>ECONOMY: S&P raises red flag

S&P has maintained India’s sovereign rating at BBB‐ but the outlook has been revised downward to ‘negative’. This action is based on factors that are already widely known. Importantly, at this stage it is just an outlook change and not a ratings downgrade. To that
extent, it is more of a warning of increasing vulnerabilities of the country. Nonetheless, the action can impact INR in the near term, which is already under pressure and perhaps raise external borrowing costs for some of the corporate. However, the silver lining could be that this action could exert pressure on the government to act on fiscal front (possibly by raising the diesel prices etc) as well as on policy front.


S&P Action: Ratings reaffirmed; outlook downgraded
S&P has revised its outlook on India from ‘stable’ to ‘negative’ while re‐affirming the
rating of BBB‐, (just one notch above speculative grade). The ‘negative’ outlook reflects 1/3rd chance of ratings downgrade over next 24 months.


The key reason for the action is the worsening macro situation, particularly the widening CAD, investment slowdown and high fiscal deficit.


What can trigger ratings downgrade?
• External situation worsens
• Growth prospects diminish
• Progress on fiscal remains slow


On the other hand, the ratings can improve if government implements initiatives to reduce structural fiscal deficits such as fuel price hikes, early implementation of the goods and service tax etc.


Our view: A timely warning
Overall, the outlook downgrade is based on the factors that are already widely known. Importantly, at this stage it is just an outlook change and not a ratings downgrade. To that extent, it is more of a warning of increasing vulnerabilities of the country. Nonetheless, the S&P action would add to the overhangs on the Indian economy. At the margin, the S&P action can have an impact on INR in the near‐term, which is already under pressure and perhaps raise external borrowing costs for some of the corporates. The silver lining could be that it will exert added pressure on the government to act on fiscal front (possibly by raising the diesel prices etc) as well as on policy front.


RISH TRADER

>BIOCON: Supply of Fidaxomicin to Optimer Pharma continues (Q4FY12 Result update)

Strong Growth Momentum

Biocon has reported excellent sales growth of 30%YoY for Q4FY12 due to good growth across its segments. However, EBIDTA margin declined by 250bps YoY from 27.8% to 25.3% due to sharp increase in other expenses.


The company’s other income fell sharply by 92%YoY from Rs169mn to Rs13mn. Net profit before EO items grew by 4%YoY. After the termination of the agreement with Pfizer for insulin and its analogues, the company is scouting for a new partner. For FY12, Biocon reported 16%YOY growth in sales and flat net profit despite net licensing income. Biocon’s subsidiaries
Syngene and Clinigene have reported 29%YoY growth in revenues. We have retained Buy rating for the scrip with a target price of Rs345 (based on 16x FY14E EPS of Rs21.5).


■ Strong revenue growth: During the quarter, the biopharmaceutical business (70% of revenues) reported 28%YoY growth, branded formulations (11% of revenues) grew by 34% and contract research (19% revenues) grew by 33% indicating strong growth across all segments.


■ Margin under pressure: Biocon reported 250bps drop in EBIDTA margin from 27.8% to 25.3% due to sharp increase in other expenses. The PBIT margin of pharma business dropped by 920bps YoY from 41.3% to 32.1%. However, the PBIT margin of CRAMS business grew by 90bps from 30.2% to 31.1%. Biocon’s EBIDTA margin has shown improvement on QoQ basis after consecutive decline in four previous quarters.

■ Decline in licensing income: During the quarter, Biocon’s licensing income fell by 40%YoY from Rs768mn to Rs463mn due to the termination of the agreement with Pfizer. For FY12, licensing income dropped by 17% YoY from Rs1.53bn to Rs1.27bn. We expect licensing income to fall further due to the termination of the agreement with Pfizer.

■ Other developments: Supply of Fidaxomicin to Optimer Pharma continues. Trastuzumab (Mylan alliance) has entered phase III clinical trials in India. Itolizumab (psoriasis molecule) has completed Phase III studies in India. 􀂁 Cheap valuations, Reiterate Buy: We expect Biocon to become leading global player in insulin, immunosuppresants, statins and branded formulations. We have revised the EPS estimates downwards by 13% for FY13 and 2% for FY14. At the CMP of Rs239, the stock trades at 13.9x FY13E EPS of Rs17.2 and 11.1x FY14E EPS of Rs21.5. We retain Buy rating for the scrip with a target price of Rs345 (based on 16x FY14 earnings).


RISH TRADER

>HDFC BANK: Q4FY12 Results

Asset quality continued to remain healthy, Retain Buy


HDFC Bank announced its results for Q4FY12. The bank reported higher than expected bottom line driven by robust NII and other income growth coupled with lower provisioning during the quarter.


