Tuesday, September 8, 2009


Stock too cheap. Transformation on track

Low valuation underestimates turnaround potential
We maintain our Buy rating on Sanofi. Although, in absolute terms, the stock has recovered its losses from the (now significantly diminished) Lantus safety scare at the end of June, it has not yet caught up with the market rally over the same timeframe. As a result, on our estimates it remains the cheapest stock in our sector, trading on a 10E PE of 7.0x, 30% below its peers and at a 20% discount to our worst case DCF value (assumes generic Lovenox) and price objective of Eur60. This is despite scope for significant upside we see to consensus earnings and PE rating as the near and long-term growth outlook improves under the new management team’s turnaround strategy.

New management has delivered on turnaround to date
In our view management has delivered on the initial stages of its turnaround strategy. Specifically it has: 1) Rationalised R&D, centralising discovery sites, increased focus on in-licensing and external collaborations and ceased NPV negative late stage R&D; 2) Cut near-term costs leading to 7-12% EPS upgrades and committed to Eur2bn in long-term cost savings to help bridge its patent cliff in 2010-12; 3) Refocused on new sources of growth with value accretive acquisitions in emerging markets/generics businesses and animal health.

We see upside to management guidance and consensus.
Despite having recently been upgraded with 2Q results, we see Sanofi’s c10% CER EPS growth guidance (and consensus) for FY09 as conservative and likely to be beaten. Guidance implies an 800bp fall in 2H margins vs 1H which we see as unlikely. Longer-term, we see upside to Sanofi’s “roadmap” for 2013 profits in line with 2008. Although, this is in line with consensus we see upside from pipeline products, synergies from recent deals, the impact of any future acquisitions and upside to its Eur2bn savings target.



Top pick; blue-sky 90% upside

Attractive valuation, cyclical recovery, pipeline newsflow
Bayer is our top pick in the EU pharma sector, and we add it to our Europe 1 list, based on: 1) Attractive valuation with shares trading at only c10x 10E PE despite premium EPS growth (10-13E EPS CAGR 10%); 2) Strong pipeline newsflow (outlined below); 3) A continued improvement in Material Science profitability from trough levels and 4) Potential for new long-term Healthcare margin targets to represent upside to forecasts.

Richest newsflow EU pharma in next 12 months
In our opinion, Bayer has the richest run of pipeline newsflow in EU pharma in the coming 12 months with updates expected including: Xarelto Phase III data from the EINSTEIN-Extension study end 09 ; First Phase II data for Kogenate liposomal (haemophilia) 2H09; Further PII data for riociguat (pulmonary hypertension) end 09; Nexavar Phase III data in lung cancer 1H 2010; Xarelto ROCKET-AF Phase III data in stroke prevention mid-2010; Launch of Yaz plus (oral contraceptive) mid-2010, potential protection against future generic erosion.

Blue-sky valuation of Eur80, c90% upside
Our Eur52 PO offers c25% upside and is based on an average of our SOTP (Eur49) and DCF (Eur55) valuations. However, our base case assumes limited contribution from the pipeline catalysts listed above. In a blue-sky scenario, with stars aligning and all above pipeline data positive, we see an upside DCF valuation of Eur81. Potential Xarelto peak sales potential of Eur5bn vs Eur1.5bn currently assumed accounts for Eur13 (or roughly half) of the upside, with the major data coming in mid-2010 (ROCKET-AF in stroke prevention).

To see full report: BAYER (MERRILL LYNCH)



Still a fair bit of steam left: We had recommended Ess Dee Aluminium (EDAL) in February 2009 at a price of Rs 135 with a target of Rs 223. Since then, the stock has gained 145% (point to
point return) and has breached our target price. However, we believe that there is still room for significant upside from a medium term perspective. On account of the merger with India Foils (IFL), the company is expected to land quite a few benefits. Foremost amongst them would be a tremendous boost to its capacity, which will now enable the company to grow its consolidated topline by 27% CAGR between FY09 and FY12 as opposed to the earlier projection of 12% between FY09 and FY11. Thus, not only are we adding projections for one more year, but the underlying growth is also expected to be a lot higher. Furthermore, continued strong demand for packaging and stable outlook for margins make the company a good low-risk bet from a 2-3 year perspective.

