Thursday, September 10, 2009


Upside from pipeline and licensing

Undervalued - upside potential from pipeline and licensing
We believe Almirall is undervalued based on its existing business, with upside possible from potential accretive licensing activity and from upcoming pipeline data. Our €9.30 price objective (12% potential upside from current levels) assumes the stock trades on 11x our ‘10E EPS versus 10x currently. Conservatively, this values the company at a 10% discount to our DCF-derived
valuation of €10. Our valuation assumes no income from potentially accretive licensing deals or positive pipeline newsflow, which represent upside. We maintain our Buy rating.

Pipeline catalysts building
In the next 12 months, we expect to see further data for aclidinium, Almirall’s Phase III long-acting muscarinic antagonist (LAMA) for the treatment of chronic obstructive pulmonary disease (COPD, smokers’ cough), including head-to-head data versus currently marketed LAMA, Spiriva (Pfizer/Boehringer Ingelheim) and first data from the new Phase III programme. We also expect full Phase II data for LAS100977, a long-acting beta agonist for the treatment of asthma and COPD, and first Phase III data from a study of linaclotide in chronic constipation.

Licensing offers significant upside
Almirall continues to pursue licensing opportunities both within Spain and on a pan-European basis, offering potential further upside to our current valuation. Over the past year, we have raised our 2014E EPS forecast by 9% as a result of four licensing deals the company has signed and, while we have little visibility on timing or scope of any future deals, they are not included in our €9.30 valuation and, thus, represent only upside.

To see full report: ALMIRALL (MERRILL LYNCH)


Attractive valuation, EPS momentum and pipeline data
We maintain our Buy recommendation given the potential for positive earnings momentum and upcoming pipeline catalysts. We believe Roche’s valuation is undemanding given it offers one of the best growth rates in EU large cap pharma with an expected ’10-’13 EPS CAGR of 9%, yet trades on only a ’10E P/E of c12x. Our CHF190 PO is in-line with our DCF valuation and assumes shares trade on 13.8x.

Pipeline catalysts and further EPS momentum expected
Meaningful catalysts for Roche in our opinion include: 1) Further positive earnings momentum (from pharma margin/Tamiflu/ tax rate; 2) Phase III Avastin data in three new indications (metastatic prostate, ovarian and gastric cancer) expected could open up a combined market opportunity of CHF3-4bn; 3) The first Phase III data for once-weekly GLP-1 analogue taspoglutide in the treatment of diabetes is expected 2H09, with filing 2010; 4) Tamiflu guidance of CHF400m for 2010 could be raised given the ongoing swine flu pandemic.

Competitor newsflow also picking up
However, we highlight a pickup in competitor newsflow with: ) Erbitux pIII data from the COIN study in colon cancer (mCRC) in Sept 09; 2) First detailed Vectibix data in 1st line mCRC, also Sept 09, from the PRIME study; 3) Potential interim analysis for ASA404 (Novartis) from the ATTRACT Phase III study in 1st line NSCLC by end 09; 4) Potential further PIII data for Sutent (Pfizer) in 1st line mBC late 09, although initial data has been negative; 5) Phase III data for Nexavar (Bayer) in 1st line NSCLC from the NEXUS study in non-squamous patients 1H10; 6) Recentin (AZN) first Phase III data in 1st line mCRC 1H 2010, although there has previously been negative data in both lung cancer and 2nd line mCRC.

To see full report: ROCHE (MERRILL LYNCH)


A Sneak Peek
Market Return Vs Capital Raising

A near 61%+ rise in the world markets since March 9th has
provided corporate a much needed opportunity to raise capital
in form of debt and equity.

Since Jan 1st 2009 to date, companies across the world have
raised nearly USD 5,075bn out of which nearly USD 4718bn
(93%) has come in form of debt while USD 357bn (7%) has
come in form of Equity.

Out of the total of USD 357bn raised in equity, nearly USD
207bn of equity has been raised in the months of June, July and
August. Indicating corporate taking advantage of the rally to
swap high cost debt and re-capitalizing by raising new equity.

