>INDIAN STEEL SUBSECTOR: Shifting sands: Initiating coverage

We argue that sustained hikes in iron ore export duties have subsidised the domestic steel industry at the expense of miners. This, coupled with the ongoing mining impasse, make us negative on the iron ore mining space, even as stock valuations are attractive. We initiate coverage of NMDC and Sesa Goa with a 3-UW. We see the contours of the Indian steel industry slowly but certainly changing in favour of the large steel producers. JSPL 1-OW is our top pick, given its superior business model and strong growth visibility. We rate SAIL 3-UW, given muted volume growth and cost pressures. Tata Steel (1-OW) offers a favourable riskreward trade-off, given that peak debt is down (c20%), ROE accretive India expansion is closer to commissioning and valuations are already factoring in a negative value for its European operations. We rate JSW Steel as 2-EW, as although negatives are already in the price, the mining impasse would delay a rerating.

■ More bullish on the medium-term outlook for Indian steel relative to iron ore mining:

While global iron ore miners have captured value from rising steel prices, rising regulatory costs in India have capped upside for the Indian miners (read export duties). In fact, India now has one of the highest taxation regimes on iron ore globally, and could increase even further if the proposed mining tax and increase in export duties get implemented. We expect NMDC (3-UW) and Sesa Goa (3-UW) to be negatively impacted by this trend. Furthermore, ongoing government probes into potential illegal mining is a further risk to earnings of Sesa Goa (3-UW) and to some extent on JSW Steel (2-EW).

■ See structural changes in the steel sector benefiting the larger, established players: While we cannot ignore the short-term risk to steel pricing in India (which has held up well relative to global prices, due to currency depreciation and supply disruptions), we expect the larger integrated mills to capture further market share in India at the expense of the sponge iron producers (whose survival is threatened from declining coal and gas linkages). The big mills are also forming JVs with technology leaders globally and improving their product specifications, thus improving long-term margin potential. Domestic overcapacity is inevitable, but there is an opportunity in sub- segments such as value-added long products. We see JSPL (1-OW) and Tata Steel (1-OW) benefiting most from these changes, relative to SAIL (3-UW).

■ Further increase in regulatory costs and exchange rate are key risks: Over and above iron ore prices and the risk of increased Chinese exports, we highlight that a further increase in the regulatory burden for iron ore miners and exchange-rate risks on foreign currency-denominated debt are two issues investors need to keep an eye on.

To read the full report: INDIAN STEEL

RISH TRADER

>RANBAXY: Launches Caduet AG; Teva deal meant to secure Lipitor monetization Ranbaxy launches

COMPANY QUICK COMMENT
RBXY announced the launch of AG Caduet. We believe FTF RBXY may have forfeited exclusivity as it failed to obtain approval within 30 months of filing. On Lipitor, mgmt indicated the Teva deal was done to secure monetization of the opportunity. We believe RBXY may clock profits of US$250-350mn during Lipitor exclusivity. We estimate annualized revenues of US$188mn post exclusivity in CY12F. While Lipitor approval and Caduet launch have eased downside risk, investor focus should now shift to comprehensive resolution. We remain cautious as revival in base business is in the price, in our view.





■ Ranbaxy launches authorized generic for Caduet (US$340mn)

Ranbaxy today announced the launch of Caduet (US$340mn) authorized generic in the US. As per the company, the launch follows an agreement with Pfizer. We believe that Ranbaxy is FTF on Caduet and might have forfeited its 180-day exclusivity as it could not obtain approval within 30 months of filing the ANDA. We note that the ANDA was a post-MMA filing and was filed in December 2008; the 30-month stay lapsed in June 2011.

We expect Ranbaxy to share a portion of its profits/sales with Pfizer in lieu of the license for launching the authorized version. Assuming a 60% price discount and 40% market share, Ranbaxy could clock revenues of US$54mn on an annualized basis. This would imply a net profit of ~US$11mn, based on our calculations.

We note that Mylan launched the generic version on Thursday, 1 December 2011. We believe that Caduet could be a limited competition opportunity in the near future with Sandoz being the only other Para IV filer that we are aware of. We believe Sandoz’s 30-month stay expires in April 2012.

■ Management indicates that deal with Teva was to secure monetization of Lipitor (US$7.4bn)

Ranbaxy’s CEO in an address to Ranbaxy’s employees regarding launch of generic Lipitor in the US stated that a partnership with Teva was to secure monetization of the Lipitor opportunity. We believe that Ranbaxy could share 25-30% of its profits from Lipitor generic during 180-day exclusivity with Teva. Please refer to our note “Lipitor approval eases downside risk” dated 1st December 2011 for further details.

Mr. Sawhney also said that Ranbaxy has enough capability to supply Lipitor through the 180-day exclusivity and beyond. He also expects Ranbaxy to remain the largest generic player in the atorvastatin market even post the 180-day exclusivity.

■ Management commentary comforting, but does not change our view on the stock

We note that the commentary is comforting as far as the monetization of the Lipitor opportunity beyond exclusivity is concerned. We estimate annualized revenues of US$188mn from generic Lipitor post exclusivity in CY12F for Ranbaxy. However, this event does not change our view on the stock. We expect a comprehensive settlement of outstanding FDA manufacturing and DOJ issues to be settled in due course. We have factored in US$350mn as penalty towards resolution. The timeline for resolution and quantum of penalty should be an important catalyst for the stock, in our view. We believe the market is factoring in settlement in the near term and expects a penalty of US$200-500mn towards resolution.