IFL merger benefits: Ess Dee Aluminium (EDAL) has recently acquired 90% stake in India Foils Limited (IFL), from Madras Aluminium Ltd (MALCO) a Vedanta Group Company. It infused Rs 1.2 bn into IFL and would merger it during the current fiscal. It has plans to revive IFL, currently under BIFR through a Rehabilitation Scheme. EDAL along with MALCO have infused Rs 2.61 bn in IFL in the form of equity and preference shares to repay all outstanding
debt IFL has with various lenders, thus making it totally debt free. IFL is a frontrunner for the distinction of being one of the earliest manufacturers of aluminium foil in Asia. For FY09, IFL‟s net sales stood at Rs 980 m and the company is profitable at the EBITDA level. The merger will benefit EDAL in the following ways:

  • Additional capacity: When fully integrated, the IFL-EDAL combine will have a capacity of 36,000 tonnes, twice the level of EDAL‟s present capacity, making it the largest pharmaceutical foil manufacturing company. The synergy would provide EDAL with additional capacity, thus providing it with an opportunity to grow its volumes. Further, IFL has three manufacturing facilities located in West Bengal backed by adequate front end conversion capacity which would allow EDAL the flexibility to offer value added products. This also saves the time and cost involved in greenfield expansions.

  • Access to client base: EDAL would also get access to IFL‟s existing clients and higher international presence (IFL exports to over 35 countries globally). With the help of new capacities under its belt, the company can look at launching a basket of new products to meet the growing demand for packaging.

  • Reduction in tax liability: EDAL would have the option of using IFL‟s accumulated losses (Rs 3.30 bn YTD) for reducing its tax liability in the event of a merger.

To see full report: ESS DEE ALUMINIUM


Haridwar plant - a shrine of technology

Hero Honda's state-of-the-art plant is spread over 275 acres (including 110 acres for auto ancillaries) in the holy city of Haridwar, Uttarakhand. It was commissioned in April 2008, with initial installed capacity of 500,000 units, which was rampedup to 1.5m units, and will be further ramped-up to 1.8m units by March 2010, the deadline to avail of fiscal incentives. It is one of the most technologically advanced and the greenest auto plant in India, far ahead of Hero Honda's other two plants.

Hero Honda's most profitable plant: The Haridwar plant is Hero Honda's most profitable, with estimated FY10 EBITDA margins of 17.5-18% against 16.5% for the company as a whole. This is due to fiscal incentives that the Haridwar plant enjoys coupled with a judicious product-manufacturing strategy. Hero Honda manufactures two of its most profitable products, Splendor and Passion, at Haridwar.

Vendor localization set to increase to 65% by 3QFY10: Between 35% and 40% of Hero Honda's vendors are based in Haridwar. Consequently the company cannot set-off excise duty paid on raw material procured from outside Haridwar due to excise exemption on the end product. However, its tier-I vendors are setting up facilities at Haridwar, due to be complete by September 2009, which will boost localization of vendors to 65%.

Valuation and view: We like Hero Honda due to its dominant position in the two-wheeler market, multiple earnings drivers, 31% EPS CAGR (FY09-11) and strong balance sheet with net cash of Rs257/share in FY10 and Rs342/share in FY11. We maintain FY10 earnings estimates at Rs100 (~56% growth) and for FY11 at Rs110.2 (~10% growth). The stock trades at 15.1x FY10E EPS and 13.7x FY11E EPS. Maintain Buy with target price of Rs1,762 (~16x FY11E EPS).

To see full report: HERO HONDA


Core infrastructure play

Play on core infrastructure
TRF provides engineered equipment, systems and services, including EPC/EPCM (equipment procurement and construction/maintenance) services, bulk material handling systems and equipment, coal beneficiation systems, coal dust injection systems and coke oven equipment for steel plants, and port and yard equipment. It caters to thermal power plants, and coal, mining, steel and ports sectors. Over the past three years, 75% of the company’s revenues have come from power and ports sectors.

Order book provides revenue visibility
As on March 31, 2009, TRF had an order book of INR ~14 bn (2.6x FY09 standalone sales), which provides strong revenue visibility for the next two years. Generally, order execution for TRF is for a period of two years. TRF has a policy of declaring its order book only once a year; it declares new projects only if they are of a size of INR 500 mn or more. Hence, tracking the order book on a quarterly basis becomes difficult.

Eyeing ultra mega power projects for future growth
TRF is targeting ultra mega power projects (UMPP) for its future growth. With planned investments of 15,880 MW already announced by GoI under UMPP, we estimate an investment of INR 665 bn over the next five years. Based on our interaction with various industry sources, bulk material handling system will be able to address ~6% of the envisaged capex, which translates into an investment opportunity of INR 40 bn for the bulk material handling industry. Even if we assume 20% market share for TRF, it means incremental revenues of INR 8 bn over the next five years (which is more than its standalone FY09 revenues).

