Sunday, September 13, 2009


Upgrade to Neutral on valuation, macro & catalysts

Macro driven Underperform thesis diminishes
We are upgrading Novartis to Neutral from Underperform and raising our price objective to CHF50 from CHF45. In our view, our macro-driven Underperform thesis is becoming less relevant as investors have moved more Neutral-weight the pharmaceutical sector, its valuation appears undemanding, and there are some catalysts on the longer-term horizon. However, our Neutral thesis is driven by Novartis’s continued unexciting forward growth through a period of cyclical recovery and limited upside potential to our CHF50 fair value and price objective. Neutral.

Valuation seems undemanding but not compelling
Novartis appears appropriately valued. The stock trades within 2% of our CHF50 DCF-based price objective (up from CHF45). On a core EPS basis (which we expect the company to use as focus EPS from 2010 onwards), it trades on a 2010E PE of c9x, a c10% discount to its EU Pharma peers and c40% discount to the EU market. This appears appropriate to us given its expected lacklustre 2% 10-13E EPS CAGR, below the sector average c5%.

Near-term events not material. Longer-term catalysts seen
We see near-term 2009 events (Flu vaccine driven EPS upside, FTY720 (multiple sclerosis) 2-year data, oncology investor event Dec 9th, including new Phase III data for Tasigna head to head versus Gleevec in front line CML and QAB149 (LAMA, COPD) head-to-head data versus Pfizer’s Spiriva) as insufficient to materially move the shares. However into 2010, we see more material catalysts as: 1) New CFO Jon Symonds (aggressive cost cutter) takes the role in April; 2) Meningitis B vaccine phase III data expected 2H10 ($5bn sales potential or 6% EPS upside); 3) Final analysis of ASA404 in non-small cell lung cancer which, if positive, could trigger c2% EPS upside (interim analysis expected 2H09).

To see full report: NOVARTIS


Fundamental risks to the fore

Focus to shift from short-term momentum to fundamentals
Much of the share price strength in recent months has been “momentum” driven in our opinion, given pipeline catalysts (Brilinta Phase III data, Onglyza approval) in recent months. From here, however, we see limited late stage clinical data to support further share price upside and expect the market to begin to re-focus on the company’s long-term fundamentals challenges (outlined below). Our PO of 2650p is c5% below the current share price. Underperform.

Long-term forecasts significantly below consensus
Our out-year EPS forecasts for AZN are c10-15% below consensus, driven by our more cautious stance on group sales progression (10-13E CAGR of -6% vs consensus -3%), as we assume new product launches are insufficient to offset significant expected generic competition. Importantly, we believe declining sales, predominantly driven by generic erosion of high-margin products, could result in a greater decline in operating profits, (MLe -9% 10-13E CAGR).

Crestor pivots approaching
Our 2014 forecast for Crestor of $5bn is substantially below consensus estimates of c$6.8bn (the $1.8bn difference is c7% of group sales). Upcoming newsflow represents asymmetric downside risk to consensus forecasts, in our opinion. Potential positives for Crestor which could theoretically expand its existing addressable patient pool include a label update for high CRP, approval of Certriad and a potential lowering of LDL targets. However, in our opinion, upside from these events is already largely assumed in consensus. Importantly, we remain cautious on the achievable sales potential in each and see downside risk to consensus should these potential positives disappoint. Importantly, potential negatives (upcoming patent trial and increasing longer term concerns over potential therapeutic substitution following Lipitor generic launch Nov 2011) represent exclusively downside risk to forecasts, in our opinion.

To see full report: ASTRAZENECA


Media reports of revision in MTN offer, Looks neutral for Bharti - ALERT

Bloomberg reported yesterday that the terms of Bharti-MTN deal have been revised with Bharti agreeing to pay more cash for the deal than decided earlier. As per the news article, Bharti would pay US$ 10 billion in cash and US$ 4 billion in stock (total consideration of US$ 14 billion) against the earlier deal terms of US$ 7 billion in cash and US$ 6 billion in stock. The incremental cash payout of US$ 3 billion would be neutralized by Singtel paying US$ 3 billion to Bharti and taking a stake in Bharti as per media reports.

• Bharti and Singtel have denied the media reports and stated that talks are still on and would be consummated by Sep 30, 2009.

Implications: The new deal terms, if implemented, would largely be neutral for Bharti as it would effectively swap the Bharti GDR offering by cash from Singtel. It would also not have a material impact on our EPS analysis – we continue to believe that the deal is largely EPS neutral
for Bharti. From a sentiment perspective, we believe this kind of arrangement would actually be positive for Bharti stock as it would remove the overhang of MTN acquisition price.

