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Thursday, 31 December 2015

F N A December 31, 2015

Sharekhan's Fundamental News and Analysis


December 31, 2015

Cadila has received a Warning Letter issued by the US FDA relating to its Moraiya formulation facility and Ahmedabad API facility (Zyfine) – Negative; do not bottomfish at lower levels; will review the TP and reco post more clarity on contents of warning letter and the impact on its financials


TOP NEWS

Godrej Consumer Products, Torrent Phrama, Concor and Jet Airways are included in F&O segment with effect from January, 1st 2016 – positive for respective stocks

BSE group re-balancing – companies shifted from B group to A group are Pfizer Kansai Nerolac, Blue Dart, Repco Home and Chola Investments & Finance  

USFDA  grants Aurobindo tentative approval for Angiomax injectable, an anticoagulant drug – Positive fof Aurobindo Pharma

USFDA gives tentative approval to Dr Reddy’s for Fesoterodine Fumarate, used to treat overactive bladder syndrome.

Madhya Pradesh bans more than 15 year old commercial vehicles; other states expected to follow suit – positive for CV manufacturers like Tata Motors and Ashok Leyland
As per media reports, the Madhya Pradesh (MP) government has banned more than 15 year old commercial vehicles from plying on the state roads. The decision has been taken to counter the increase in pollution. There will be no new permits or fitness certificates for  the old vehicles. View: Madhya Pradesh is the second region after NCR to put a restriction on plying of old commercial vehicles. We expect other states to follow suit considering the renewed focus on controlling pollution. The move will increase demand for replacement from fleet operators and is positive for CV manufacturers such as Tata Motors and Ashok Leyland.

Bharat Electronics set to get a boost from Defence systems upgrade plan
Bharat Electronics Ltd (BEL), one of the largest Defence electronics equipment manufacturer, is all set to be a key beneficiary of the Centre’s increasing thrust on the replacement and modernisation of military hardware in the country. Currently, the company has a 60% share in the Defence electronics segment. But over the last few years, the business model of BEL has witnessed a shift from being a pure product supplier to a system integrator. New orders have been placed with the company for entire systems rather than separate products, as was being done earlier, said sources, adding that the Akash air Defence missile system, a medium range, surface-to-air missile, was one such example, as was the company's Battlefield Surveillance Radar, and Advanced Gun Fire Control Systems. BEL has not only maintained a consistent policy of R&D investments but also has launched collaborative R&D with private small and medium-size firms in the country. On an average, 80 per cent of BEL’s sales turnover is from indigenous R&D every year.

Solar power - CCEA approved higher budget for grid connected solar rooftop system (during market hours) - positive read thru for solar power players i.e. Swelect Energy and Ujaas Energy 
The Cabinet Committee on Economic Affairs has approved an increase in the budget for implementation of grid connected solar rooftop systems under National Solar Mission from Rs 600 crore to Rs 5,000 crore by 2019-20. This will support Installation of 4,200 megawatt peak (MWp) solar rooftop systems in the country in the next five years. A capital subsidy of 30% will be provided for general category states and union territories, and 70% for special category states. However, there will be no subsidy for private commercial and industrial establishments since these entities are eligible for other benefits such as accelerated depreciation, customs duty concessions, excise duty exemptions and tax holiday, etc. 

INVESTMENT CALLS

View Point - Rossell India - Risk-reward ratio unfavoruable after recent appreciation; Book profit
·         Handsome gains; stock appreciated by 25%: Since our Viewpoint on April 13, 2015, the stock of Rossell India has posted handsome returns of 25% in the last nine months. In the volatile market environment, the stock has outperformed the major indices.
·         Declining tea supply from Kenya positive for Indian tea producers: The drought in Kenya (largest tea exporter globally) has affected the tea production in the country, which led to an increase in the Kenyan tea prices. The increase in Kenyan tea prices should fetch better realisation for Indian tea producers in the upcoming tea season (starting from March-April 2016), as domestic tea prices are expected to move up in line with international tea prices. Also, the exports from India are expected to increase due to the short supply from the Kenyan market. Rossell India (tea contributes 85% of consolidated revenues) will be one of the key beneficiaries of rising tea prices in the domestic and international markets, as it will help to improve profitability of the tea business on the backdrop of stable tea production in FY2017. However, in the event of significant y-o-y decline in the tea production in India, the likely benefits of higher tea prices would get moderated. 
·         Defence and QSR businesses still in nascent stage: Though we continue to remain positive on the value creation in its defence and quick-service restaurant (QSR) businesses, it would takefew years before they start contributing meaningfully to the consolidated earnings. Moreover, these businesses could require infusion of funds to scale up to a viable scale in the near term. 
·         Near-term positive priced in; Book profit: The expected improvements in the performance of the tea business (in FY2017) and positives from emerging footprints of defence and hospitality space have been factored in the recent run-up in Rossell India’s stock price. Thus, we see limited upside and advise investors to Book profit at the current level.