Large Equity in Offing

In the current environment this fresh capital is like a lifeline
for certain banking and real estate companies while other
took the advantage of the lower interest rates to swap high
cost debt.

In a way this rally has provided a great opportunity for
certain companies to emerge stronger.

A near 61% rise in the market past March, 2009 has
rewarded investors who participated in the rally. Improving
Economic numbers and corporate profits coupled with
rising liquidity augur well for Capital Markets. Hence, we
expect Primary & Secondary Markets to remain buoyant.

To see full report: REVIVAL IN MARKET


McLeod Russel is one of the world’s largest bulk tea producing companies with annual production of 75 million kg per annum. The company exports one third of its production and has a market share of 10% in the North Indian tea market. Over the past four years the company has acquired four tea plantations (three in India and one in Vietnam). The company currently has over 59 tea gardens spanning across Assam, West Bengal and Vietnam.

Tight domestic demand-supply to boost tea prices

Tea prices have surged above Rs 130 per kg, almost 30% higher than last year on the back of shrinking inventories. The precipitous decline in auction tea prices during 2001-2005 had adversely affected tea plantation activity in India. Subsequently, several tea estates in India have been afflicted with low yields and require investments in replantation. This, in turn, has lead to sluggish growth in tea production during 2006-2009. Tea consumption in India, on the other hand, has grown at a consistent pace of 3%, resulting in shrinkage of tea inventories from 305.9 million kg in 2006 to 220.7 million kg in 2009. Simultaneously, a significant decline in tea production in major tea exporting countries like Kenya and Sri Lanka has further aggravated the situation. With black tea consumption growing steadily and adverse weather conditions taking a toll on tea production, primarily in major tea exporting countries we expect tea prices to remain firm,
going forward.

Best play in the industry
McLeod Russel is the largest bulk tea producer in the country, accounting for 8% of tea production in India. The company has witnessed consistent volume growth through various acquisitions of
tea estates over 2006-2009. Moreover, the company replants around 2% of its tea estates every year, in order to enhance the yields and increase production. The company’s realisations are almost 30% higher than the industry as most of its tea estates are located in Assam, which is known for its high quality tea. Rising tea prices have resulted in a higher EBITDA margin in 2009. With the company’s fixed cost structure, higher plucking productivity per plucker at Rs 25 per kg
(vis-à-vis industry average of Rs 21 per kg) and rising tea prices, we believe the EBITDA margin will further improve in 2010.

Growth through inorganic route
McLeod Russel is one of the largest bulk tea producers in India, accounting for 8% of the country’s total tea production. From 30 tea estates during 2004, the company currently operates over 59 tea estates, thereby doubling its production capacity from 40 million kg per annum in FY05 to 75 million
kg per annum in FY09. The company acquired Doom Dooma and Moran Tea Co in 2006 and 2007, respectively, with an annual production capacity of 6 million kg and 4 million kg, respectively. Additionally, in 2008-09, the company forayed into Vietnam and Africa through the acquisition of Phu Ben Tea Co (US$7 million) and Olyana Holdings LLC, US (US$2.75 million), respectively, through its UK-based subsidiary Borelli Tea Holdings Ltd. The Phu Ben Tea Co and Olyana Holdings have a production capacity of 4.5 million kg and 1.7 million kg of tea per annum, respectively. Given the company’s aggressive acquisition plans we expect this trend to continue,
thereby driving inorganic growth, going forward.

To see full report: MCLEOD RUSSEL


Time to Buy this Forgotten Stock at 0.6x BV

Raising target price to Rs. 325 (1x F2010 BV): We have raised our target price on the back of greater visibility on margin progression and comfort on earnings outlook. We estimate that OBC can generate close to 12% ROE in F2011 without any support from capital gains and even after assuming Rs. 55 bn of loan loss provisions (3x that in F2009). We believe a cyclical uptick in core earnings over the next few quarters could be the catalyst for a re-rating.

