>ICICI BANK LTD: Q1FY13 Results

• ICICI Bank reported PAT of Rs.1815 crore in Q1FY13 v/s market expectation of Rs.1730 crore.
• Net Interest Income was Rs.3193 crore in Q1FY13 v/s market expectation of Rs.3061 crore.
• NIMs have improved YoY from 2.6% n Q1 FY12 to 3.01% in Q1 FY13.
• Advances have grown by 22% YoY to Rs.2,68,429.9 crore in Q1FY13
• Deposits grew by 16% YoY to Rs.2,67,794.2 crore in Q1FY13.
• Asset quality has improved YoY but has stayed flat sequentially. GNPA stood at 3.5% in Q1FY13 v/s 4.4% in
Q1FY12 and 3.6% in Q4FY12. Net NPA was 0.7% in Q1 FY13 v/s 1% in Q1 FY12.

RISH TRADER

>Divi’s Laboratories Ltd.

We (Ventura) initiate coverage on Divi's Laboratories Ltd as a BUY with a Price Objective of `1,287 (target 21.0x FY14 P/E). At CMP of ` 952, the stock is trading at 19.6x and 15.5x its estimated earnings for FY13 & FY14 respectively, representing a potential upside of ~35% over a period of 18 months. Being a leading player in the CRAMs space, Divi’s will be a key beneficiary of the increased generic opportunities emanating from the patent expiry cliff on the back of its expertise in complex chemistry, efficient and cost conscious processes and relationships with the top 25 global innovators. We expect Divi's revenues and earnings to post a CAGR of 25.2% and 23.5% to `2915 crore and `814 crore, respectively by FY14. Further, timely approvals for ready to market products can be a game changer for the company and further accelerate the pace of growth.


 Continuous growth of the matured API product portfolio and impending sales of the new ready to market API’s to fuel growth


 In the generic API segment, Divi’s enjoys a significant market share in its key products and derives 47% of its revenue from the top 5 products, which are in the matured stage. The company also has a strong pipeline of ready to market products, in addition to its developmental pipeline, which provides Divi’s with strong revenue visibility over the long term. Seeing the robust growth potential in the API space, we expect revenues from this segment to grow at a CAGR of 19.6% to `1306.9 crore by FY14.


 CRAMS on growth path leading to profitability
Backed by the strong relationship with the innovators, presence across the entire CRAMS value chain and its ability to support the innovator in late life-cycle strategies has enabled Divi’s to establish itself as a leading player in the CRAMS space. Further, the increased focus of MNCs on outsourcing led by cost arbitrage and strong R&D capabilities will only benefit Divi’s. We expect this custom synthesis business to grow at a CAGR of 25% to ` 1277 crore by FY14.

 Strong execution and effective control to ensure sustained margin
Compared to peers, Divi's have been able to maintain strong margins on account of its ability to swiftly execute capex and ensure quick capacity ramp up. Divi’s policy of adding capacities, only post clear visibility of orders ensures that there is no spare capacity and strong cash flows from the very 1st week of operations leads to ROCE being much higher than peers.


 Valuation
At the CMP of ` 952, Divi's is trading at 19.6x and 15.5x its estimated earnings for FY13 and FY14, respectively. Divi’s is trading at a considerable premium to its counterparts in the domestic market i.e. Biocon, Jubilant as well as to the international players. However, considering the high margin business, steady organic growth, strong cash flows and high return ratios, we believe the premium is completely justified. We initiate coverage on Divi's Laboratories Ltd as a BUY with a Price Objective of `1287 (target 21.0x FY14 P/E) representing a potential upside of 35% over the next 18 months.


