, Ranbaxy is discounting its CY2008E base earnings (excluding the first-to-file opportunities) by 22.8x and its CY2009E base earnings by 19.9x. We maintain our Buy recommendation on the stock with a sum-of-the-parts price target of Rs625 (Rs490 per share for the base business and Rs135 per share for the first-to-file opportunities: Imitrex, Valtrex, Nexium, Flomax and Lipitor). Tata Consultancy Services Cluster: Evergreen Recommendation: Buy Price target: Rs1,079 Current market price: Rs887 Price target revised to Rs1,079 Result highlights Tata Consultancy Services (TCS) has reported a growth of 2.9% quarter on quarter (qoq) and of 18.4% year on year (yoy) in its consolidated revenues to Rs6,094.7 crore for Q4FY2008. The sequential revenue growth was contributed by a volume growth of 4.8% and rupee depreciation of 1.1%. However, the revenues during the quarter were adversely affected by a 1.6% decline in the blended realisation and a 1.4% decline due to a change in the revenue mix (following a higher offshore proportion). The operating profit margin (OPM) declined by 118 basis points to 25.5% sequentially. The OPM was dented by lower blended realisation (a 1.6% sequential decline) and an increase in the overhead cost as a percentage of sales (up 70 basis points to 21.1% of the sales). On the other hand, a favourable offshore-onsite mix and a 320-basis-point improvement in the utilisation rate (including trainees) to 75.8% partially cushioned the pressure on the OPM. Consequently, the operating profit declined by 1.7% qoq to Rs1,552.4 crore. The other income declined sharply by 25.4% qoq to Rs78.1 crore. Moreover, the company's effective tax rate increased to 13.5% in Q4FY2008 from 12.7% in Q3FY2008. Consequently, the net income fell by 5.6% qoq to Rs1,255.9 crore, which was below our expectation of Rs1,377.7 crore.  The performance was largely dented by a slowdown in the business from two of its top clients (from the banking and financial services domain) and project delays in the other verticals in the last quarter. The decline in the blended realisation was largely on account of pre-transition of a large deal (ie TCS put employees on a project but didn't charge it to the client). As a result, a 4.8% sequential volume growth didn't completely translate into higher revenues and improved margins. The stock is expected to under-perform in the near term. Given the sluggish demand in the banking, financial services and insurance (BFSI) vertical, the management is cautiously optimistic on the demand environment. The scenario is expected to improve, moving ahead. The company closed six large deals during the quarter. The deal pipeline is also healthy (25 deals with the run rate of over US$50 million) and the management expects the growth to improve in the coming quarters. TCS has set a target of 30,000-35,000 gross employee additions in FY2009. To fine-tune our earnings estimate and to factor in an exchange rate assumption of Rs39.5 per dollar for FY2009, we have revised our earnings estimate for FY2009 down by 5.0%. We have also introduced our FY2010 earnings estimate in this note and expect the company's earnings to grow at 6.4% during the fiscal. At the current market price, the stock is trading at 14.9x FY2009 earnings estimate and 14.0x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with a revised price target of Rs1,079. UltraTech Cement Cluster: Ugly Duckling Recommendation: Buy Price target: Rs1,100 Current market price: Rs824 Q4FY2008 results: First-cut analysis Result highlights UltraTech Cement's (UltraTech) Q4FY2008 results were in line with our expectation. The company reported a top line growth of 9.3% year on year (yoy) at Rs1,601.6 crore against our expectation of Rs1,588.4 crore. This was mainly on account of higher realisation during the quarter, which stood at Rs3,282 per tonne against Rs3,047 per tonne a year ago, implying an increase of 7.7% yoy. Volumes for the quarter stood at 4.88 million metric tonne (MMT) against 4.81 MMT a year ago, implying an increase of 1.5% yoy. The operating profit margin (OPM) for the quarter improved by 260 basis points yoy to 30.5%. The OPM improved mainly on account of higher cement prices. The earnings before interest, depreciation, tax, and amortisation (EBIDTA) per tonne for the quarter stood at Rs1,001, higher by 17.8% yoy. However, on a sequential basis EBIDTA per tonne was down 7.9%, as the increase in the cost of manufacturing cement was higher compared to the rise in the cement prices. For the quarter ended, the company reported a profit after tax (PAT) of Rs282.8 crore, up 22.2% yoy. However, this was marginally lower than our expectation of Rs295 crore. The lower-than-expected PAT could be attributed to higher tax rate of 34.4% against our assumption of 32%. The cost of raw material per tonne of cement during the quarter ended shot up by 38.4% yoy to Rs326. The cost of power and fuel per tonne of cement also was higher by 15.5% yoy to Rs756.5. This was mainly on account of higher domestic and imported coal prices. Imported coal prices were up almost 100% yoy. For the quarter ended, the freight and handling expense per tonne of cement was lower by 10.6% yoy at Rs578.7. However it was marginally up on a sequential basis. The increase in freight and handling cost sequentially can be attributed to the diesel price hike in February 2008. For the year ended FY2008, on a standalone basis the net sales stood at Rs5,509.22 crore, up 12.2% yoy. The operating profit stood at Rs1,720.06 crore, up 21.3% yoy and the PAT stood at Rs1,007.61 crore, up 28.8% yoy. For the year ended FY2008, on a consolidated basis the net sales stood at Rs5,623.82 crore, up 13.2% yoy and the PAT was reported at Rs1,010.05 crore, up 28.7% yoy. For the year ended FY2008, realisation stood at Rs3,192 per tonne from Rs2,821 a year ago, which is an increase of 13.2% yoy. EBIDTA per tonne for the year ended FY2008 stood at Rs997 per tonne against Rs814 during FY2007, implying an increase of 22.4% yoy. The company has announced a dividend of Rs5 per share. At the current market price of Rs825, UltraTech Cement is trading at 10.6x its FY2009E earnings per share (EPS) and at an enterprise value/tonne of $137. We maintain a Buy recommendation on the stock with a price target of Rs1,100. MUTUAL FUND: INDUSTRY UPDATE  MFs feel the global heat; caution continues The AUM of equity MFs stood at Rs181,776 crore in March 2008, down by 11.8% from February 2008. However, on adjusting for the net inflows, the fall was steeper at 14.5%. This was more than the market decline of 11%.

Regards, The Sharekhan Research Team