>MADRAS CEMENT: Completion of Capacity Expansion from 10.49 MTPA to 12.49 MTPA

Strong Growth delivered in FY12 & Encouraging Return Ratios. The company has registered a strong financial growth in FY12. It’s Net sales increased by 24% to INR3278 crore and PAT improved by 82% to INR386 crore. Its EBITDA margin also improved from 24.6% to 29.3%. ROE of the company came at 20.4%. Its total D/E ratio also came down marginally from 1.1 to 1.0. Madras cement’s financial ratios are strong and are very much in line with top cement players like Ultratech Cement, ACC and Ambuja Cement.

Completion of Capacity Expansion from 10.49 MTPA to 12.49 MTPA to add to Topline once the demand improves: Madras Cements has completed the capacity expansion of its cement plant of 2MTPA (million Tonnes Per Annum) capacity at its Ariyalur plant in Tamil Nadu to increase the total capacity from 10.49 MTPA to 12.49 MTPA. This capacity expansion will help in increasing its topline and meeting the demand which is expected to improve after the monsoon departure and government’s thrust on infrastructure revival. Also the company is expected to add another 45MW of captive power taking its total captive power capacity to 157 MW which will further reduce its power cost.

Pick up in Cement prices by INR25-30 per bag after the monsoon season: Cement prices in the Andhra Pradesh market have started to pick up after the correction witnessed in the earlier 3 months time. Prices of cement have gone up by INR25-30 per bag of 50 kg in AP in October after hovering around a level of INR230-240 per bag. Cement companies, which have been going through a bad patch, see not just a recovery of prices, but growth with demand increasing, as the monsoon season is just over and construction movement is showing signs of improvement.

To read report in detail: MADRAS CEMENT

>SANOFI INDIA: Acquisition of UMPL business

Sustainable growth
Sanofi India (SIL) is a leading MNC pharma company with strong product portfolio in the domestic market. Five of its ten major brands are growing faster than the market and are likely to drive future growth. Three of the company’s major brands contribute 23% of total revenues. In Nov’11, SIL acquired the generic neutraceutical formulation business of Universal

Medicare Private Limited (UMPL) for Rs5.61bn. Thebacquisition would result in a sustainable growth. SIL is unlikely to get majorly impacted by National Pharmaceutical Pricing Policy (NPPP). We initiate coverage on the company with a Buy rating and target price of Rs2,729 based on 24x CY14 earnings.

Strong product portfolio: As per IMS-MAT June’12 data, ten of the company’s brands appear in the list of top 300 products. The top 10 brands contribute ~51% of its revenues. We expect these brands to drive the future growth.

Acquisition of UMPL business: In Nov’11, the company acquired 40 neutraceutical brands of UMPL for Rs5.61bn. These brands had sales of Rs1.1bn in FY11. The acquisition was made at 5.1x of their revenues. With this acquisition, SIL has entered into the OTC segment. We expect these brands to deliver higher growth from the marketing thrust from SIL.

No major threat from NPPP: Currently, four major products of SIL are under price control. Under the NPPP provisions Amaryl M and Clexane would be under price control. However, if the combinations with NLEM drugs are excluded, Combiflam and Amaryl M would be outside the purview of price control.

Debt-free cash rich company: SIL continues to be a debt-free company even after the Rs5.61bn acquisition of UMPL business in Nov’11. The company had cash of Rs2.34bn (Rs102 per share) as on 31st December’11. We expect SIL to continue the debt-free status due to the descent cash flow from operations.
 
Initiate coverage with a Buy rating: We expect SIL to report 18% CAGR in revenues and 19% CAGR in net profit over next 3 years from the strong growth of its brands in niche therapeutic segments and acquisition of UMPL business. At the CMP of Rs2235, the stock trades at 25.3x CY12E EPS of Rs88.3 and 19.7x CY13E EPS of Rs113.7. We initiate coverage on the company with Buy rating and target price of Rs2,729 (based on 24x CY13E EPS of Rs113.7) with a 22.1% upside over next 12 months.

