Sharekhan Investor's Eye dated April 23, 2008

 

Investor's Eye [April 23, 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: Rs477 A soft quarter  Result highlights Ranbaxy Laboratories (Ranbaxy) has delivered a mixed performance for Q1CY2008. While the revenues and net profit have been below our estimates, the operating performance has been ahead of our expectations.  The revenues grew by a modest 3.9% in rupee terms to Rs1,613.7 crore in Q1CY2008 and were below our estimate largely due to the poor performance across the key Western European countries, particularly Romania. The revenue growth was also affected by the ~10% year-on-year (y-o-y) appreciation in the rupee, as the revenue growth in dollar terms was more robust at 15%.  Ranbaxy's operating performance was ahead of our expectations in this quarter. The reported operating profit margin (OPM) expanded by 350 basis points to 15.8%, causing the reported operating profit of the company to grow by 33.8% year on year (yoy) to Rs255.20 crore. Further, on excluding the new drug discovery research (NDDR)-related research and development (R&D) expenses of Rs20.5 crore (which would get reversed upon completion of the demerger) during the quarter, the margin would have stood at 17.1%. The reported net profit of Rs136.5 crore was in line with our estimate but was boosted significantly by an extraordinary income of Rs89.5 crore (pre-tax) received from the sale of surplus land and buildings. Adjusting for the extraordinary income and the NDDR-related R&D cost (which would be excluded upon the approval of the demerger), the net profit of the company stood at ~Rs83 crore. The same was significantly below our estimate primarily due to a higher than expected foreign exchange (forex) translation loss of Rs79.8 crore incurred during the quarter.  The process for the demerger and the subsequent listing of the NDDR division are on track, with the expected date of the listing at the end of Q3CY2008. The effective date of the demerger, however, remains January 1, 2008. The management has disclosed that the company is working on a new R&D deal for its NDDR business (similar to the one it currently has with Glaxo SmithKline) 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 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 (Orchid), Ranbaxy has entered into a strategic business alliance with Orchid, involving multiple geographies and therapies for both finished dosage formulations and active pharmaceutical ingredients (APIs). We believe this alliance is a win-win arrangement for both the companies.  At the current market price of Rs477, Ranbaxy is discounting its CY2008E base earnings (excluding the first-to-file [FTF] opportunities) by 22.3x and its CY2009E base earnings by 19.5x. 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 FTF opportunities: Imitrex, Valtrex, Nexium, Flomax and Lipitor). Reliance Industries   Cluster: Evergreen Recommendation: Buy Price target: Rs3,025 Current market price: Rs2,577 Q4 results in line with expectations Result highlights Reliance Industries Ltd (RIL) has reported a growth of 35.8% year on year (yoy) in its stand-alone revenues to Rs37,286 crore for Q4FY2008 which is on the higher side of market expectations. In terms of segments: The refining division grew by 36.4% yoy to Rs28,686 crore. The petrochemical division grew by 12.3% yoy to Rs14,119 crore, driven largely by the growth in volumes.  The exploration and production (E&P) division grew by 51.1% to Rs828 crore. The operating profit margin (OPM) during the quarter declined by 270 basis points yoy and by 80 basis points quarter on quarter (qoq) to 16.1% in Q4FY2008. In terms of segments: The margin for the petrochemical division declined by 60 basis points to 10.4% due to higher crude oil prices. The gross refining margin (GRM) for the company increased marginally on a sequential basis from US$15.4 per barrel to US$15.5 per barrel in the quarter ended March 2008. The GRM was higher on account of sustained structural tightness in the global distillate market and sustained light-heavy differential. The margin for the E&P division declined by 110 basis points to 54%. The company's net profit increased by 24% yoy to Rs3,912 crore during Q4FY2008 from Rs3,156 crore during the same quarter last year. Its interest expenses were lower during the quarter due to the rupee's appreciation vis-à-vis the US Dollar whereas the depreciation charge was marginally higher. For FY2008, the consolidated net sales grew by 19.5% to Rs137,147 crore. The consolidated net profit (after excluding exceptional items) grew by 26.9% to Rs15,326 crore. The exceptional item of Rs 4,733 crore represents gains primarily arising out of transactions concerning Reliance Petroleum Ltd (RPL) shares. During the year, RIL made nine new discoveries in its offshore E&P blocks. It also achieved 90% overall progress in the implementation of RPL's complex refinery. Reliance Retail today operates over 590 stores in 57 cities, spanning over 3.5 million square feet of trading space across 13 states. With nine oil and gas discoveries during the year and a portfolio of exploration blocks, the company holds a great promise in the exploration business. The refinery business would exhibit good performance on the back of superior margins and volume growth in future as RPL's new refinery becomes operational during FY2009. This along with the growing contribution from the retail business provides a well diversified growth opportunity. Currently the stock is trading at 14.5x FY2010E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.1x. We maintain our Buy recommendation on the stock with a price target of Rs3,025.   SKF India   Cluster: Apple Green Recommendation: Buy Price target: Rs424  Current market price: Rs306 Price target revised to Rs424 Result highlights SKF India's Q1CY2008 results are slightly below our expectations due to lower than expected margins. The company's net sales grew by 9% to Rs392.1 crore during the quarter, which we believe was primarily by strong industrial sales. The operating profit margin (OPM) declined by 170 basis points year on year (yoy) but improved by 60 basis points sequentially to 15.1%. The margin dropped yoy due to higher prices of raw materials, particularly steel. Consequently, the operating profit declined by 2.3% to Rs59.1 crore. As a result of a higher other income the net profit grew by 3% to Rs37.8 crore against our expectations of Rs41.9 crore. SKF India is expanding its capacity by setting up a greenfield plant at Haridwar, Uttarkhand at a cost of Rs150 crore. The project is expected to be completed by the end of this year.  Since a large portion of the company's sales comes from the automotive segment, the slowdown in the automobile sector is expected to be a temporary dampener for the company. At the same time, industrial demand remains strong and going forward, the recovery in the automobile sector, industrial buoyancy and company's expansion plans should put SKF India back on its high-growth path. On the back of slower growth expected in automobiles this year, and margin pressures due to a continued surge in the raw material prices, we are downgrading our CY2008E earnings estimates by 9% to Rs32 and CY2009E earnings by 10% to Rs35.4. At the current market price of Rs306, the stock discounts its CY2009E earnings by 8.7x and its CY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA) by 4.1x. We maintain our Buy recommendation on the stock with a revised price target of Rs424.

Regards, The Sharekhan Research Team

 

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