RISH TRADER

WOCKHARDT LIMITED: US business to grow on the back of robust product portfolio and FTF opportunities

We initiate coverage on Wockhardt Limited (Wockhardt) as a BUY with a Price Objective of ` 978 (target 10.0x FY14 P/E). At CMP of ` 565 the stock is trading at 3.4x and 5.8x its estimated earnings for FY2013E & FY2014E representing a potential upside of ~73% over a period of 18 months. With the contingent liability concerns addressed and bulk of FCCBs already repaid, the sale of nutrition business will lead to a substantial increase in cash which could be used to draw down debt or pursue organic / inorganic grow opportunities. Further its portfolio of high margin niche products and impressive FTF launches should provide for strong growth in revenues (12.3% FY11-14 CAGR) to ` 5311.2 crore and earnings (123.6% FY11-14 CAGR) of ` 97.8 /share by FY14. During the period 2003 through 2008, Wockhardt has traded mostly in line with the 1 Year forward PE multiple of its peers viz: Sun Pharma, Cipla, Lupin and Glenmark. However, post its derivative losses, Wockhardt’s EPS turned negative. Now that the balance sheet is all cleaned up and all contingent liabilities addressed, we expect that going forward, Wockhardt will catch up with its peers leading to a substantial re-rating of the stock.



Integrated assets, niche positioning and monetization capability to heighten growth pace
Wockhardt’s revenues are expected to grow at a CAGR of 12.3% to ` 5,311.2 crore by FY14 on the back of strong traction in high margin niche product sales and FTF product launches in the rewarding markets of EU and the US. Driven by gradually improving operational efficiencies on the back of better raw material sourcing, cost optimization and increasing contribution of high margin products and FTF opportunities, we expect margins to improve by 540 bps to 29.6% in FY14. Consequently earnings are expected to grow at a CAGR of 123.6% to ` 1,070.1 crore over the forecast period. Further, strong focus on R&D and development of complex products would ensure future sustenance of this growth trajectory.


Strong traction in revenues from regulated markets to boost profitability Currently, Wockhardt’s sales mix is tilted towards the regulated markets with US and EU markets contributing a significant 66.5% of the revenues. With strong FTF opportunities emanating from these markets over the next couple of years, we expect the sales mix to tilt further in favour of these markets with US and EU contributing 73.8% (US- 38.2% and EU-35.6%) of the overall revenues in FY14.


US business to grow on the back of robust product portfolio and FTF opportunities The growth in the US markets is driven by its niche product portfolio consisting of Metaprolol (CVS), Divalproex (CNS), Flonase (Respiratory) and a slew of FTF opportunities in Stalevo (CNS), Comtan (CNS) and Lunesta (Anti Depressant). We expect these niche products and FTF opportunities to contribute ` 768.3 crore and ` 424.4 crore to the revenues in FY13 and FY14 respectively. Further, the base business contribution is expected to be ~ ` 1152.0 crore and ` 1497.6 crore to the US revenues in FY13 and FY14 respectively.

Strong presence in EU markets to drive growth Wockhardt has a strong presence in the EU markets through its subsidiaries Wockhardt (UK), Pinewood Healthcare (Ireland) and Negma Laboratories (France). Wockhardt (UK) has a strong foothold in the exports and CRAMs segment and is one of the major suppliers of healthcare products to the Retail Pharmacy and Hospitals in the UK as well as European markets. Growth in Wockhardt (UK) is supported by its strong product pipeline in key high growth therapeutic segments of diabetes, oncology, pain management, anti infectives and anti-coagulants coupled with numero uno position in Animal Insulin. Pinewood, too, continues to deliver robust numbers driven by the successful launch of product Nexazole (GI) and strong growth in the hospital business. However, performance of Negma remains under pressure on account of lost patent cover of ART 50. In order to address the underperformance of the French unit significant restructuring initiatives are being implemented in addition to enhanced focus on novel drugs. We expect these initiates to lead to positive outcomes in the medium term. On the back of the strong business model in place, we expect the European business to contribute ` 1,719.7 crore and ` 1,891.6 crore to the overall revenues in FY13 and FY14 respectively.


