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Monday, 28 September 2015

F N A September 28, 2015

Sharekhan's Fundamental News and Analysis

>>10: 25 AM

Dr Reddy Launches Esomeprazole Magnesium Delayed-Release Capsules in US – Positive for company
Dr Reddy has announced that it has launched Esomeprazole Magnesium Delayed-Release Capsules, 20mg and 40mg, a therapeutic equivalent generic version of Nexium, in the US market on 25 September 2015, following the approval by USFDA. It’s a big positive for the company as it can add ~ Rs 250-300 crore of sales for full year and increase earnings by Rs 3-4 for full year. It’s a 3-4 player market currently so the profitability of the product is expected to be better.

>>08: 56 AM

TOP NEWS

Alert: FDA cancels Sun Pharma Advance Research Company Ltd’s (SPARC) Seizure drug over compliance issues – Negative for Sun Pharma and SPARC
The U.S. Food and Drug Administration (USFDA) has revoked an approval issued in March to India's Sun Pharma Advanced Research Company Ltd (SPARC) to launch a drug for seizures, citing manufacturing quality problems at its production site. The move comes as a setback to SPARC, the research arm of India's largest drugmaker, Sun Pharmaceutical Industries Ltd . The drug, Elepsia XR, was its first to receive an FDA approval. The company was aggressively looking for partners to launch the drug by second half of FY2016 and could generate sales of Rs 330-350 crores annually. SPARC had said it would produce the drug at Sun Pharma's Halol plant where the group has been working on fixing the issues the FDA. It’s a negative news for both SPARC and Sun Pharma as the delay in clarity from USFDA for Halol plant continues to impact company’s performance.

Alert: Maruti Suzuki signs wage settlement with permanent workers; but temporary workers agitate demanding a raise which resulted in a violent incident – Negative (possibility of some provisions in Q2 results from retro hike in salary; watch for any further escalation in agitation from temp wokers)
Maruti Suzuki management entered into a wage settlement with permanent workers at its Gurgaon and Manesar plants. The agreement is for three years till March 31, 2018 and will be applicable retrospectively. The workers have been given a cumulative wage hike of Rs16,800 for three years of which 50% hike would come into effect in the first year and the rest in two equal installments. The temporary workers at the company’s Manesar facility started agitations demanding a similar wage increase. View: The wage hike is similar in quantum to the one done three years ago and should not have big impact on profitability. However, given the payment of arrears the margins for Q2FY2016 could be impacted to that extend. Also, the agitation by temporary workers is a matter of concern and an early resolution would be needed.

Alert: Ultratech - Real estate body CREDAI NCR on Saturday announced that it has banned two cement companies UltraTech and Lafarge, accusing them of artificially hiking cement prices. The development is negative for Ultratech

Thomas Cook: Kuoni’s management is confident of turning business profitable in 2015 – positive read through for Thomas Cook India
Mr. Rajeev Wagle MD, Kuoni India indicated that Kouni Travel Group will turn profitable in the current year. The company’s revenues are growing by 20% growth in the MICE and leisure segment, which will results in increase in gross profits and with better cost management, the overall operating margins of Kuoni is expected to improve. Thomas Cook India acquired Kuoni’s travel business in India and Hong Kong in August 2015 and the better operating performance by Kuoni India will enhance the operating performance Thomas Cook India consolidated business.

Dr Reddy's Laboratories to buy IP rights of fondaparinux for Rs ~116 crores – Positive for company.
Australian drug discovery and development company Alchemia Ltd today has entered into an agreement for sale of exclusive intellectual property rights of fondaparinux sodium to Dr Reddy's Laboratories (DRL), for USD 17.5 million (about Rs 115.6 crore). Fondaparinux is a generic version of the anticoagulant drug Arixtra which is indicated for the treatment of deep vein thrombosis (DVT) and pulmonary embolism (PE). It is also indicated for prevention of DVT after major surgery, such as knee and hip replacement worldwide.  Under the binding terms of the sale, Alchemia will receive USD 17.5 million in cash from Dr Reddy's upon the closing of the transaction. In 2007, Alchemia granted Dr Reddy's non-exclusive rights to manufacture fondaparinux sodium in API (Active Pharmaceutical Ingredient) form, and exclusive rights to market fondaparinux in the North America.  Dr Reddy's is responsible for finishing of the product, all regulatory filings and market launch. It’s a positive news for company as it is trying to consolidate its sales in key markets for future.