>Adding to Cyclicals as Market Heads for Life High in 2013

Quick Comment – Cyclicals look cheap relative to defensives: We have already pointed out in our August 13 note Cyclicals Approaching Ultra Cheap Territory that cyclicals look ultra cheap relative to defensives (Exhibit 1). The decisive policy action at home (reduction in subsidies and opening up of FDI) and, more crucially, concerted action by European and US central banks have reduced India’s tail risk linked to poor macro stability (twin deficit). Our preference for quality cyclicals is already expressed in our Focus List. We now put money to work on cyclicals in our sector model portfolio (Exhibit 2). Accordingly, we go underweight consumer staples and raise energy and materials to overweight, as well as taking industrials to neutral. We are also trimming technology by 100 bps. Consequently, our average sector position has expanded, and we see this as our emerging strategy, as the average correlations of stocks to the market appear to be falling and no longer merits extreme focus on stock picking.

25% upside to Sensex to Dec-13: We are expecting Sensex earnings growth at 10% and 19% in F2013 and F2014. Significantly, broad market earnings may have troughed or could trough in the current quarter. We have seen M1 growth put in a firm base in and revenue growth should slowly accelerate in the coming months. Margins could rise in the coming months with a favorable base effect driven by the relative movement in the current and fiscal deficit. Interest rates are already down YoY, and that should stem the steep rise witnessed in interest costs in the previous 12 months. The risk to earnings is that the investment rate collapses, although recent signals suggest that the public sector is starting to spend money. We roll our market target to Dec-13. Our target of 23,069 implies that the market will be trading at 14.9x our F2014e Sensex earnings in Dec-13 (Exhibit 5).

New bull market? Conditions for a new bull market are getting slowly satisfied. The yield curve has stopped supportive and profit margin expansion is a growing possibility in the coming months. The market is likely to form a new base with positive developments on domestic policy. Key risks are that commodity prices rise quickly, bringing inflation pressures to the fore, and/or global risk appetite wanes as global policy makers slip into another cycle of complacency. Mid-term polls are also a possibility, but we do not necessarily see that as a downside risk to equities. flattening, liquidity is improving, valuations appear

To read report in detail: INDIA STRATEGY

>FDI in retail aviation and broadcasting are probably the biggest and toughest reform initiatives that the UPA Government

Shrugging off its image of being in a state of ‘policy paralysis’, Government of India unleashed a blitz of reforms late last week, including diesel price hike and opening up FDI in several key sectors. Though many will argue that these measures will have limited impact, we believe that 51% FDI in multi-brand retail and 49% in airlines are probably the biggest and toughest reform initiatives that the UPA Government has taken in its tenure of eight years. We believe that it will have significantly positive implications for the economy and the market.

FDI in retail (51%), aviation (49%) and broadcasting (74%)
FDI will bring much needed funding options for domestic players. We see Pantaloon, being the largest player, a key beneficiary of FDI in retail as it will strengthen its back end operations and inventory management, which in our view has been one of the most challenging areas for the company. We believe increased FDI is very positive for the broadcasting industry. With nearly 90m households and top five players having market share of 50%, the market is fragmented. FDI, coupled with digitalization, will lead to consolidation, benefiting larger players. We remain positive on both cable and DTH. Our top picks are Hathway and Dish. On the other hand, Spicejet is among the biggest beneficiaries of FDI in civil aviation due to significant market share (~18%) and relatively better balance sheet.

Rate cut hopes: Not unfounded
With falling GDP growth and dwindling capex cycle, need for sustained rate cuts is more
than ever before. We believe that the Government has initiated small yet meaningful steps,
such as diesel price hike and divestments of certain PSUs, to bring down cost of capital. We
believe that banks, particularly PSU banks, will be key beneficiaries of rate cuts, as it will
arrest formation of NPAs in the system. SBI is our top pick among banks. Lower rates,
coupled with PM’s concerted efforts to revive infrastructure investments, will also boost growth
outlook for large infra-plays. We like L&T and IRB Infrastructure in this space. We
believe that stocks like Maruti (demand outlook may improve, lower import bill) and PFC
(Wholesale funded NBFCs key gainers of rate cuts) will also see significant re- rating, following
rate cuts.

Re unlikely to fall further; Can appreciate buoyed by inflows
FII investment in India has already crossed US$10b, YTD. Historically, strong reform initiatives
by government have led to improved foreign capital inflow. We believe that appreciation of
INR vs. US$ will significantly benefit a host of companies, exposed to imports. This will also
help curtail oil import bill, thereby further helping fiscal situation. We like JSW energy,
which operates 2.6GW of power plant, and meets its coal requirement through imports. JSW
Energy will benefit from appreciating INR, apart from falling international coal prices.

To read report in detail: FDI