Two way growth strategy to drive domestic business Wockhardt’s domestic business (sans Nutrition segment) is expected to outperform the industry growth and grow at a CAGR of 13% to ` 1,118.9 crore in FY14 on the back of its entry into the high margin chronic therapy product portfolio and enhancement of its field force strength. Operational efficiencies and effective funds management to drive margin expansion Driven by gradually improving operational efficiencies on the back of better raw material sourcing, cost optimizations and increasing contribution of high margin products and FTF opportunities, we expect EBITDA margins to expand by 540 bps to 29.6% in FY14. Already the margins in Q3FY12 have improved by 200 bps over Q2FY12 on account of strong performance of high margin product Toprol XL in the US markets. The net margins are also expected to improve by 1750 bps to 20.1% over the forecast period as the impact of settlement of contingent liabilities, repayment of debt and better funds management kicks in.



Contingent liabilities stand resolved
The contingent liabilities have been bought down to zero after addressing the claims in full of Rs 240 crore of liabilities with Deutsche Bank and a USD 24 mn with Lehman Brothers. This balance sheet clean up exercise should help boost investor sentiment and lead to further re-rating of the stock.



Sale of non-core assets to ease debt pressure burden
Post sale of its nutrition business to Danone, we expect significant liquidity to be injected in the company helping it tide over the current debt issues and pursue other organic and inorganic growth opportunities. Out of the proceeds of its divesture, we expect Wockhardt to settle the remaining FCCB dues and reduce the debt to ` 1052.1 crore in FY14 from the current ` 3,849.5 crore thus deleveraging the balance sheet considerably. Post clearance of the contingent liabilities, we foresee no major hindrance and expect the deal to be completed in the stipulated time frame.



Valuations: Re-rating of the stocks on cards
At the CMP of ` 565, Wockhardt is trading at 3.4x and 5.8x its estimated earnings for FY13 and FY14. We initiate coverage on Wockhardt Ltd as a BUY with a Price Objective of ` 978 (10x FY14 EPS) over a period of 18 months. Currently, Wockhardt weighed by high debt is trading at a considerable discount to peers. However with the contingent liabilities settled, repayment of FCCB debt on track and the sale of the nutrition business, we expect the stock to be re-rated substantially in the medium term. Wockhardt is trading at a significant discount of 54% to the industry average, and we expect the discount to narrow down substantially over time.



RISH TRADER

>BAJAJ CORP: New product launches in niche segments and inorganic acquisitions; Sustainable growth of its flagship brand "Almond drops"; New foray into Light Hair Oil segment

We initiate coverage on Bajaj Corp Ltd as a BUY with a Price Objective of ` 136 (target 14x FY13 P/E). At CMP of ` 99, the stock is trading at 12.7x and 10.2x its estimated earnings for FY12 & FY13 representing a potential upside of ~37.4% over a period of 15 months. Strong sustainable volume growth and pricing power of its flagship brand “Almond Drops”, new product launches in niche segments and inorganic acquisitions should lead to an earnings growth of 30.6% CAGR over the period FY11 to FY13. Bajaj Corp Ltd is one of the fastest growing companies in the FMCG space with market leadership in the niche “Light Hair Oil” category and over the years has successfully consolidated its market share.

■ Brand leadership, product differentiation, and extensive network reach has helped BCL maintain its market leadership

The Light Hair Oil (LHO) segment (~13% of total hair oil market) has witnessed ~25.5% CAGR (in value terms) and ~17.6% CAGR (in volume terms) over the period of 6 years since 2006-07. Further this segment is expected to grow at ~17% CAGR over FY12-14 and Bajaj Corp with its offering of Almond Drops hair oil ADHO (~93% of total sales) is best placed to benefit from this opportunity. Over the years, ADHO has enhanced its market share to 53.9% (+1360 bps since FY08) and has ambitious plans to further consolidate its position in this segment to ~65% over the next five years. Slew of measures like sachets to penetrate the rural market (being the only player), targeted advertising, product differentiation through use of glass bottle packaging (which reinforces its value proposition) and market expansion strategies to convert coconut hair oil users to the higher value added LHO category should stand the company in good stead to achieve its growth targets. 