INVESTMENT CALLS

Viewpoint: Granules India Limited – View positive
·         Shift from low-margin to high-margin business: Granules India Limited (GIL) has successfully shifted its business from low-margin APIs to medium-margin PFIs and high-margin formulations. It is now completely integrated vertically which has helped in building a long-term relationship with customers. The company started selling formulations in FY2009 which today contributes 32% of revenues followed by 24% from PFIs and 44% from APIs. The EBITDA margins of consolidated business have correspondingly increased by 410BPS over the last five years to 16.1% in FY2015.
·         Acquisition of Auctus Pharma a strategic fit: GIL acquired Auctus Pharma Ltd (APL) in February 2014 for consideration of Rs1.2 billion. APL reported sales of Rs1.1 billion with a loss of Rs64 million at the time of acquisition. APL provides GIL with a ready platform for high-value APIs to expand its base as APL has a USFDA-approved unit at Vizag which will reduce time-to-market by around three to four years in comparison with a Greenfield project. With the acquisition of the API business of APL,GIL has added 12 APIs to its product basket, which offer higher margins than GIL’s existing APIs. GIL plans to forward integrate (to formulations) the current basket of APL’s APIs; the benefits of which would improve margins significantly. GIL shall also file 10 ANDA applications over the next couple of years, the benefits of which would be visible after two to three years. The margins could improve further post-approval of ANDAs in the long run.
·         OmniChem JV (CRAMs Business) gives long-term visibility: Under the joint venture ([JV]; 50:50) with Ajinomoto (OmniChem), a facility is being set up at Vizag SEZ to manufacture high-value APIs for existing customers of OmniChem. OmniChem currently makes APIs, which are still under patent protection, for global pharma companies. Going forward, as these products go off patent, they will be shifted to the JV, to retain OmniChem customers’ market share by shifting to a low-cost destination like India. This will provide a steady revenue stream with healthy margins and we believe from FY2018 onwards the JV will contribute rapidly after getting site approvals.
·         Low regulatory risks: Most of GIL’s plants have recently been inspected by the USFDA without any observations thereby reducing the regulatory risk. Also, since GIL’s is a B2B business, the customers regularly audit the facilities on monthly basis.
·         Positive view on the stock with better upside: With a defined strategy of transforming itself into a high-margin formulation player and good earnings visibility of 23% CAGR (despite dilution due to warrant issue to promoter) over the next three years, though the company is in an investment mode, yet its balance sheet is in a comfortable position. Its debt-to-equity stands at 1.1x. With good earnings prospect and better cash flows, the debt on books will further reduce and strengthen the balance sheet. Hence, we have a positive view on stock with a potential upside of 20% returns from the current level over the next six months.
·         Risk: Any delay in product approvals by the USFDA can affect future earnings prospects.


OTHER NEWS

Ballarpur Industries sells stake in Malaysian arm for $500 million (Rs3300); funds will be utilized to reduce debt on books – positive read through for the stock
Ballarpur Industries Limited (Bilt), the flagship company of Awantha Group announced the sale of its indirectly owned subsidiary in Malaysia --Sabah Forest Industries Sdn. Bhd, for an enterprise value of $500 million to Pandawta Sakti. Ballarpur Industries will used the proceeds from the proposed transaction to reduce its overall debt of about Rs 7,000 crore. The company will continue to focus on its core business of manufacturing of paper and paper products. The transaction is likely to complete in three months.

RBI revises norms for change in Ownership of Borrowing Entities outside SDR
RBI has  decided to allow banks to upgrade the credit facilities extended to borrowing entities whose ownership has been changed outside SDR ( strategic debt restructuring), to ‘Standard’ category upon such change in ownership, subject to certain conditions ( eg the change in ownership is by way of sale by lenders to new promoters, the new promoters must have 51% stake and should not have any relation with exiting company etc). Such a facility was available for SDR cases but has been the extended to non-SDR cases as well which will strengthen the NPA recovery efforts of banks and hence positive readthru  for PSU Banks.

Renault launches entry level hatchback Kwid priced between Rs2.6-3.5 lakh; to compete with Maruti Alto
Renault has launched its entry level hatchback ie Kwid in the Indian market. The Kwid is the cheapest offering from Renault and has been designed for India. The vehicle is priced between Rs2.53 Lakh and Rs3.5 Lakh ex-showroom Delhi. The Kwid is powered by a 3-cylinder 800cc engine and generates 53hp power. The vehicle has a length of 3.68mtr and has a high ground clearance to give it an SUV kind of look. View: The Kwid will directly compete against Maruti’s Alto and WagonR as well as Hyundai Eon. The vehicle has a large boot space of 300ltr and its SUV stance wold be a strong selling point. The vehicle has been priced aggressively by Renault and will increase the competitive intensity in the entry car segment. A strong sales, distribution and service network continues to give Maruti the edge however the competition would rise with entry of the Kwid.