Outlook and valuations: Attractive; initiate coverage with ‘BUY’
At CMP of INR 458, TRF is trading at 8.8x our FY10E consolidated EPS of INR 51.8 and 7x our FY11E consolidated EPS of INR 65.9. Based on historical valuations, we ascribe one-year forward multiple of 9, which gives the company a fair value of INR 593 per share over the next 12 months. Given TRF’s track record in project execution, management pedigree, revenue visibility, healthy return ratios and attractive valuations, we initiate coverage on it with a ‘BUY’ recommendation.

To see full report: TRF


Got the zing…

Hindustan Zinc (HZL) is India’s largest and the world’s second largest integrated producer of zinc and lead with total metal production capacity of ~7.54 lakh tonne per annum (TPA). With its world class mining and smelting assets ensuring low cost of operations, strong volume CAGR of
~13% in FY09-12E through expansion and robust balance sheet with cash/share of ~Rs 240 (June’09), the company is set to ride the bumps in the commodity cycle with ease. We expect HZL to register a CAGR of 16.1% and 17.8% in net sales and net profit, respectively, from FY09-12E. We are initiating coverage on the stock with an OUTPERFORMER rating.

Capacity expansion of integrated operations continues
HZL has increased its zinc capacity threefold since 2002. The company is currently implementing a 3.1 lakh TPA capacity expansion plan, which would catapult it to the No. 1 spot among integrated zinc-lead producers in the world. The expansion would help the company to register a sales volume CAGR of ~13% in FY09-12E, reaching zinc sales of ~7.5 lakh tonne in FY12E.

Ever increasing reserves and resources
Through aggressive exploration and drilling activities, the reserves and resources of its world class captive mining assets are continuously increasing. HZL currently holds ~31 million tonne (MT) of contained zinc-lead metal in its mines. This translates into remaining operational life of more than 30 years at an expanded capacity of ~1 MT.

Immune to down cycles on low cost of production
HZL boasts of one of the lowest cost operations in the world. With current cost of production at ~US$700/tonne, it remains largely immune to commodity down cycles.

Valuations leave room for upside
At the current market price of Rs 736.7, the stock is trading at 4.5xFY11E EV/EBITDA and 8.9x FY11E EPS of Rs 82.9. We expect an upward re-rating of the stock, going forward and value the stock at 6.5xFY11E EV/EBITDA. We are assigning a target price of Rs 910 to the stock and initiating coverage on HZL with an OUTPERFORMER rating.

To see full report: HINDUSTAN ZINC LIMITED



Stock Update >> Hindustan Unilever
Stock Update >> United Phosphorus

To see full report: INVESTOR'S EYE 070909


Support at 4740

Markets on Sep 08, 2009: Above 4800

The market continued to move up third day on trot and closed marginally higher on support from heavyweights like Reliance Industries (up 3.5%) and the State Bank of India (up 4%). After hitting the day’s high in the first half, Nifty faced resistance around 4850 and slipped in the second half. In the coming sessions, Nifty is expected to take support around 20 hourly moving average (HMA) at 4740 and continue the up-trend for the short-term target of 5000. The bullish island on the daily chart holds the key for the current up-trend, however a close below 15275 will lead to trend reversal. Nifty is currently trading above 20 daily moving average (DMA) and 40DMA at 4626 and 4539 respectively, which are crucial support levels going forward. The momentum indicator (KST) has turned up and has given positive crossover. Our short-term bias is up for the target of 5000 with reversal above 4575.

On the hourly chart, Nifty is trading above 20HMA and 40HMA at 4743 and 4704 respectively, which are crucial supports in the immediate run. The momentum indicator (KST) has given negative crossover and trading above the zero line. The market breadth was negative with 532 advances and 741 declines on the NSE and 1384 advances and 1503 declines on the BSE.

Nifty added 22 points and Sensex 107 points to its kitty today. Of the 30 stocks of the Sensex, aluminium major Hindalco Industries (up 6%) and biggest Indian bank the State Bank of India (up 4%) were the top gainers, however Tata Power (down 3.5%) and FMCG major Hindustan
Unilever (down 2.5%) were hit the most. Metal stocks saw good buying, while auto stocks were under pressure.

To see full report: EAGLE EYE 090909



• BHEL is one of the largest engineering and manufacturing enterprises in India ranked among the leading Power Plant Manufacturers in the world.

• Its current order book stands at Rs1, 240 billion, which represents 4.6x of FY09 revenue and provides strong revenue visibility for the near-to-medium term.

• Its initiative in nuclear power and super critical segment as key positives for future growth.

• The company has already increased its capacity to 10GW and is looking to increase it further to 15GW by the end of this calendar year.

• Increased order inflows from private sector are a key positive for the company.

• Net sales and PAT of the company are expected to grow at a CAGR of 27.30% and 17.34% over FY08 to FY11E.

To see full report: BHEL