Wednesday, June 20, 2012

>EMAMI: Launches talc in kids' personal care segment

Carves another niche

Emami has entered into the kids' personal care market in India with the launch of 'Boroplus Kids‐Total Defense Talc', priced at INR45 for 100g, targeting consumers in the age group of 5‐12 years. Currently, this relatively niche category has no major competitors; hence, Emami plans to cash in on its Boroplus brand. In the past, Emami has successfully identified niche spaces and scaled them up (like fairness cream for men). It is currently being test marketed in Andhra Pradesh and post that will be rolled out nationally. Based on the response, Emami may expand into other kid focused categories like lotion and creams. A key challenge will be adequately sub segment in terms of product and brand positioning. Emami is already present in the highly competitive infant baby oil segment; we believe this strategy of entering a new segment would help it add new growth drivers. Maintain ‘BUY’.

Launches talc in kids' personal care segment
The entry into this category gives Emami a competitive edge over other personal care players as major baby care companies like Johnson & Johnson and Wipro are currently not present in this sub‐segment, but remain focused on baby/infant segment. Currently, the product is being test marketed in Andhra Pradesh in prime cities like Hyderabad, Vijaywada, Vizag and Nellore and is available in a single variant of 100 gm pack, priced INR45. Emami is already present in the infant care segment with its baby oil ‘Himani Sona Chandi Healthy & Fair Ayurvedic’.

Well‐positioned in various niche segments
In the past, Emami has been successful in identifying niche segments in the personal care categories as seen with the entry into fairness cream for men, cool talcum powder, cooling oil etc.

Outlook and valuations: Positive; maintain ‘BUY’
We are optimistic about this launch and remain positive on Emami. At CMP, the stock is trading at 24.3x and 19.8x FY13E and FY14E, respectively. We reiterate ‘BUY’ on the stock and recommend ‘Sector Performer’ rating on a relative return basis.



Berger Paints India Ltd. (BPIL) is one of the India’s foremost paint companies, currently ranked as second largest on the basis of consolidated sales turnover in Indian paint industry. It enjoys about 19 percent share of the over Rs.21,000 crore of the Indian paint industry.

The company has registered smart numbers for the quarter ending March 2012. Revenues from operations stood at Rs. 746.50 crore as against Rs.592.50 crore in the corresponding quarter of the last year representing an increase of about 26%. Improved sales performance by subsidiaries and joint ventures boosted revenue for the quarter together with strong domestic performance. Operating profit too surged 29.45% in Q4FY12 at Rs.73.40 crore from Rs.56.70 crore in the like quarter last year. A comparatively sharp net profit growth of about 32% to Rs.44.60 crores was clocked for the Q4FY12 compared to Rs.33.90 crore of same quarter previous year. The increase in net profit is due to improved performance in the emulsion business and growing presence in the western part of the country. EPS stood at Rs.1.29 compared to Rs.0.98 in the same quarter last year.

Material cost to sales(%) jumped at 64.3% in quarter ended March 2012 as compared to 62.2% in the corresponding quarter last year. This increase is attributable to consistent rise in raw material prices and impact of depreciating rupee on imported raw materials. Further, there is sustained increase in advertisement and sales promotion spends in decorative business.

With stronger market share, wide distribution network, huge capacity expansion on stream, better product mix and higher A&SP spends; Berger Paints India Ltd. growth prospects look promising. We believe BPIL is trading at an attractive valuation at 22.9x and 19.79x of FY13EPS of Rs.6.29 and FY14EPS of Rs.7.28. We initiate a ‘BUY’ on the stock with a target price of Rs.190 (appreciation of about 32%) with the medium to long term investment horizon.


>NATCO PHARMA: Copaxone remains the key value driver:

Risk-reward remains favourable
􀂄 Strong operating performance in FY12: Natco posted 15% sales growth forFY12 at `5.2bn. During FY11, the company had divested one retail pharmacy store in US (sales of $10mn). Excl the US retail sales, underlying sales were stronger at 27%. EBITDA at `763mn was up 25% YoY while margins at 14.7% were higher 120bps YoY. The margin increase was driven by better product mix (lower US retail). Adjusted net profit at `596mn was up 2.8% YoY primarily due to higher taxes (at 26.1%). Domestic oncology sales at `1.5bn grew by 22% YoY driven by both volume and price increase.

􀂄 Base business earnings to be steady: We expect base business earnings to witness 9% CAGR for FY12-14 with FY13/14 EPS at `20/`22.9. We expect FY13/14 sales growth to be 11%/13% with EBITDA margins at c.20%.

􀂄 US opportunities to unfold in FY13; Copaxone remains the key value driver: We estimate NPV value/share of `275 for the 4 US opportunities. The earliest of the US launches will likely be Lansoprazole (Rx/OTC; `11/share) expected in FY13. Lanthanum launch is likely in FY14 (`13/share). The district court decision in the Copaxone litigation is expected near-term. Our NPV value of `160/share assumes 75% probability of launch reflecting the regulatory approval risk. We see a tentative approval for Natco’s filing as a key trigger which will raise the probability to 100% (independent of the litigation outcome; full value of `213/share). Our estimates for Copaxone are conservative and assume a 4-5 player market – earlier launch can provide upside to JMFe. Lenalidomide (at 75% probability) accounts for an NPV value of `91/share – although timelines are stretched.

