>MAHINDRA & MAHINDRA: Management Cuts Tractor Output

■ What's New — MM reported it will cut tractor production in Mar by ~1-2 days per week, till the end of the month. Assuming a 26-day production schedule, a production stoppage of 4-6 days implies a 15-23% reduction in March output.


■ Our takeaways from mgmt’s conf call are as follows — a) There has been a buildup in finished stocks at MM’s factories & stock depots beyond the typical level of 3-4 weeks. Mgmt didn’t state the current level but, given mgmt is targeting a shutdown of 4-6 days (and there could probably be shorter shifts too), we reckon the inventory buildup is perhaps 2-3 weeks above the level mgmt is comfortable with. b) Mgmt attributed the sales slump to i) falling food prices, ii) slower sales in drought impacted AP and iii) falling cotton prices. Our analysis indicates that the three main cotton growing states (AP, Maha and Guj) accounted for >40% of tractor industry growth in 9mFY12; the slump in cotton prices doesn’t augur well for FY13 outlook. c) Mgmt’s outlook remains positive – FY13 tractor volume growth is forecast at ~7-8%; the slump in volumes post Nov is a blip – not a cyclical trend. This is predicated on resumption in GDP growth, lower inflation and an expected decline in interest rates. d) Capex continues per plan – 100k tractor capacity will be operationalised in 2HFY13 – capacity will rise ~40% - a tad risky from an op. lev. perspective, if volume growth doesn’t escalate at that juncture.


■ Earnings Implications — Our PAT estimates are ~9% / 3% lower than consensus for FY13/14 respectively, with the variance attributed to our flat tractor volume forecasts for FY13. We will await trends in 1Q13 before adjusting forecasts / earnings. We don’t think a 5 month slowdown is a blip; it remains to be seen if the tractor cycle continues on its downward trajectory into FY13, or if it exhibits a muted recovery.


■ Maintain Neutral…given sharp underperformance over the past few months, and the fact that some of the negatives are priced in. We look to the upcoming budget for pointers on the legislation front, which will influence the demand for farm equipment into FY13. From a sector perspective, we prefer Tata Motors (TAMO.BO; Rs279.20; 1) and Maruti (MRTI.BO; Rs1,341.90; 1).


To read full report: MAHINDRA & MAHINDRA
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>PIRAMAL GLASSES: global leader in delivering packaging solutions for the perfumery and pharmaceuticals businesses

■ Glass Packaging Industry – Ample Scope to Scale up the Business
The global market size of the glass packaging industry is currently valued at US $30 bn dominated by the moulded glass packaging industry to the extent of US $28 bn while the balance is being contributed by the tubular glass packaging industry.


Further, of the moulded glass packaging industry, food and beverage (F&B) glass constitute majority of the market (more than 85%), while the balance is contributed equally by the pharma, and cosmetics and perfumery (C&P) segments. On the other hand, the SF&B market size is pegged at US $1.3 bn (5% of the F&B market). The addressable market for PGL (which has presence in C&P, pharma, and SF&B segments) is thus ~20% of the moulded glass packaging market.


■ Cost Advantage and US Subsidiary Given Competitive edge
Flacconage is a labour and skill intensive industry. Though the manufacturing of glass itself is highly automated, critical functions such as quality control need large teams of skilled professionals. Not surprisingly, the total cost of production in India, where manpower is among the cheapest in the world, is less than 50% of that in France and almost half of that in the US (Source: Mckinsey). With manufacturing facilities in India and Sri Lanka, Piramal Glass is able to produce glass at significantly lower costs than its competitors in other parts of the world and deliver a sustainable cost advantage to customers.


■ Healthy ROE and improving ratios
PGL has exhibited a sharp improvement in return ratios. The RoE is clearly improving as it was 3.4% in 2010 and 34% in 2011. High RoE in 2011 was because of leverage effect and going forward we expect 25-27% RoE is manageable.


The debt/equity has also reduced from the peak of 31x in FY09 to 3x in FY11. Going forward, we estimate the D/E of the company to reduce further to a reasonable 2x by FY13E and 1.5x by FY14E thus lightening the balance sheet despite the capex of Rs 260 cr. Moreover, the company has already restructured its debt to a lower interest rate, which is now stands at 7.5% against earlier peak rate of 13%.