Key beneficiary of strucural and cyclical margin expansion theme: OBC’s net interest margin (1.8% in QE-Jun 09) is the lowest in our coverage universe. Its margins have declined by two percentage points since F2004 primarily due to a collapse in bond spreads. We believe that this trend is behind us. Further, by QE-Dec 09, OBC will see the full benefit from repayment of
high-cost deposits amounting to Rs. 209 bn (17% of assets). This alone will likely help margin expand by more than 30 bps.

Bond book relatively insulated from losses: OBC’s bond portfolio is relatively immune to bond losses up to a yield of 8.25%. Hence, even if bond yields were to rise to 9%, OBC’s earnings would be impacted by 13-14%. Note that there would be some offsetting cushion in the form of higher yield on investment book.

Upside Optionality from Insurance Business: OBC has a 23% stake in a life insurance JV with HSBC and Canara that has gained significant market share within one year of operation. We currently do not ascribe any value to this. If it keeps gaining market share, we would likely start ascribing value to this business, which could potentially amount to >25% of current market cap.

To see full report: OBC



We recently met Lanco Infratech’s (LITL) management and visited its Kondapalli power plant, to get the latest business update. Following are key takeaways:

Existing 368 MW plant running at full capacity
Post commercialisation of RIL’s KG gas basin, LITL has been receiving 1.6–1.65 mmscmd of gas, enabling Kondapalli stage 1 to operate at 94% PLF.

366 MW Kondapalli stage II plant expected to be operational in Sept/Oct
Work on Kondapalli plant phase II is in final stages of completion with management confident of commissioning the gas turbine (233 MW) by end of Sept/early Oct. This plant will be initially run on open cycle; with commissioning of the steam turbine (133 MW) by Q4FY10, it will be a combined cycle plant.

Output will be sold on merchant basis
Management has indicated that the entire capacity will be merchant based, while our interactions with state energy department officials indicate that only a portion is based on merchant. Government officials further stated they are only processing requests for regulated/competitive bid projects. However, with respect to fuel linkage, both the government officials and the company management indicated that in principle allocation of natural gas to the requisite level has been done.

Further expansions planned
Management indicated that it will finalise plans to expand the capacity by ~750 MW (phase III & IV) at the same location. It also said that the proximity to Krishna river and anticipated higher KG basin output will alleviate water and gas issues.

Potential upsides to our forecasts
We have assumed earnings of INR 717 mn from this plant in our FY10 estimates assuming merchant tariff and sale of ~610 mn units. If LITL is able to operationalise the plant, source fuel, and execute merchant sales for the entire capacity, then there could be upside risks to our earnings forecasts.

Outlook and valuations: Back-ended growth; maintain ‘HOLD’
At CMP of INR 420, the stock is trading at 2.8x FY10E and 2.2x FY11E book value. We have a ‘HOLD’ recommendation on the stock. On a relative return basis, the stock is rated ‘Sector Outperformer’.

To see full report: LANCO INFRATECH



1. Market View

2. Economic Indicators

i. Leading
  1. 10 year Yield
  2. Bond Market
  3. Commodities
  4. Money Supply
  5. Credit growth
  6. Yield Curve
  7. Corporate Bond Spreads
  8. P/E ratio

ii. Coincident
  1. Inflation
  2. GDP
  3. IIP
  4. Core Infrastructure Industries

iii. Lagging
  1. Exports
  2. Imports

To see full report: ECONOMY 360 DEGREES


Deccan Chronicle is the largest circulated English daily in South India. Last year the company launched its English daily in Bengaluru taking its daily circulation to 13.3 million copies, the
highest among English dailies in the Southern region. The company also owns the winning team of IPL 2009 edition, Deccan Chargers. Deccan Chronicle also has a presence in retail with 46
books and eyewear stores across the country covering a total built up area of more than 2.6 lakh sq ft.

Business model
Deccan Chronicle has grown from being an undistinguished No. 10 in the list of most read English
newspapers in the country to being the largest circulated English daily in the south. It has evolved from being a regional paper to a national player with a presence not only in media channels like print and web but also in retail with Odyssey book stores and sports with the Hyderabad team ‘Deccan Chargers’ in the Indian Premier League. However, print continues to be the major revenue contributor for the company with about 88% of the total topline and ~97% of the total bottomline coming from the traditional segment.