■  New foray into the fast growing cooling hair oil segment to help diversify product portfolio and boost revenues

Leveraging on its strong presence in the LHO segment and the distribution strength of over 2 mn retail outlets, BCL is looking at strategic brand extension and new product launches. In line with this strategy, the company has forayed into the ~ ` 640 crore cooling hair oil segment with the launch of Kailash Parbat Cooling oil (KPCO). The initial response has been quite promising with KPCO attaining a volume market share of 1% within the first quarter of its launch. However we have not factored this in our model and represents an upside risk to our estimates.

■ Prospective inorganic growth on the back of cash availability

In its initiative to grow through acquisitions BCL is scouting for brands in the personal care segment in the domestic, as well as, international market. The huge cash pile of ~ ` 346.7 crore is a strong advantage and can be put to work to undertake a sizable acquisition which would catapult the company into a higher growth phase. This would not only help de-risk the brand portfolio but would help diversify the revenue stream and improved profitability leading to better shareholder returns which in turn should lead to higher valuations.

Valuation

At the CMP of ` 99, BCL is trading at 12.7x and 10.2x its estimated earnings for FY12 and FY13. We initiate coverage on Bajaj Corp Ltd as a BUY with a Price Objective of ` 136 (14x FY13 EPS) over a period of 15 months.

We have valued the stock at ~35.5% discount to Marico‟s valuation of 21.7x FY13 EPS (as per Ventura estimates). BCL‟s earnings are expected to grow at a 30.6% CAGR over the forecast period FY12-13 which is far ahead of the FMCG sector‟s growth. Strong cash generation ability and the better visibility of its earnings over the next two to three years are an added attraction.

To read the full report: BAJAJ CORP

RISH TRADER

>ZF STEERING GEARS (VENTURA)

ZF Steering Gears (India) Limited, a pioneer in manufacturing and supply of Steering Gears for commercial vehicle (CV) space in India, is expected to gain from the rising demand for the steering gears. Apart from the positive business outlook, ZF also has significant liquid investments in its balance sheet which at the current prices is valued of Rs 115 per share. This provides much needed cushion to the stock. Over the next two years ZF is expected to exhibit a CAGR of 29% & 40% in its revenues & profitability respectively. At CMP of Rs 450, the stock is available at 9.1x & 7.3x its estimated earnings of Rs 49.4 & Rs 61.3 respectively. We recommend a BUY at CMP for a price target of Rs 615 an upside of 37% for a time horizon of 12 to 15 months.

■ Favourable Industry Outlook The Indian CV industry, after facing a severe demand slowdown in the second half of 2008-09, has bounced back strongly, reporting a strong demand recovery across most segments. After posting a drop of 24% in the production of CV for the fiscal 2008-09, the CV industry achieved an impressive 36% growth in 2009-10. The trend has even continued in the first quarter of the current fiscal (Q1FY11) with growth coming in at a robust 36.4% growth. Although the medium to longer term outlook remains strong given the expectations of continued economic revival, the growth in volumes is likely to see some moderation & is expected to be at around 19-20% for FY11 & 7-8% for FY12.

■ Commands a significant market share ZF Steering commands a strong market share in the domestic CV space with nearly 45% market share. Its only competitor with similar market share is Rane TRW Steering Systems Limited. The balance 10% of the CV Steering Gears market is met by imports from China. Almost 65% of the Tata Motor’s requirement in the CV space is met by ZF whereas in case of Ashok Leyland, it meets nearly 35% of its requirements. Further 100% of the requirement for Eicher Motors & Man Force is met by ZF.

■ Investment Value per share provides cushion Besides its core business of manufacturing steering gears, ZF has significant portion of income coming from its investments in liquid funds. The cash value per share of these investments is valued at Rs 115 per share and provides significant cushion.

■ Better Capacity Utilization to enhance its operating margins Currently ZF has installed capacity of 270,000 power steering gears & 180,000 mechanical steering gears. The capacity utilization in FY10 stood at 51% & 69% for power & mechanical steering gears respectively. With the volume growth expected at 24% & 15% for FY11 & FY12 respectively capacity utilization would improve leading to higher operating margins at 22.8% in FY12 from 20.4% witnessed in FY10, an increase of 240 bps.