To read full report: PRIRAMAL GLASS
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>PRINT SECTOR: Top-2 dailies register decline in readership

Pecking order remains largely unchanged

■ Lokmat makes a comeback as it climbs up to rank 7th from rank 8th (Lokmat had slipped to rank 8th from rank 6th in IRS 2Q 2011 survey) with an AIR (Average Issue Readership) of 7.6mn. Saving this reshuffling, the pecking order remained unchanged. The top-2 dailies, Dainik Jagran and Daink Bhaskar registered AIR decline on ror (readership over readership) basis of ~0-2%, while, Hindustan registered marginal increase of 0.1% ror in its AIR


■ Jagran Prakashan (flagship daily Dainik Jagran (DJ), other dailies Mid Day and Inquilab) maintained its leadership with AIR of 16.4mn, while, DB Corp ( flagship daily Dainik Bhaskar) registered an AIR of 14.6mn. DB Corp’s strategy of increasing urban readers has paid rich dividends, with consolidated DB Corp (dailies Dainik Bhaskar (DB), Divya Bhaskar, DB Star and Business Bhaskar) increasing its urban readership by 0.7% ror to 12.8mn, however, rural readership of Dainik Bhaskar registered decline of 5% ror to ~5mn. Hindustan maintained its 3rd rank albeit on a flattish growth rate with AIR of ~12mn


■ We have highlighted the urban readership numbers for the companies under our coverage (refer Exhibit 4 and Exhibit 5), as we believe dominant presence in urban areas is a good indicator for the companies to garner higher advertisement revenue


■ We maintain our Neutral recommendation for Jagran Prakashan (CMP Rs103, fair price of Rs104/share) and HT Media (CMP Rs141, fair price of Rs143/share). We are Reduce on DB Corp (CMP Rs209) with Target Price of Rs174/share as we believe, that the market is not factoring : 1)slower GDP growth rate of India resulting in lower advertisement revenue recognition (as DB Corp is primarily an urban play) and 2) numerous new launches (launched Divya Marathi), which will be a drag on the company’s balance sheet.


To read full report: PRINT SECTOR
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>CIPLA: A potential opportunity in Dymista which is a combination of azelastine and fluticasone; has been a development partner for Sweden-based speciality pharma company Meda AB

Sweden-based speciality pharma company Meda AB (MEDA) has indicated that its NDA for a combination inhaler branded Dymista (azelastine and fluticasone) for allergic rhinitis could be approved in H2CY12. Cipla is the development/manufacturing partner of Meda for this product. The global market size for azelastine is ~US$250mn market while that for fluticasone is ~US$350mn. We expect Cipla to benefit significantly when this product is launched in the US and EU markets in CY12. We have currently not built this prospect into our estimates and expect upgrades if and when this product is approved. Maintain BUY with target price of Rs393/share.


■ Dymista, the opportunity: Dymista is a combination of azelastine and fluticasone and is administered through an inhaler device. Having filed an NDA in the US in Jun’11 and a pre-registration in EU in Oct’11, Meda is preparing for a launch of the product in H2CY12. Individually, fluticasone (a steroid) and azelastine (antihistamine) have global sales of ~US$250mn and ~US350mn respectively and we believe that a combination has potential to offer better treatment. In one single product, patients will receive the benefit of a steroid (to treat the inflammation) and an antihistamine (for rapid effect and relief of nasal congestion).


■ Cipla as a partner: Cipla has been a development partner for Meda and will also be the manufacturer for the product – both the formulation as well as the inhaler device. In CY09, it expanded its partnership to include other major markets like Australia, Brazil, Europe, Japan and South Korea over and above the US and EU. We believe Cipla will gain from the combination product as its sales pick up.


■ Timelines: Meda has filed an NDA (for seasonal allergic rhinitis) in the US in Jun’11 and has indicated that its PDUFA (Prescription Drug User Fee Act) date for Dymista will be early May’12 indicating an imminent launch thereafter. In the EU Meda has filed a pre-registration in Oct’2011 and an NDA would be filed soon.


■ Recent underperformance provides an opportunity: Since the announcement of Q3FY12 results, the Cipla stock has corrected ~10%. Our estimates have not changed post the Q3FY12 results and we continue to believe that Cipla’s export potential remains under-appreciated. At current price, Cipla trades at 17.8x FY13E EPS – ~10% discount to peer average. We find value in the stock and thus recommend BUY with target price of Rs393/share.


To read full report: CIPLA
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