Larsen & Toubro (L&T) is planning to monetise its 67-acre land parcel in one of the plush areas of Bengaluru by developing a residential township. The plot used to house L&T and Komatsu joint venture's manufacturing unit for heavy machines which is been shifted. – Positive read thru

Bajaj Auto to launch quadricycle ‘Qute’ in 16 countries; positive for the company
Bajaj Auto on the back of receiving approval under European regulations plans to launch its quadricycle branded as ‘Qute’ in 16 countries. The company will start with launch in turkey where it is expected to be priced about USD2000. The launch of the quadricylce in the domestic market continues to remain in a limbo as the matter is still in the court.

Accenture Q4FY15 earnings, beats estimates but guidance was lackluster, Digital services grew by 35% yoy for FY15: Neutral read-thru for Indian IT sector
Accenture reported its Q4 FY 2015 results on September 24th  ( fiscal year’s end with August). Due to the strong dollar, the company posted 1% year-over-year growth in revenues to $7.89 billion, though revenues were up 12% in constant currencies. This was above the company’s guided range of $7.45 billion to $7.7 billion. Consulting revenues posted just 4% year-over-year growth in revenues to $4.2 billion, though it was up 14% in constant currencies. Outsourcing revenues decreased by 1% to $3.7 billion, though it was up 9% in constant currency. Additionally, during the quarter, the company reported new orders of $8.8 billion. The slower growth rate in new signings indicates the underlying softness in demand for IT services and will surely impact Accenture ‘s revenues in future quarters. The company guidance for 2016 reflected this trend.
Guidance For FY16 and Q1
Accenture expects net revenue growth in local currency to be in the range of 5% to 8%. It expects diluted EPS to be in the range of $5.09 to $5.24. Accenture expects net revenues for the first quarter of fiscal 2016 to be in the range of $7.70 billion to $7.95 billion, a growth rate of 6 percent to 9 percent in local currency. This range assumes a foreign-exchange impact of negative 8.5% compared with the first quarter of fiscal 2015.
Order book Signings:
Accenture reported new signings worth $8.8 billion during Q4, which bought the total to $34.36 billion for FY15. This was 4% lower than the new signings in FY14. Even after adjusting for dollar appreciation against the local currencies (approximately 10%), the new order signings are tepid compared to those of 2014 and grew by 2.8%. While Accenture will meet its guidance for 2016, largely due to the 11 companies it acquired in Q4, its revenue growth in the coming years might lag the vigor posted in 2015 as the company books revenues against its outstanding order book.

Demand for Indian tea rises in Russia; traders want joint ventures with India tea companies – positive for tea processing companies
Tea traders in Russia, one of the largest tea importers in the world, have shown interest in forming joint ventures with Indian companies to sell packet tea in their country. Russia's import duty on packet tea can go up to as high as 18 per cent, making it difficult for foreign brands to compete with local ones. However, bulk import of tea does not attract any tax. 
View: Russia is one of the largest importers of tea in the world and imports its tea from Kenya and India. The JVs with Indian tea companies would result in sustainable exports of tea from Indian markets to Russia, which is positive for tea companies (as export business margins are higher than the domestic margins).

ITC aims Rs 18,000-crore revenue from Agri business by FY-21 – positive read through for the stock
ITC is expecting nearly three-fold jump in turnover of its agri division to touch Rs 18,000 crore in the next five years, driven mostly by procurement and retail initiatives in rural markets. A majority of its agri business is generated from its 'e-Choupals', a web-enabled supply chain network in villages and rural hypermarts 'Chaupal Sagars'. Also the company expects internal consumption by group companies to increase to almost half of its agri segment business in the next five years. The business has margins in the range of 9-11% and is consistently achieving double digit revenue growth.

Swelect Energy Systems is expanding its PV module production capacity from 40 MW to 100 MW – positive read thru
As per media reports, Swelect Energy Systems, is more than doubling its PV module production capacity. The expanded capacity will be 100 MW a year compared with 40 MW previously, which will go on stream in mid-October at its subsidiary unit HHV Solar Technologies in Bengaluru.  It has invested about Rs15 crore in the expansion to make polycrystalline and mono-crystalline modules. This will help it tap the growing domestic market for roof-top and utility scale projects and tap the markets in the US and Europe.

