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Wednesday, 30 December 2015

F N A December 30, 2015

Sharekhan's Fundamental News and Analysis


December 30, 2015

Dr. Reddy's Laboratories (DRL)announces the relaunch of Esomeprazole Magnesium Delayed-Release Capsules – Positive
Dr Reddys Laboratories Ltd has announced the relaunch of Esomeprazole Magnesium Delayed-Release Capsules, the generic version of Nexium in the US market. The re-launch is due to change in the capsule color. Though the news comes as respite to DRL, gNexium is already a diluted opportunity as there are already 4-5 players in the market. DRL has recently filed its response with the USFDA for the warning letter, which shall be key trigger to watch for.

Alkem Labs gets USFDA nod for Gabapentin (used to treat postherpetic neuralgia or shingles) – Positive

Torrent Pharma  gets USFDA nod for pain killer Celecoxib – Positive


Jubilant Life  ’s arm Jubilant Generics gets nod for Citalopram hydrobromide (an antidepressant drug)
TOP NEWS

According to a median forecast of 27 economists in a Reuters poll, The official manufacturing Purchasing Managers' Index (PMI) is forecast to inch up to 49.7 from November's 49.6, however the activity fell to a three-year low. The report suggests that chronic overcapacity, sluggish demand at home and abroad and deflationary pressures are expected to continue to weigh on the sector next year. – Negative for Metals companies

HDFC Life gets nod to up foreign partner stake, may list in FY17 – positive for HDFC
The foreign investment promotion board (FIPB),  cleared Standard Life’s proposal to raise its stake in its insurance joint venture (JV) with HDFC  to 35%. The British insurer will acquire additional 9% stake from HDFC for Rs 1,700 crore and the deal will precede realization of the company’s long-term aim of listing on the Dalal Street.

IDBI Bank gets Rs 2,229 cr capital infusion from the Govt at Rs 75.28 per share
The government has infused Rs. 2,229 crore into IDBI bank by way of preferential allotment of shares at a price of Rs 75.28 per share. While capital infusion will help to tide over the capitalization concerns, its is done at significant discount to book value resulting in higher dilution in equity. Also the government stake post capital infusion (incl LIC stake) will go ~90% levels which will delay the proposal to reduce stake below 50% envisaged by finance ministry. We have reduce rating on the stock.

INVESTMENT CALLS

Max India – Stock Update: Demerger driven value unlocking playing out; maintain Buy
·         Demerger proposal to result in listing of life insurance business–Only listed pure play on insurance: Max India has finally received the nod of high court to take forward the proposed restructuring of Max India into three listed entities through a three-way demerger proposal. As per the scheme, the life insurance business would be housed under Max Financial Services (MFS; where existing shareholders of Max India will get one share of MFS against one share held in Max India). The specialty films business would be hived off into Max Ventures (shareholders will get one share for every five shares held of Max India). Lastly, the healthcare business (Max Hospitals, Max Bupa Insurance) and other investments will be held under Max India. The proposal has resulted in value unlocking for Max India shareholders and the stock has appreciated by ~30% over the last 12 months (comprehensively beating the benchmark indices). That’s because the demerger would create a listed entity holding life insurance business (only pure play listed company in the life insurance space) that would command premium. More so, Max Life Insurance is among the top five private sector life insurance companies with superior operating metrics (conservation ratio, expense ratio, return on embedded value etc).
·         Growth outlook remains strong for insurance, healthcare businesses: Max Life Insurance is among the leading non-bank insurance companies having balanced product portfolio and among the best operating performance. Going ahead, the macro drivers like low insurance penetration, rising savings rate, improvement in capital market will drive growth. On the other hand, the company has consolidated its presence in the healthcare space (around 2,400 operation beds) and performance may improve further as the newer hospitals mature.
·         Retain Buy; fair value works out to Rs648: Given the inadequate disclosures across the sector and lack of listed player in the insurance space, the valuation of the recent deals in insurance space has been a challenge. However, the reported transactions have been in the range of 2.2x-2.5x its embedded value (EV; media sources). We have valued Max Life Insurance at a premium to its peers (around Rs17,500 crore or 3.3x its EV) due to sound business model and premium attached to being first listed entity in the insurance space. Therefore, we estimate the fair value for proposed Max Financial Services to be Rs474. Also, we value the healthcare businesses under restructured Max India (Max Healthcare + Max Bupa + Antara) at Rs134 per share and Max Ventures at Rs40. Thus, we have retained our Buy rating on the stock with an unchanged price target of Rs648.
·         Key risk: Change in IRDA regulations, especially relating to cap on expenses  (as suggested in the draft) could impact embedded value in life insurance