Key Highlights
■ Net Profit after tax for the current quarter increased 30.4% YoY (1.6% QoQ) to Rs 14530.8 mn from Rs 11147.1 mn for Q4 FY11. The growth in PAT on YoY basis, despite higher operating expenses (driven by aggressive branch addition), was mainly driven by 19.3% YoY (32.0% QoQ) increase in the NII at Rs 33883.1 mn (led by robust growth in advances 22.2% YoY and 0.6% QoQ) and 18.8% YoY (5.1% QoQ) increase in other income. The main contributor to other income for the quarter was fees & commissions of Rs 12373 mn, which was up by 23.7% YoY. Besides this lower provisioning (decline of 30.8% YoY and 9.4% QoQ) during the quarter led by lower slippage further aided growth in net profit. Cost / Income ratio during the quarter increased by 175 bps YoY (298 bps QoQ) to 50.6% driven by aggressive branch and ATM expansions during the quarter.


■ Net Interest Margins during the quarter registered an increase of 10 bps sequentially to 4.2% on the back of higher average CASA balance during the quarter (the bank was the collecting banker for issuance of tax-free bonds for some of the issuers in Q4 FY12). Added to this the bank’s continued focus on retail lending due to attractive yields and run down of low yielding corporate loans has further aided in margin expansion.


■ Total business of the bank registered a robust growth of ~20.0% YoY (3.6% QoQ) as at Q4FY12. Deposits grew by 18.3% YoY (6.1% QoQ), whereas Net Advances grew by 22.2% YoY (0.6% QoQ). The advance book grew on the back of healthy 34% YoY (7% QoQ) growth in the retail book, while corporate advances book grew 11% YoY (decline of 6% QoQ). The share of retail book in the total advances improved to 54.8% against 50.1% YoY. Going forward, management expects corporate loan book to pick up pace and has guided for a credit growth of 19-22% for FY13.


■ Asset quality continued to remain stable with gross NPA at 1.01% (1.05% YoY, 1.03% QoQ) and net NPA at 0.18% (0.19% YoY, 0.20% QoQ). The bank’s slippage ratio for FY2012 was low at 0.98% (1.13% in FY11 and 2.66% in FY10). Restructured assets were also stable at 0.4% of gross advances in Q4FY12. Provision coverage based on specific provisions was at 82.4% higher by 207 bps sequentially despite lower provisioning during the quarter mainly led by lower slippages. Going forward, the management expects credit costs to rise from the current levels.


■ The bank had opened 343 new branches in this quarter taking the total number of branches to 2544. The bank plans to add ~250 branches each year going forward.


Outlook and Valuations
The banks consistent strong performance despite challenging times reflects its strong and dynamic business model. We estimate HDFC Bank to report an EPS CAGR of 28.5% over FY11-FY14E. ABV is estimated to grow at 19.3% CAGR during the same period. The bank’s strong asset quality, superior return ratios, strong asset growth and adequate capitalization bodes well for its future growth. HDFC Bank has always commanded a premium valuations visà- vis its peers due to its track record of consistent growth in earnings and assets. The stock currently trades at 3.7x FY13E ABV and 3.0x FY14E ABV. Over the last five years, the bank has traded at a mean multiple of 3.5x its one year forward ABV. We believe the bank to continue to command premium valuations going forward. We retain our BUY rating with a March 13 target price of Rs 635.9 implying an upside of 15.4% from current levels.


RISH TRADER

>GEOMETRIC: One‐off marred, otherwise a decent quarter

Geometric posted a steady revenue growth in line with expectations, however EBITDA margin deteriorated by 544bps QoQ to 12.5% due to extra ordinary items of expenditure & currency fluctuation. In our upgrade note in the previous quarter, we indicated presence in growth market, with focus on margins yielding stronger performance. But this quarter performance marred our expectation due to volatility. We retain ‘Accumulate’, with a TP of Rs80.


■ Steady performance accompanied by lower than expected margins : Geometric reported in-line revenue growth of 2.7% QoQ to Rs2.25bn (PLe: Rs2.21bn, Cons:Rs2.20bn) and 5.4% QoQ in USD terms to $44.92m (PLe: $43.91m). EBITDA margin dipped by 544bps to 12.5% (PLe: 17.4%, Cons: 16.5%), due to rupee depreciation, higher utilization & extra ordinary items of expenditure. EPS degrew by 39.9% QoQ to Rs2.04 (PLe: Rs3.23, Cons: Rs3.15).


■ Two‐fold performance – Revenue growth and margin expansion: We believe that the company’s strength in PLM and PES space is playing out well. The company’s ability to cross-sell strength of different geographies has started paying-off. We expect steady margin performance as these extra-ordinary is not going to be part in FY13. The management didn’t give detail for extra-ordinary.


■ Conference call highlight 1) Volume growth at ~5.1%, no change in pricing 2) New contracts amounting to $11.71mn awarded during the quarter (Q3FY12 : $3.55mn) 3) Total headcount is 4567 (Q3FY12: 4447) 4) Growth from emerging verticals like ship building, Oil & Gas & Energy 5) Effective tax rate to be ~28% for FY13 6) Fresher Hiring for FY13 to be ~200+ 7) DSO stood at 65.28 for Q4FY12 (Q3FY12: 71.36)


■ Valuation & Recommendation: We believe that Geometric’s operational performance is expected to strengthen from here. We expect a steady revenue performance for the company in FY13 with improved margins. We reiterate our ‘Accumulate’ rating, with a TP of Rs80, 6x FY13E earnings estimate.


RISH TRADER