Print is the traditional segment for the company. It has been present in this segment for over 71 years and is now the most circulated English daily in the south. It recently launched its English daily ‘Deccan Chronicle’ in Bengaluru taking the total circulation to over 13.3 million. It has achieved a circulation of 1.5 million in Bengaluru within a year of launch and is expected to go up from here. In addition to this, it has a presence in the international news segment with ‘The Asian Age’ and the business news segment with ‘The Financial Chronicle’.

Print media contributed Rs 852.8 crore representing ~88% of the topline during FY09.

The company owns Hyderabad ‘Deccan Chargers’, the winning team of IPL Season 2. The IPL has emerged to become one of the most valuable sport properties in the world. Going forward, it would benefit the company both in terms of branding and valuation. This segment contributed about Rs 56.6 crore to the topline in FY09.

The company has a presence in the retailing segment with Odyssey book and eyewear stores across the country. It has 46 stores entailing a total built up area of over 2.6 lakh sq ft. The stores offer over 1,00,000 titles across genres. In addition to books the Odyssey stores have also diversified to offering toys, gift and home décor, stationery, cards and eyewear. This segment contributed about Rs 55.9 crore to the total topline in FY09.

To see full report: DECCAN CHRONICLE

>Crude trims gains on equities; await DOE data

London - Crude futures trimmed gains Thursday morning due to falling equities and a slight rebound in the dollar as well as cautious sentiment ahead of key U.S. oil inventories data.

Crude futures hit intraday highs after the International Energy Agency revised up global oil demand by 500,000 barrels a day for 2009 and 2010 in its monthly Oil Market Report. But the gains proved to be short-lived, and the market soon succumbed to weakness in equities and gold.

"The IEA report is slightly supportive, but I think the market is still totally dominated by economic factors, particularly the dollar," said Tony Machacek, vice president of energy broker Bache Commodities Ltd.

At 1040 GMT, the front-month October Brent contract on London's ICE futures exchange was up 16c at $69.99 a barrel.

The front-month October light, sweet, crude contract on the New York Mercantile Exchange was trading 38 cents higher at $71.69 a barrel.

The ICE's gasoil contract for September delivery was down $8.25 at $562.00 a metric ton, while Nymex gasoline for October delivery was down 44 points at 182.37 cents a gallon.

Global oil demand in both 2009 and 2010 is now expected to be 500,000 barrels a day higher than organization's August estimate, at 84.4 million barrels a day and 85.7 million barrels a day respectively, the IEA said.

"We would expect the IEA to make further upward revisions to oil demand in their next report as for now they have adjusted for the 2009 higher-than-expected demand but we do not think that they have yet adjusted their demand models for the higher GDP growth forecast," said Olivier Jakob, managing director of Swiss consultancy Petromatrix.

The IEA was still using a World GDP growth assumption of +1.9% for 2010 from the International Monetary Fund's April outlook. While the IMF September outlook isn't "officially" out yet, it is widely leaked to be +2.9% for 2010, Jakob said.

The IEA also expects global refinery runs to rise in the fourth quarter, reflecting the first annual growth in refining activity since the third quarter of 2008.

The Organization of Petroleum Exporting Countries' decision to keep its output level unchanged failed to have an effect on the market, as it was widely expected by the market, analysts said.

The focus of the market is now switching to the upcoming oil inventories data by the Department of Energy, due 1500 GMT Thursday.

Wednesday, the American Petroleum Institute data reported a big drop of 7.2 million barrels in crude oil stocks in the week ending Sept. 4. However, it remains to be seen whether the DOE data posts a similar drop, due to constant divergence of the two sets of data.

A Dow Jones Newswires' survey showed crude oil stocks are likely to be down 1.6 million barrels, while gasoline stocks are expected to drop by 1.3 million barrels, and distillates stocks are forecast to be 600,000 barrels higher, according to an average of forecasts by 15 analysts.