View Point - SJVN: Deleveraged efficient utility available at a bargain , CMP Rs 30.
·         Most efficient hydro assets available at a bargain: SJVN is having a total operational power capacity of around 1,960MW, which is running successfully with more than 100% plant availability factor. We believe, at the current market price, the assets are available at a bargain as the current enterprise value (EV) of SJVN stands at around Rs12,000 crore (derived ~Rs6 crore/MW), which is lower than the replacement cost considering the efficient hydro assets. Moreover, the company is one of the rare utility company with net cash positive position (cash Rs4,000 crore and debt of Rs3,400 crore) and given the lower capex requirement in near term, it has a potential to generate healthy free cash flow, especially with the new plant which got operational from FY2015. With commencement of 412-MW plant, we expect its annual cash flow from operations to improve from around Rs1,300-1,400 crore to around Rs1,700 crore, which is 15% of the current EV of the company.
·         Energising through renewable growth path; 50% jump in capacity in three years: SJVN is having two operational hydro-based power plants. The first is in Nathpa Jhakri (1,500MW) and the second in Rampur (412MW). It also has one windmill of 47.6MW in Ahmednagar district of Maharashtra, taking the total generation capacity to 1,960MW. Going forward, SJVN is planning to add around 1,000MW (50% more than the existing capacity) from solar and wind-based power generation capacities in the next three years. As these capacities are solar and wind based, we believe they have substantially lower execution risk and substantially short gestation period. Given the deleveraged balance sheet and strong cash flow generation visibility, SJVN is quite comfortable to fund the incremental 1,000MW capacities, apart from funding other projects lined up. In the long run, SJVN is having ambitious plan to take its power generation capacity to 10,000MW by 2022.
·         View: Healthy returns generating cash-rich balance sheet at bargain: Given the utility nature of the business, the company is generating a respectable RoE of around 15% at the project level (excluding additional incentives of around 2-3%) and 12-13% RoE at the company level. The stock is currently available at 1.1x its FY2016 BV and 1x its FY2017 BV as per our rough estimates. Apart from sustainable RoE, SJVN is one of the rare utility companies with net cash positive position and healthy cash flow generation visibility. Moreover, expected 50% incremental capacity (solar and wind based with short gestation period) would start throwing cash soon and continue to bolster the balance sheet. Currently, the stock also offers a dividend yield of more than 3.5% which could potentially inch up, considering lower capex requirement in the near term and substantially higher cash in the balance sheet. On this backdrop, we expect 15-20% appreciation in SJVN stock price in the next six to nine months.  

Ashok Leyland management media interaction key takeaways:
·         The management expects the MHCV industry to grow by 15-20% in FY2016. It expects total industry sales of about 280,000 units in FY2016. The industry would take 2 years to scale the previous high of 350,000 units. The recent ban on plying of old trucks in NCR is a welcome step and would boost replacement.
·         There is no capex expected on capacity expansion for atleast 1-2 years. In case there is a sudden pick up in the LCV segment then a capacity expansion may be warranted.
·         The management expects volumes to be buoyant in FY2017 due to the pre-buying ahead of the BSIV implementation across the country.
·         The management stated that it will maintain margins in the double digit range and would not resort to big discounting to gain marketshare.
We continue to remain positive on Ashok Leyland and reiterate our Buy with a price target of Rs105.

OTHER NEWS

BHEL’s order from Yadadri plant faces MoEF hurdles (during market hours) –Negative for stock
As per media reports, Expert Appraisal Committee (EAC) under the MoEF has deferred Terms of Reference (ToR) for the Yadadri Thermal Power Project, citing ecological concerns. BHEL had won the order for 5 x 800 MW super critical Yadadri Thermal Power Project earlier this year. The order was the biggest single order received by BHEL and was worth around Rs 16000 crore, a substantial part of its current order book (more than 10%). We believe the project is crucial for the newly formed state, Telengana; hence we expect alternative solution from the state government soon. Nevertheless, it could have negative knee jerk reaction on the stock price.