To read the full report: ZF STEERING GEARS

>ADOR WELDING LIMITED (VENTURA)

Ador Welding Limited, one of the leading players in the welding consumables & equipment space is all set to benefit from a pick up in the investment cycle in the core infrastructure space resulting in strong demand outlay for its welding products. AWL is expected to exhibit a revenue & PAT CAGR of 24% & 26% for the period FY10-12 respectively on the back of strong volume growth of 25% and capex in continuous welding equipment which is margin accretive. We value
AWL at 10x its FY12e earnings and initiate a BUY at CMP with a price target of Rs 298, representing a potential upside of 42% over a 15-18 months horizon.

■ Volume expansion: key growth driver
In FY10 AWL clocked a volume growth of ~42% from 18,655 TPA in FY09 to ~24,000 TPA in FY10. Considering a further uptick in the demand for electrodes, we expect a volume growth of 25% (on conservative basis) over the next two years. With the volume growth set to kick in, the revenues in the welding consumables segment are expected to exhibit a CAGR of 26% from Rs 196 crore in FY10 to Rs 310 crore in FY12.

■ Capex in continuous welding segment to fuel further growth
With the demand for continuous electrodes outpacing manual electrodes, AWL has initiated a Rs 15 crore capacity expansion programme which would add 10,000 TPA of capacity space in the form of adding special wires. The main purpose behind this expansion is to enable AWL to enter into high growth & niche areas of welding application which includes nuclear power, super critical
boilers & some special steel applications. This would not only help in widening its product profile but would enable the company to improvise on its margins backed by low competition in these niche segments.

■ Uptick in infrastructure spending spells good opportunity for welding players
We are currently witnessing a strong pick up in the capex cycle across its user segments viz Steel industry, petrochemicals, fertilizer, hydro electric and thermal power, nuclear power, ship building and heavy machinery, etc. This would present increasing opportunities for the Welding players. AWL which has a market share of ~23% is expected to be one of the biggest beneficiaries.

■ Clean balance sheet, Zero Debt Company with attractive return ratios
AWL has one of the cleanest Balance Sheets apart from being a debt free company. Further it has a track record of paying dividend since more than 12 years with the current dividend yield placed at 2.8%. The ROE & ROCE which stands at 18% & 26% respectively in is expected to further increase to 22% & 32% respectively in FY12e on the back of improved financial performance.

To read the full report: ADOR WELDING

>CORPORATION BANK LIMITED (VENTURA)

Corporation Bank is one of the major banks of south India with a diversified business mix of 133,456 crore and 100% network connectivity of its core banking. Recently it was ranked as the Best Bank by Asset Quality by the Business Today – KPMG study and has also won awards for the “Use of technology for financial inclusion”

Key Highlights
■ Robust credit growth and operational efficiencies to boost profitability:
Corporation Bank’s projected credit growth at 20-22% over the period FY2010- 2011 is superior to the projected industry growth of 16-18%.This coupled with its superior operational efficiencies in terms of costs should help the bank boost its profitability.

■ Bank’s asset quality and capital adequacy is the highest amongst peers: Prudent lending and conservative provisioning policies have helped the Bank maintain high asset quality despite its large exposure to the retail and SME sectors. Its gross and net NPLs at 1.18% and 0.29% are one of the lowest whereas its capital adequacy of 18.2% is the highest in the industry. Though restructured loans are up substantially from 0.3% to 2.1%, they are still one of the lowest amongst peers. We further forecast that the worst case stress impact (assuming 100% write off) of these restructured loans at only 18% of FY2011 book value.

■ Fee income continues to remain buoyant: Corporation Bank’s fee based income continues to demonstrate robust growth at a time when most public and private banks have seen a slowdown. This growth in fee income is from its core lending business and hence we do not expect any slowdown in the fee receipts over the period FY2010-2011.