We believe the approval for Lipitor and launch of authorized generic of Caduet have reduced downside risk to some extent. However, given the valuation and expectation of revival in the base business post FDA resolution, the stock is not yet in the buying zone in our assessment. Excluding potential one-off exclusivity upside, the stock is trading at 25.6x CY11F EV/EBITDA and 48.9x P/E (pricing as of 1 December 2011), indicating strong expectation of base business revival.

To read the full report: RANBAXY

RISH TRADER

>INDIA PURCHASING MANAGERS INDEX CHARTBOOK: Moderate growth amid high inflation (DECEMBER 2011)

Manufacturing and services diverge

The momentum in the manufacturing sector eased in November after briefly springing back to life in October. The pull-back was mainly led by slower growth in output and domestic orders, and partly reflected supply-disruptions due to power outages.

However, the service sector bounced back in November, with PMI readings for both business activity and new business accelerating.

Capacity constraints tightened in the manufacturing sector as reflected in rising backlogs of work and longer supplier delivery times. However, service sector companies managed to keep up with the order flow.

Both the manufacturing and services sector are growing well below their historical trends, but this did not prevent input and output prices from accelerating in both sectors.

Without a meaningful decline in inflation pressures and barring a further worsening of global economic conditions, we believe the RBI will choose to stay on hold for a while to get inflation under control.

Read more about PMIs

RISH TRADER

>The Draghi character test in World Stock Market (CLSA)

Stockholm

The short-term direction of world markets has now become a bet on the true character of the

new ECB President Mario Draghi. As discussed here last week (GREED & fear – Action time?, 1

December 2011), the key issue for investors ahead of this latest EU summit is whether

sufficient consensus can be achieved on the path to fiscal integration to give the ECB an excuse

to start monetising debt. For such a move would clearly be as bullish for equities as it likely

would be bearish for the euro.

The reason why the character of Draghi has become all important is that it is clear that the

compromise agreed by Nicolas Sarkozy and Angela Merkel in Paris earlier this week does not

establish the groundwork for a credible fiscal union. For this reason a conservative ECB boss

would not view it as a reason to pursue debt monetisation. But if the ECB boss is a politician,

looking for an excuse to monetise, then the central bank’s reaction to the new agreement will

be different. Note last week that Draghi said more could be done from a monetary policy

perspective if a more resolute approach to fiscal integration was agreed. To be precise, Draghi

told the European Parliament in Brussels on 1 December that “a new fiscal compact” is

definitely the most important element to start restoring credibility, and that “other elements

might follow, but the sequencing matters. And it is first and foremost important to get a

commonly shared fiscal compact right”.

This leads on to the point why the latest Franco-German compromise is not really credible

assuming, as is likely, the same sort of deal is agreed at the coming summit to be held on 9

December. The main reason why is that the new framework is not so different from the

Eurozone’s old “Stability and Growth Pact” which proved such a failure in maintaining fiscal

discipline. The reason why it is not so different is because national governments will still have

the final say on budgets. The reason this is the case is because Frau Merkel has seemingly

backed off from her earlier demands that the budget rules be policed by a supranational body

like the European Commission or the European Court of Justice. In this respect, the clue as to

Germany’s more conciliatory approach is that Frau Merkel travelled to Paris to meet an

obviously delighted Sarkozy for their Monday meeting ahead of Friday’s summit.

This raises the issue of why Frau Merkel has agreed on the above approach. The answer, based

on the information gleaned by GREED & fear during a visit to Berlin last week, is lobbying from

Germany’s own financial establishment that the crisis in European banking has become systemic. This financial crisis also has a German aspect. To cite just one example, the current market capitalisation of Germany’s second largest bank, Commerzbank is only €7.3bn, and this is after a 21% rally from the recent low reached on 23 November (see Figure 2 in report).

True, the German demand for greater collective fiscal discipline will derive some comfort from

the agreement that each Euro state will be required to incorporate so-called “debt brakes” into

the constitution. The concept of a “debt brake” is borrowed from Germany’s own federal

system, where the debt brake essentially prohibits the Federation and the Länder from

borrowing to finance their budgets. This rule has been enshrined in Germany’s constitution. The

European Court of Justice will also be empowered to rule on individual countries’ behaviour in

achieving fiscal discipline. It is these sorts of points which may give Draghi the excuse if he is

looking for one to hail a so-called “fiscal compact”.

The other major development this week again involves a concession from Frau Merkel. She has

reportedly agreed that private sector bondholders, most notably Eurozone banks, will in future

not be compelled to take losses on their sovereign lending in the Eurozone, as they have been

in the case of Greece. This marks in GREED & fear’s view a massive retreat from the German

leader’s previous stance driven by moral hazard concerns, and also by demands from the left

wing of German politics that banks should take losses. Again, concern about financial sector

systemic risk appears to have driven this Merkel backdown. But it is, of course, much easier

asserting the principle that there will be no sovereign defaults than deciding who is ultimately

responsible for all the sovereign borrowings. And here the likes of Mr Sarkozy, and his friends in

the periphery, will be looking to Mr Draghi’s printing press to relieve them of the burden. Does

Frau Merkel really agree to that? GREED & fear doubts it.

To read report in detail: DRAGHI CHARACTER TEST

RISH TRADER