View point -Welspun Corp (CMP Rs 116): Strong growth in pipeline
·         Global leadership in pipes, de-risks from domestic slowdown: Welspun Corp Ltd (WCL) is a leading global manufacturer of the large diameter steel pipes with around 10% market share. It has the largest capacity of 2.4 million metric tonne (MT) per annum, strategically located across the USA, Saudi Arabia and India. It is also a preferred vendor to over 50 major oil and gas companies like Shell, Saudi Aramco, TOTAL, Chevron, Exxon Mobile and TransCanada, as very few players qualify for the large global tenders. The company was able to survive the low domestic investment regime in the oil and gas pipeline over the past few years as it expanded successfully into overseas market while some players like PSL Ltd had to trim or shut down their operations over the same period.
·         Robust revenue visibility from overseas: After the recent order win, its order book now stands at Rs6,400 crore/1,040 KMT (0.76x its FY2015 pipe revenue) to be executable over the next eight to nine months. Robust bids, which are in pipeline of 3,600KMT are likely to provide further boost to the order book in coming quarters. By FY2017, global bidding opportunities for about 12,000KMT pipeline are likely to float mainly in the USA, Mexico, Europe and Saudi Arabia (where WCL is one of the strong contenders). Overall, global pipeline investment is likely to generate $422-billion opportunity over the next four to five years as the fall in prices of crude oil and metals lead to preference for steel pipeline over railways as the preferred mode of transport.
·         Deleveraging balance sheet to lead healthier ratios: After the demerger of the non-pipe business in Welspun Enterprises in FY2013, WCL has become a pure and quality play on the global pipes sector. The company has been generating robust cash flows from which it has systematically repaid debt worth Rs2,555 crore over FY2013-15 and further it is expected to annually repay debt of at least Rs200 crore for the next few years. Accordingly, its debt-equity ratio is likely to come down to 0.7x in FY2018 from 1.3x in FY2014. The operating profit margin is also expected to be stable at 10-11% as; (1) its future revenue traction is heavily tilted towards North America (54% of the current order book versus 16% in FY2014) which enjoys better margin; (2) increasing contribution of its capex-heavy plates facility to revenue would help in better utilisation of capital employed. Further, return ratios will also improve led by improved profitability and lower interest cost.
·         Turnaround story at reasonable valuation: Given its diversified clientele portfolio, strong manufacturing capabilities and robust bids in pipeline, WCL is our preferred pick among the Indian pipes manufacturers. Backed by high-margin, North American revenue visibility and lower interest cost, we are expecting it to report a growth rate of 15% CAGR in revenues and 80% CAGR in earnings (on a low base of FY2015 earnings) in the three-year period of FY2015-2018. The company has reported very robust numbers in H1FY2016 with a PAT of Rs117 crore versus a loss of Rs92crore in H1FY2015. Based on valuation, the company is trading attractively at 10.9x its FY2017 earnings per share which is 20-25% lower than its post-demerger average price earnings (PE) multiple. Hence, we see a potential upside of 20-25% in the stock price from the current level.
·         Key risks: (1) Slowdown in capex cycle of pipeline network both in domestic and overseas markets; (2) Unfavourable movement in foreign currency exchange rates, metal and crude oil.

OTHER NEWS

Gulf Oil Lubricants launched entry level synthetic engine oil for the passenger car segment to gain market share in the segment – positive read thru for Gulf Oil Lubricants
Gulf Oil Lubricants launched entry level synthetic engine oil for the passenger car segment yesterday under the name Gulf Ultrasynth X. This is inline with the company’s strategy to expand the market share on existing products while introduce new products. The company aims to increase its market share in the passenger car segment with its launch, as currently it has a very small market share in the passenger car segment. The management expects to gain some market share over the next two-three years. To support this efforts, it aims to increase its distribution footprint as well, by increasing the distribution reach year-on-year by 15 per cent.

Hero MotoCorp working on three performance motorcycles; positive for the company
As per media reports, Hero MotoCorp is working on three new motorcycle models which are expected to be launched in CY2016. Of the three two motorcycles are in the 150-160cc range while one motorcycle is in the 200-250cc range and would replace the company’s flagship model ie Karizma. The company is also expected to inaugurate its state-of-the-art R&D centre in Jaipur.

Kaveri Seeds has confirmed investment of Rs298 crore as on 28 December 2015 in liquid funds of different fund house.

Media report: Cipla, Pfizer, Sun take hit on NLEM price cut – Short term negative
As per the media reports, the revision of the National List of Essential Medicines (NLEM) will have an impact on companies like Cipla, Pfizer and Sun pharma. Cipla will lose Rs 84 crore because of the price cuts followed by Pfizer which will see an erosion of Rs 56 crore and Sun Pharma that will have an impact of Rs 42 crore. Its negative for short term for the mentioned companies but in long run volume gain from products under NLEM negates the losses incurred.

As per media reports, due to low bidding interest, increased coal availability and falling global prices, the Coal Ministry cancelled the fourth round of coal block auctions, which was scheduled to start on January 18. Coal Secretary also confirmed that sufficient bids had not been received.

Amtek Auto has pledged its entire stake in JMT Auto (18.1 crore shares – 71.73% stake) with IL&FS Trust Company. Negative for company.

CDR failures continue to mount pressure on NPAs of Banks
As per media reports total failures  from CDR cell for first eight months of the fiscal are to the tune  of Rs 22303 crore and Rs 3000 crore in Q3FY16.  When  an account fails CDR ( corporate debt restructuring ) it is likely to be classified as NPA. This suggests that NPAs of banks are not likely to decline significantly in near term also because RBI has asked banks for early NPA recognition to get rid of prolonged stress.

Kajaria Ceramics – Management Interview key takeaways
·         As per Kajaria management industry has been suffering due to China’s aggressive dumping of vitrified tiles in India since 2014 which is impacting the sales of domestic companies
·         Company expects anti-dumping duty decision to come by January-end. Antidumping during is likely to around $3-4 per square meter.Imports constitute around 7-8% of the overall market (total market size is 850 million square meter).
·         On demand side government have started infrastructure spending over last 2-3 month which is positive sign of revival in spending by government.
·         Government of India is likely to construct about 60 million houses in the next 6 years under EWS and LIC and smart cities will take shape from around January 26 (around 20 cities to started in phase -1).

·         We don’t have coverage on the stock.


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