Friday, April 10, 2009

>Glenmark Pharmaceuticals(CITI)

 Conclusion — We believe the knee-jerk reaction in the Glenmark stock to the
US FDA warning letter requiring the company to stop selling three products (all
morphine based) is overdone. The impact on financials will be minimal, in our
view, and the issue is not reflective of any quality or manufacturing problems.
 FDA clamps down on unapproved drugs — The FDA has issued warning letters
to 9 firms (incl. Glenmark), asking them to stop marketing certain unapproved
narcotic pain medicines. The letter to Glenmark relates to formulations of
morphine sulphate (15 & 30 mg tablets, 20mg/ml & 20mg/5ml solutions). The
FDA allows 60 days to stop manufacturing & 90 days to stop all shipments.
 Not company specific — This is part of the FDA’s attempt to clamp down on
drugs that have not gone through the proper approval process. These drugs are
usually ones launched prior to 1938 (categorized as “grandfather drugs”)
before the establishment of the current approval process. In June '06, the FDA
issued guidance on its stand on the unapproved drugs & the steps it intended
to take in regard to this matter. These warning letters are a part of that process.
 Small products, marginal impact — As per management, the products in the
warning letter have revenues of cUS$1m (<1% of US revenues). Besides, given
that Glenmark sources these products from LVT (which has also received a
similar warning letter), the profitability on these sales is likely to be lower than
the US average. As such, we do not expect a meaningful impact on the biz.
 Could there be more? — This is an ongoing process & there may be other
products that could be affected in future. It is, however, difficult to determine
the exact impact although it is unlikely to be material.

To read full report Glenmark Pharmaceuticals(CITI)

>India Mobile sector(UBS)

􀂄 Do greenfield mobile operators have a business case in India?
Greenfield operators such as Telenor-Unitech and Swan-Etisalat plan to enter the
India mobile market in 2009. In this report, we examine whether these operators
have a business case in light of passive infrastructure sharing, intra-circle roaming,
and lower interconnect charges.
􀂄 Proprietary survey and new entrant financial model provide some answers
We conducted a proprietary survey of 30 mobile industry participants with an
average industry experience of over 10 years in India. Based on the survey, we
built a proprietary financial and valuation model for a greenfield operator.
􀂄 UBS view: greenfield operators do not have a business case
We believe new entrants face several challenges—brand building, distribution,
spectrum availability, organisation building, negative free cash flow, and scale. We
conclude it will take four to five years for EBITDA to breakeven and seven to
eight years for net profit to breakeven. We arrive at a negative NPV (US$25m) for
a new operator. Of the new operators, Telenor-Unitech has the best chance of
success, in our view.
􀂄 New entrants unlikely to impact competitive intensity
The mobile sector is very competitive in India and we do not expect new entrants
to impact competitive intensity, although they will try to create value. We have
factored in higher competitive intensity to account for Reliance Communication’s
(RCOM) recent GSM launch and Tata Tele’s potential GSM launch in H209. We
maintain our Buy ratings on Bharti Airtel, RCOM and Idea Cellular. We maintain
our Short-term Sell rating on Bharti, as we expect more consensus earnings

To read full report India Mobile sector(UBS)

>BHEL(JP Morgan)

• BHEL’s provisional results for FY2009 showed strong execution and
signs of easing material cost pressures. 4Q PAT was however 16.5%
lower than estimates (FY2009: Rs30.4B, 4Q: Rs12.5B) due to a sudden
gratuity provision of Rs6B. We are disappointed that management
had not anticipated or guided for this liability earlier.

• We lower our estimates for FY2010 by 7%. We now have sales and
PAT growth of 21.4% and 29.6% and EBITDA margin improvement of
290bps. Non-recurrence of gratuity provisions and end of wage hike
provisions account for the margin expansion.

• During the meltdown, BHEL’s outperformance and premium
multiples arose from predictability of growth (at least the topline) in
a difficult environment. An OB of ~Rs1180B guarantees visibility
through 2012. This OB remains relatively immune to cancellations due
to the predominance of gov’t utility power projects with guaranteed
returns. The company’s ability to allay market fears of execution
bottlenecks was also an important contributor to outperformance.

• However, the return of risk appetite will likely see markets placing a
lower premium to this predictability. In our view, L&T (OW) might
outperform BHEL in a rising market, as it has done in past rising
markets. We revisit our 'everything goes right' DCF model originally
published 15 months back and believe our new Mar-2010 PT of Rs1,300
(down from Rs1400 earlier, terminal growth rate (g):6%, WACC: 11.5%,
terminal year: FY17), implying 16.2-x FY2010 earnings, is fair for the
stock. We downgrade the stock to Neutral. Key upside risk to our PT is
stronger than expected margin improvement and a rise in investor
preference for safe growth stocks.

To read full report BHEL(JP Morgan)


Investment conclusion: We are upgrading DRL to
Overweight. Increasingly, we believe the risk to
F10-11e EPS is diminishing in view of niche and longer
term (quality) opportunities in the US and weak INR (vs
US$ and €). P/E multiples will likely expand in view of
the earnings growth and, possibly, better visibility of IP
intensive portfolio (bio-similars, derma and NDDS). The
stock is down 40% over the last nine months.
Near-term challenges remain. Depreciation in the
Russian ruble (20% YTD), AOK tender driven erosion in
German business (possibly from June’09), flat sales in
India formulations (for next two quarters), and disclosure
of forex losses/goodwill impairment (in F4Q09 results)
are the most pressing issues.
Stock price trajectory, therefore, will be checkered.
Bad news will likely come first (F4Q09 results in May),
and good news thereafter – omeprazole OTC approval
(3-6 months), 2 bio-similar launch, fondaparinux launch
(12 months), recovery in domestic growth (6-9 months).
We would be buyers of the stock on declines.
In particular, we see continuity in lucrative
opportunities for the US market. – Imitrex (till Aug ’09),
omeprazole (F2H10), fonda (F11), rivastigmine,
desloratadine (F12) plus 1-2 additional niche products
every year in F10-14. DRL has 69 pending ANDAs, of
which 32 are Para IVs and 19 ftfs ($9 bln brand value).
Unsung bio-similar efforts. With a focus on
monoclonal anti-bodies, DRL could emerge as the key
player in this segment, with end to end capabilities in
India, we believe. Generic Rituxan is already launched,
and a couple of such launches targeted for F10.

To read full report Dreddy(MorganStanley)