■ Valuation and Recommendation: We are initiating coverage with a BUY recommendation on Corporation Bank and assign a price objective of Rs 632 for FY2011, based on our blended valuation methodology, representing an upside of 39% from current levels over a 18-month horizon. At the CMP of Rs 455, the stock is trading at 1.0x Adj BV and a forward PE multiple of 5.1x for FY2011 respectively.

To read the full report: CORPORATION BANK

>PIPE INDUSTRY REPORT (VENTURA)

“Profits in the Pipeline”

Commensurate with the global recovery, the pipe industry is expected to benefit considering the quantum of investments proposed for the pipeline projects across the globe. The business potential for the SAW pipe manufacturers from these projects is pegged at US$ 117 billion over the next four to five years. The Indian Pipe manufacturers which have majority of the revenues coming from exports & having accreditations from oil & gas majors across the globe are expected to garner a sizeable share from these projects. In addition to the new projects, the replacement market in North America would be an additional demand driver for the Indian pipe manufacturers. The demand-led growth coupled with healthy order book and capex plans augurs well for the Indian players. We are initiating coverage on the Pipe Industry with the top three picks being PSL, Welspun Gujarat & Jindal Saw.

Key Investment Highlights

■ Demand driven growth to continue
The global pipeline requirements is expected to be ~98 million tons with a total of 710 projects and an opportunity of more than $117 billion across the globe for the next five years. Thus the addressable market for the pipe manufacturers is pegged at $23.4 billion per annum while the tonnage requirement is estimated at 19.6 million tons per annum. With the close proximity to the ports coupled with lower labor cost & locational advantage, Indian players are expected to bag sizeable share of these orders. Further we believe the Indian companies is set to benefit from the proposed gas pipeline network to be built by GAIL, GSPL, and other domestic players,
who have announced plans to construct pipeline transmission networks in India worth over Rs 20,000 crore.

■ High revenue visibility inspires confidence
Indian pipe manufacturers have strong order book despite the challenging circumstances prevalent in the economy. These order books are set to galore with the demand for pipes likely to pick up over the next few years. This provides high revenue visibility for these companies.

■ Positive outlook especially for SAW pipe manufacturers
While the demand for seamless & ERW pipes remain sluggish, the demand for SAW pipes is likely to remain firm as these pipes are basically oil & gas transportation pipes required for setting up oil & gas pipelines. While PSL is purely a SAW pipe manufacturer, Jindal Saw & Welspun Gujarat have majority of the revenues coming from this segment.

To see full report: PIPE INDUSTRY

>SUGAR SECTOR UPDATE (VENTURA)

El Nino to dampen crop in Brazil
Parts of Brazil have had four times more than normal rain due to the El Nino effect, adversely affecting sugarcane crop. Due to this, Brazil’s sugar production is expected to fall short of the estimated 32 – 33 mt to 30.3 million tons in 2009-10.

Competitive buying pressures from countries apart from India to further accentuate the shortage
Besides India, the largest consumer, with contracted imports of 4 million tons of sugar, neighboring Pakistan and Bangladesh also plan to import the sweetener to cater to their domestic demand. “Pakistan must import as much as 1 million tons of sugar by December’, as per the spokesman for the Pakistan Sugar Mills Association. Indonesia, Southeast Asia’s largest sugar buyer, India, may also step up imports to stem the domestic prices.

International raw sugar prices are expected to reach 30 cents / pound
October raw-sugar contract, which is trading at 23.45 cents a pound on ICE Futures U.S., is expected to go up to 30 cents a pound in 2010’s first quarter on constructive fundamentals and support from speculators. Reports of hoarding, confiscation of stocks and rationing in various parts of the world are indicative that there is more upside in near future.

World outlook
Worldwide demand for sugar will exceed output by 9.35 million tons in the year ending Sept. 30, more than the 7.8 million tons projected in May, according to London-based International Sugar Organization.

To see full report: SUGAR SECTOR