Investment view: We are fundamentally cautious on the sector and Bharti due to increasing competition. However we do believe that a positive consummation of MTN acquisition (without significant increase in deal price) would be positive for Bharti stock in the near-term. Valuations for Bharti are no longer demanding, in our view.

To see full report: BHARTI AIRTEL


Deserves a look

We recently met Mr KR Kamath, Chairman and Managing Director of Allahabad Bank. With the share price overhang about top management out of the way and business restructuring underway, we believe core profitability is set to improve and, hence, a re-rating is warranted. The stock should trade up to 0.9–1x FY11E book from 0.7x currently, narrowing the discount to its peers to ~25% from 45%.

Stability at the top
Mr R P Singh of Punjab & Sind Bank is taking over as CMD of PNB. This puts speculation about Mr. Kamath (current CMD of Allahabad Bank) moving to PNB at rest. Hence, the restructuring initiated by him at Allahabad Bank will continue.

Restructuring under way
Since taking over as the CMD in August 2008, Mr Kamath has been responsible for initiating steps that should lead to enhancing the bank’s operating and financial performance. Balance-sheet restructuring both on the liabilities and the asset side will aid margin improvement. Fee income is set to gather traction, given the thrust on fee income and implementation of the bank’s core banking solution (80% business is currently under CBS). The bank’s conservative approach of putting cyclical treasury gains to good use, shoring up the provisioning buffer and wage revisions should hold it in good stead. The share of available for sale investments at 50% may seem dangerously high. However, a large proportion of these is contributed by investments in liquid schemes. After a subdued FY09, when earnings declined 21%, we expect a robust 27% CAGR over FY09–11 with core operating profits growing at a faster 31% CAGR over the same period.

Calls for a re-rating
Allahabad Bank has always traded as if it were a poorer cousin to its larger PSU peers—at a discount of 35% over the past four years. The discount should narrow, as the bank improves its operating performance through technology upgrades and balance-sheet restructuring. Factors that already favour a narrowing discount are a steady deposit profile, comparable cost-to-income, manageable asset quality and, above all, a stable guard at the helm.

To see full report: ALLAHABAD BANK



Overview of Indian Ancillary Sector
  • Introduction
  • Potential of Indian car market
  • Indian Auto Component Industry
  • Exports
  • Products Profile
  • Global Markets (India, US & UK)
  • Commodity Prices
  • Outlook
  • Final Recommendation
  • Motherson Sumi System Ltd
  • Amtek Auto Ltd
  • Precision Pipes & Profiles Ltd.
To see full report: ANCILLARY SECTOR


While growth markets Indonesia, India and China have seen strong bank performance, relative to local markets they are down YTD. We moved to OWT Indonesia following our country visit last week. Our India recommendation remains OWT and China which is Neutral, remains under
review for an upgrade, as the cycle appears to be being pushed out longer and where margins are about to expand with provisions levelling off.

Banks since January
Banks stocks are up 45% on average this year
However vs local market banks are down 1%
Some high growth bank markets have underperformed

Indonesia (OWT)
While Indonesian banks are up 59% YTD they are down 10% vs their market
Banks there indicate NPL formation has been muted and they will restart lending
Demand remains strong given low penetration and rates on mtgs are being cut

India (OWT)
India bank stocks are up 42% but banks are down 11% vs their market YTD
Results out of India’s banks have generally been in line or stronger than estimates
Treasury gains have supported profits, but also limited NPLs and provision costs

China (Neutral – Under review for upgrade)
China’s banks are down 2% vs the market YTD, even though they are up 44%
Key feature of 2H09 will likely be stable margins if not slightly higher, unlike 1H09
Having met provision requirements, expect lower growth in LLP during 2H09, 2010

We focus a lot more on PB when in times of distress
India’s banks are on 11.0x PE with a peak of 17x
China’s banks are on 10.7x PE with a peak of 28x
Within high growth markets, China’s banks are 2nd cheapest, India PSU are 1st
Indonesia’s banks PEs historically are high due to losses
BCA is on 15x vs peak of 20x, in recent years, with no losses
Mandiri is at 14x on 10CL, where earnings will most positively surprise in 2H09

To see full report: LEADERS & LAGGARDS


  • Acquires 50% in Dhariwal Infrastructure's 600 MW thermal plant
  • Budge Budge III due to commence operations in September
  • Spencer's expected to break even by FY12
  • Upside priced in, re-iterate MP
To see full report: CESC


Healthy operational performance

Better revenue mix augurs well for margin profile: Growth in the tyre industry always mirrors growth in the road transport sector which is expected to grow at a pace of 8-9% for the next 3-5 years. CEAT, with a market share of 13%, is a major tyre maker in India and offers wide range of tyres to all the user segments, including the heavy duty truck and bus (T&B), LCV, tractor, trailers, PCs, motorcycles and 3-wheelers. The company currently manufactures over 7m tyres every year and has a strong presence in the replacement market. The current revenue mix stands at 79:08:13 as of Q1FY10 in favour of Replacement: OE: Exports segment compared to 70:10:20 in FY09. With a shift in the product mix towards the replacement market which is a better margin product, the margin profile is expected to be better than the average 6-7% in the last 4-5 years.