Government’s holding in IDBI Bank to be reduced to 49% -- sentimentally positive for IDBI bank
As per media reports, the government has firmed up plans to bring down its holding in IDBI Bank 49%, marking a big bang start to its commitment to reform state-run banks. The department of financial services in the finance ministry is working on the details of the proposal that could be considered shortly. While the reduction in government stake and turnaround  of bank will take long time; the stock may  appreciate in near term on related news flows.
Demand for Indian tea rises in Russia; traders want joint ventures with India tea companies – positive for tea processing companies
Tea traders in Russia, one of the largest tea importers in the world, have shown interest in forming joint ventures with Indian companies to sell packet tea in their country. Russia's import duty on packet tea can go up to as high as 18 per cent, making it difficult for foreign brands to compete with local ones. However, bulk import of tea does not attract any tax. 
View: Russia is one of the largest importers of tea in the world and imports its tea from Kenya and India. The JVs with Indian tea companies would result in sustainable exports of tea from Indian markets to Russia, which is positive for tea companies (as export business margins are higher than the domestic margins).

ITC aims Rs 18,000-crore revenue from Agri business by FY-21 – positive read through for the stock
ITC is expecting nearly three-fold jump in turnover of its agri division to touch Rs 18,000 crore in the next five years, driven mostly by procurement and retail initiatives in rural markets. A majority of its agri business is generated from its 'e-Choupals', a web-enabled supply chain network in villages and rural hypermarts 'Chaupal Sagars'. Also the company expects internal consumption by group companies to increase to almost half of its agri segment business in the next five years. The business has margins in the range of 9-11% and is consistently achieving double digit revenue growth.

>>08: 43 AM

Stock Idea: Inox Leisure Ltd (INOX)
Target price: 307
Recommendation – Buy
CMP – 219

Title: Well poised to script a blockbuster …   
Making of a ‘Mega’ Show:  Inox Leisure Ltd (INOX), the India’s second largest multiplex operators with 101 properties and 393 screens across 55 cities accounting for about 20% of the multiplex screens in India, is scripting a blockbuster growth story through mix of inorganic (acquisition of Satyam Cinemas that provides it a foothold in lucrative northern market) coupled with aggressive organic expansion to scale up total screen count to 565-570 over the next 24-30 months. In addition to its aggressive push in northern region (challenging the dominance of PVR), INOX is leveraging on its strong brand and balance sheet to increase its presence in tier II/III towns where the multiplex phenomenon is gradually catching the mindshare in line with India’s inclusive growth story.

Top class casting and script in place: INOX mega show is supported by improving quality of content in Indian mainstream and regional cinema with movies regularly hitting the Rs100 crore or Rs200 crore box office collections on a regular basis. The acceptance of Hollywood movies has also provided another source of quality saleable content for multiplexes not only in metros but across cities in the country. The economic conditions are also turning favorable to support robust uptick in urban discretionary spending   given the sharp moderation in inflation and steady job market. The urban leisure consumption would also get a boost from the expected 25-30% hike in salaries of central and state government employees with implementation of seventh pay commission recommendation.

Recommend Buy with TP of Rs307:  INOX is expected to report revenues and net income to grow at a CAGR of 19% and 35.5% over FY16-18E led by strong box office revenues (19% CAGR), higher F&B revenues (23% CAGR) and advertising revenues (20% CAGR) over FY16-18E. Further, with healthy balance sheet with 0.3 Debt: Equity ratio and treasury shares of 4.3 crore shares provides strength to drive inorganic growth activities in the coming years. At the CMP of Rs 219, stock trades at EV/EBITDA of 11x/9x/7.4x FY16/17/18E earnings estimates. We believe, INOX with its strong brand and extended reach is well poised to leverage opportunity in India’s under penetrated multiplex sector. We initiate coverage on INOX with a price target of Rs307, based on 9x FY2018 EV/EBITDA.

Risk: 1) Delay in execution of expansion plan, INOX has accelerated expansion plans over next 2-3 years 2) Content quality, failure of flows of quality movie content will impact the earnings of INOX.

Valuation
Rs Cr
FY15*
FY16 (P)
FY17 (P)
FY18 (P)
Total Revenue
1016.8
1374.3
1665.2
1947.3
EBITDA  margin %
12.1%
14.7%
15.1%
15.4%
Net Profit
20.0
73.7
104.5
135.4
EPS (Rs)
2.2
8.0
11.4
14.8
PER (x)
100.3
27.3
19.2
14.8
P/BV
3.0
2.7
2.4
2.0
EV/EBITDA
18.7
11.3
9.0
7.4
ROE %
3.0%
9.8%
12.2%
13.7%
ROCE %
6.9%
13.3%
15.7%
17.6%
 *FY15 includes consolidation of Satyam Cinema, which impact the overall profitability

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