>Koutons Retail India (ICICI DIRECT)

Koutons Retail India reported a dismal performance in Q4FY10, far below our and the Street expectations. The company reported net sales of Rs 386 crore against our expectation of Rs 460.9 crore. This translates into a meagre 1.9% growth YoY. The EBITDA margin was at 19.4%
against 25% in Q4FY10, a steep contraction of 560 bps YoY. This was mainly driven by lower average realisation per sq ft and higher discounts offered to push sales. Net profit including prior period expenses (Rs 1.2 crore) declined by 12.2% YoY with net margin of 8.1% against 9.5% in the corresponding quarter of the previous year.

■ Retail space declines marginally QoQ but rises 7% YoY
The retail space at the end of the quarter stood at 13.6 lakh sq ft with 95.3% of stores on a franchise basis. The company operates 1,307 stores with 702 stores under Koutons (including 15 racks stores) and 605 stores under Charlie Outlaw.

■ Thrust on better profitability
The company has taken initiatives to improve the profitability by better inventory management, debt restructuring (average cost of capital now between 13-14%), introducing family stores that yield better profitability and focus on better margin products. Koutons is looking at reducing its discounts to improve profitability.

Valuation
We are positive on the business model of Koutons Retail wherein 95.3% of stores are on a franchise model. The refinancing of debt would be a positive for the earnings of the company. The initiatives taken to improve efficiency and profitability would bear fruit in the near term performance of the company. At the CMP of Rs 309 per share, the stock is trading at a P/E of 9.2x and 8x its FY11E and FY12E earnings of Rs 33.6 and Rs 38.4, respectively. We are maintaining our STRONG BUY rating on the stock with a downward revised target price of Rs 384 valuing the stock at 10x its FY12E earnings.

To read the full report: KOUTONS RETAIL

>Abbott, US has bought the domestic formulation business of Piramal Healthcare

Most profitable business sold out…
Abbott, US has bought the domestic formulation business of Piramal Healthcare (PHIL) for cash consideration of US$3.7 billion (US$2.12 billion upfront and equal annuity payment of US$400 million for four years starting CY11). The deal is valued at ~9.3x the revenue of the domestic
business and is expected to close by Q2FY11 end. The domestic formulation business contributed ~54% to the FY10 topline. The deal includes transfer of manufacturing facilities at Baddi, rights to ~350 brands and trademarks and transfer of ~5,200 employees of the domestic
formulations business to Abbott. PHIL has received Rs 350 crore as nonabatement
fees whereby the Piramal group companies will not enter the branded domestic business for the next eight years. We estimate the residual businesses will clock an EPS of ~Rs 8.2 in FY12E. Valuing the cash per share at Rs 496 and residual business at Rs 98, we have arrived at a fair value of Rs 595 for PHIL, providing 18% upside from current levels. We are assigning BUY rating to the stock.

■ Highlights of Analyst Meet
PHIL has retained its CRAMS, global critical care, diagnostics and domestic API and vitamins/minerals business. The company is considering a special dividend post the deal. The proceeds from the deal will be used to retire debt of ~Rs 1300 crore and venture into other emerging opportunities. The company will also look at acquisitions to complement the residual business and enter newer businesses.

■ Valuation
PHIL is set to receive US$3.3 billion on NPV value. This works out to Rs 496 per share (post long-term capital gains taxed at 21.5%, book value adjustment and debt repayment of ~Rs 1300 crore). The residual business is valued at Rs 98 (12x FY12E EPS). We rate PHIL as BUY with a target price of Rs 595. With cash utilisation by the management post the deal we expect
the stock to get re-rated, going forward.

To read the full report: PIRAMAL HEALTHCARE

>Container Corporation of India (NOMURA)

■ Action
Container traffic data released by the Indian Ports Association suggest flattish m-m activity in April 2010, though y-y growth was still healthy at 21.4%. Note that April has historically seen subdued EXIM traffic activity over March, with the latter period being inflated by a boost in year-end activity. However, with the stock trading at 17x FY11F P/E and possible downsides to our estimates, we maintain NEUTRAL.

■ Catalysts
Strength in port traffic could trigger a positive change, in our view, on Container Corp of India. Risks to margins exist in the domestic segment, however, and these could pose as negative risks to estimates and targets.

■ Anchor themes
A pick-up in industrial activity will likely lead to a turnaround in EXIM traffic, benefiting port entities and container logistics companies. The key is to pick stocks that still offer value after a substantial run-up in 2009.

To read the full report: CCI

>TATA POWER (INDIA INFOLINE)

■ Generation grows by 6.3% yoy to 3.8BU during Q4 FY10 against 3.6BU last year, average realizations jump 13.7% yoy

■ Revenues in Q4 FY10 for the (consolidated entity) coal and power divisions increased by 27.2% and 9.7% yoy respectively

■ Coal division’s EBIT margin doubles to 22% from 11% last year

■ Better operational efficiency and higher merchant sale translate into 93.7% yoy growth in adjusted PAT during the quarter

■ Reduce target price to Rs1,536 on account of marginally lower than expected FY10 earnings, maintain BUY

To read the full report: TATA POWER