SRS acquires Group Company at par to make it a wholly owned subsidiary – Positive
SRS  Ltd has acquired the entire paid up capital of the group company – “ SRS Entertainment ltd” , comprising 1.33 crore shares of Rs 10 each at par making it a wholly owned subsidiary of SRS Ltd. – SRS Entertainment Ltd has 6 screens. We believe that with this acquisition, there would be no conflict of interest with any group company, and thus serves as a positive development for the listed arm- SRS Ltd.

Infrastructure sector – The government has set up Rs40000 crore National Investment and Infrastructure Fund (NIIF) and its chief executive will be finalized by January end. Several sovereign funds and pension funds from Russia, Singapore, UK and UAE are willing to participate in the fund and cooperate with it at various levels. NIIF Governing Council will meet again in March to review the progress in the participation of the funds that are willing to invest. The NIIF would invest in greenfield, brownfield and stalled projects. The development is positive for Infrastructure sector as a whole over the medium to long term.

INOX Leisure starts commercial operations of a new Multiplex at Goa – Positive for the company
INOX Leisure Ltd commenced the commercial operations of a Multiplex Cinema Theatre in Goa, taken on Lease basis on December 29, 2015. This Multiplex has 2 screens and 335 seats.

HDFC Bank reduces base rate by 5 bps ( effective from January 2016) – neutral
HDFC Bank has reduced its base rate by 5 bps to 9.3% which is among the lowest in the system. Given HDFC Banks bulk of the loan book is based on fixed rate, the base rate cut will have negligible impact on margins.

MEP Infra plans to raise Rs 1000 crore via Infrastructure Investment Trust to cut on debt and use the revenue to bid for toll-operate-transfer and operate-maintain-transfer projects as per media reports. The company plans to file the trust with SEBI in January 2016. The development is positive for MEP Infrastructure.

Monsanto to challenge center decision in Delhi High Court: Favorable decision is positive for the company
Monsanto to challenge center decision to regulate the price of cotton seeds including trait value in Delhi High Court. Any encouraging development in favor of Monsanto will be positive for the company. However seeds companies are backing government decision to regulate the cotton seeds price which will end all the pending queries and cases. Capping of the cotton seeds along with trait value is positive for the seeds company as big chunck of the profit is taken of by the Monsanto in terms of royalty payment for leasing of cotton seeds technology.

Zuari Agro Chemicals board has approved merger of its three wholly-owned subsidiaries
Zuari Agro Chemicals board has approved merger of its three wholly-owned subsidiaries into the company in order to simplify the group structure and achieve synergies in operations. The three companies which are going to get merged in Zuari Agro Chemicals are Zuari Fertilisers and Chemicals Ltd (ZFCL), Zuari Rotem Speciality Fertilisers Ltd (ZRSFL) and Zuari Agri Sciences Ltd (ZASL).

Bosch Ltd has suspended production at its Bengaluru and Bidadi plants for 2 days in order to adjust production to market demand. These plant manufacture diesel and petrol injection systems and other electrical components. The company has already suspended operations at Jaipur for 8 days. Sentimentally negative for the stock.

The government is expected to come out with notification for implementation of BS V and BS VI norms across the country. As per the draft notification the BS V norms were proposed to be implemented from April 2019 and BS VI from April 2021.

As per media reports, L&T Infotech (subsidiary of L&T) is planning to raise over Rs 2,000 crore through IPO in the fourth quarter of FY2016 to fund its expansions  – positive read thru for L&T

The Tata Power Company’s subsidiary Coastal Gujarat Power has refinanced its term loan of Rs 3,864 crore, which will reduce the interest burden by Rs77 crore a year for the company. The refinancing scheme will help in extending the tenure of the rupee facility and assist in reducing the cost – positive read thru for Tata power.


Sterlite technology has emerged as a lowest bidder for the Rs 2700 crore Odisha based power transmission projects. – Positive for Sterlite technologies

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