􀂄 Maintain BUY; raise Mar’13 TP to `458 (from `375): We raise our FY13E EPS by 13% to `20.0. We introduce FY14 EPS of `22.9. Our Mar’13 TP of `458 is based on 8x FY14 base EPS and `275 for the US opportunities. Given litigation/regulatory actions expected in the near term, we see the risk-reward as favourable for the stock. Maintain BUY. Risks to our call are delay in approvals and negative outcome in litigation.


>TITAN INDUSTRIES: Scheme of Amalgamation

Titan Industries a joint venture between the Tata group and Tamil Nadu Industrial Development Corporation in 1984 for manufacturing and marketing of watches.

The company has sold 135million watches world over and manufactures 13 million watches every year.

During the quarter ended, the robust growth of Net profit is increased by 72.17% Rs.1442.80 million.

Titan Industries Ltd has recommended a dividend on the equity shares of 175%, free of tax, viz., Rs. 1.75 per equity share. (Previous year: 125% free of tax).

Net Sales and PAT of the company are expected to grow at a CAGR of 20% and 27% over 2011 to 2014E respectively.

Q4 FY12 Results Update
Titan Industries Ltd has reported net profit of Rs 1442.80 million for the quarter ended on March 31, 2012 as against Rs 838.00 million in the same quarter last year, an increase of 72.17%. It has reported net sales of Rs 22817.70 million for the quarter ended on March 31, 2012 as against Rs 17779.40 million in the same
quarter last year, a rise of 28.34%. Total income grew by 28.03% to Rs 23069.60 million from Rs.18019.30 million in the same quarter last year. During the quarter, it reported earnings of Rs 1.63 a share.

Recommended Dividend
Titan Industries Ltd has recommended a dividend on the equity shares of 175%, free of tax, viz., Rs. 1.75 per equity share. (Previous year: 125% free of tax).

Scheme of Amalgamation
The company Scheme of Amalgamation of the domestic subsidiary Tanishq (India) Ltd. (transferor Company) with Titan Industries Ltd. (transferee Company).

>PRATIBHA INDUSTRIES: PPSL merger and rights issue

Going strong in tough environment; we reiterate a Buy

We met the management of Pratibha Industries recently. Its order book is `56bn, up 55% yoy, with a strong L1 position. Management has guided to an order inflow of `40bn during FY13 and is confident of maintaining the OPM at the current level. We retain our estimates and iterate our Buy, with a price target of `73.

Robust order book. Pratibha’s order book is a sound `56bn (3.9x FY12 revenue). Water (52%), Buildings (36%) and Urban Infra (12%) continue to dominate the order book. L1-stage projects and those being negotiated with private parties amount to `29bn. For future orders, the focus is on the metro-rail, water and real-estate sub-segments in India and overseas (mainly the Middle East and Sri Lanka). The company secured orders worth `34bn during FY12 and aims to bag orders of ~`40bn in FY13.

Revenue growth intact, margin to be stable. We expect to see good execution in major projects (that of the Delhi Jal Board, DMRC and some in real-estate and water) during FY13. Work on the Bhopal-Sanchi road BOT project has begun. Pratibha is one of the few construction companies to have met FY12 revenue guidance. Given its strong order book, it is bidding for new orders at higher margins. We expect a 22% revenue CAGR over FY13-14 (management is confident of surpassing that) and a 32% PAT CAGR, with a stable EBITDA margin of 14-15%.

PPSL merger and rights issue. On 5 Jun’12, shareholders approved the amalgamation of the pipe division with Pratibha Pipes & Structurals, likely to be completed by Sep’12. The Board has passed an enabling resolution to a rights issue, though it will tap the market only if required.

Valuation. Our price target of `73 is based on 7x FY13e earnings, at a 20% discount to other midcap construction companies’ target multiples (`69) and 1x book value for equity invested in BOT projects (`4/share). 

Risks: slowdown in order inflows, margin squeeze.


Maintains status quo as indicated in April policy…
No major announcement or indications on future stance were made as June policy is a mid-quarter review. Repo rate, CRR were kept unchanged as per their earlier indications but led to market disappointment as consensus of 25 bps cut in repo rate had been built aggressively in prices. 10 year Gsec yields also reacted negatively with new series rising 7 bps to 8.14%.

Extending some relief to exporters, there was an easing of the limit of export credit refinance from 15% to 50% of outstanding export credit of banks. This will release | 300 billion of liquidity, thought to be equivalent to a 50 bps CRR cut. However, the benefit will not flow to all banks equally but more to large export credit exposure banks. A CRR cut would have had a positive rub-off on all banks.

Under this refinance window, banks can borrow at repo rates under LAF as announced from time to time. Hence incremental borrowing cost on these funds will be lower by 100-150 bps. Refer Exhibit 3.

RBI has maintained its stance - inflation remains critical. It stated that… ‘Assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small.

Consequently, a further reduction in policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.’ ‘Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.’

We expect the RBI to make major policy announcements in its July policy meet with respect to revised GDP growth and inflation projections along with change in policy interest rates, if any.

Monetary/Liquidity Measures Announced
 No change in cash reserve ratio (CRR) of scheduled banks at 4.75% of their NDTL

 Policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0%

 The reverse repo rate remains unchanged at 7%, and MSF rate and the Bank Rate at 9%

For augmenting liquidity and increase credit flow to the export sector, RBI increased the limit of export credit refinance from 15% of outstanding export credit of banks to 50%, potentially releasing additional liquidity of over Rs.300 billion, equivalent to about 50bps reduction in the CRR.