Capacity expansion to aid volume growth: CEAT is ramping up its production facilities to benefit from the uptrend in the automobile industry. The company has a current capacity of 400 tonnes per day (TPD) in the Bias tyres. Bhandup plant has a capacity of 240 TPD, whereas Nashik plant has a capacity of 160 TPD. The company is looking at expanding its Nashik capacity by 35 TPD by April 2010. At the same time, CEAT is looking at a new Radial tyre capacity at Baroda of 145 TPD to be operational by October 2010. The capex slated for the Radial capacity is Rs500 crores spread over the next two years. The same would be funded by Rs250 crores debt and the remaining Rs250 crores will be from internal accruals.

Outlook & Valuation: We expect CEAT to report revenue CAGR of 13.8%, mainly led by CAGR of 10.2% volume growth in tonnage terms and 3.3% CAGR in realization for the period FY09 – FY11E. We expect CEAT to report a PBT of Rs2336m and a PAT of Rs1542m in FY10E. We expect an EPS of Rs45.0 in FY10E and Rs42.6 in FY11E which discounts the CMP of Rs152, by 3.4x FY10E and 3.6x FY11E. Given the attractive valuations, we maintain our ‘Accumulate’ rating on the stock, with a price target of Rs210.

To see full report: CEAT


Circumventing potholes

The two-wheeler segment, after a sharp recovery in the recent months, is heading towards rough weather – Deficient monsoons impacting rural income is likely to affect segmental growth post H2FY10. Although profitability of players is expected to be robust, we prefer companies with higher revenue diversification, which would de-risk the domestic growth slowdown. We initiate coverage on two-wheeler sector with Bajaj Auto (BAL) as BUY, Hero Honda Motors (HHML) as HOLD and TVS Motors (TVSM) as SELL.

Two-wheeler growth to moderate. We expect the domestic two-wheeler segment to grow at a moderate 10.3% over FY09-11E after a sharp 15.8% recovery in 4MFY10. The rural segment is a key long-term growth driver for the industry on account of lower penetration level and rising rural income. Due to 24% lower monsoons during June-August ’09, agricultural income would be affected, taking a toll on rural segment growth. Higher liquidity and decline in interest rate would be incrementally positive for retail sales. However, exports will likely grow at 8.2% over FY10E-11E, de-risking companies against further decline in domestic growth.

Profitability to be robust. Two-wheeler players would post improved profitability due to sharp decline in raw material costs, which hurt margins in FY09. HHML and BAL would continue to benefit from fiscal incentives from their Uttaranchal plants, thereby improving profitability. We expect the industry’s EBITDA margin to expand 440bps YoY over FY09-11E, as indicated by the sharp margin expansion in Q1FY10 results.

HHML – Initiate with HOLD and Rs1,650 target price. HHML is trading at FY10E & FY11E P/E of 17.7x and 14.2x respectively. Our one-year target price is Rs1,650, based on FY11E P/E of 15x. HHML will maintain its leadership in two-wheelers, which is factored in higher valuations. Key risk is the impact of dismal monsoons on rural segment growth. HHML’s FY09 dividend yield is 1.3% and cash per share Rs180.

BAL – Initiate with BUY and Rs1,400 target price. Higher-than-expected growth in exports, passenger three-wheeler segment and decline in raw material costs would drive BAL’s profitability. BAL enjoys the most diversified product portfolio with threewheelers and spares together accounting for 31.6% of net sales. We expect recurring net profit CAGR to be 44.1% over FY09-11E. Our one-year target price is Rs1,400 based on FY11E P/E of 14x (in line with current valuations, discount to HHML). BAL’s FY09 dividend yield is 1.8% and cash per share Rs82.

TVSM – Initiate with SELL and Rs34 target price. TVSM has been losing market share in motorcycles and scooters, while strengthening its position only in mopeds. We expect market share losses to continue. Recent margin uptick would not be sustainable due to high cost structure and losses from the Indonesian subsidiary. Our one-year target price is Rs34 based on FY11E EV/E of 12x (premium to peers).

To see full report: AUTOMOBILE SECTOR