Monday, September 14, 2009


Valuation upside; but too many near-term risks
While our 12 month price objective (Eur71) represents c15% upside from current levels, we do not expect this to be realised short term given upcoming events (Vecibix Phase III data and cladribine data exclusivity decision, discussed below) represent asymmetric downside risk, in our opinion. In addition, uncertainty on Erbitux EU approval in lung cancer is expected to remain as sentiment overhang. With higher, less risky returns available elsewhere in EU pharma (Bayer and Sanofi top picks), we maintain our Neutral rating.

Vectibix asymmetric risk to Erbitux forecasts
Detailed data from the PRIME study investigating Vectibix (Amgen, anti EGFR antibody) in 1st line colorectal cancer (mCRC) is expected at the ESMO conference on the 24th September. We see limited upside to Erbitux forecasts from competitive data, but potentially significant downside, dependent on strength of the Vectibix data. Importantly, in our opinion, Vectibix may be able to gain market share, even if efficacy is only broadly similar to Erbitux (base case expectation), given its lower dosing frequency and potentially better infusion site reaction profile.

Cladribine data exclusivity increasingly a focus
While we believe Phase III data for cladribine is impressive and potentially supportive of blockbuster sales potential, we remain cautious on cladribine’s patent estate and data exclusivity. Cladribine’s composition of matter patent has already expired and method of use patents in MS are valid until only c2013E (EU/US). We, therefore, believe that any data exclusivity granted is crucial to protecting cladribine from generic competition. In EU, we currently assume (in-line with company guidance) the product remains protected by 10 years new indication exclusivity. However, obtaining the latter is not a given and if not secured, it could severely restrict cladribine’s long-term commercial potential.

To see full report: Merck KGaA


Merchant cap – On or off?

The recent draft order by the Central Electricity Regulatory Commission (CERC) capping the merchant tariff has left the market worried about possible CERC intervention in the market pricing mechanism in power. Such a step could be a possible deterrent for attracting capital in the sector. We met Mr R Krishnamoorthy (a member of CERC) to understand the implication of the draft and discuss other issues. Essentially, the commission believes that the draft order should be seen in the light of the shortage created by drought and the onset of festive season, and should not be considered as setting a precedent.

Drought and festive season led to draft order on capping merchant tariff. The drought has seriously hit hydro generation, leading to further power shortage. Also, onset of festive season (Ramadan) has led to pressure on state electricity boards (SEBs) to procure power at higher rate. CERC has intervened to cap merchant rate so as to control rising tariffs due to the shortage caused by drought and onset of the festive season. The draft proposes a cap at Rs11/KwHr for 45 days and a subsequent review.

No plan to control market pricing mechanism, except in exceptional cases. CERC believes it has no role to play in controlling merchant power tariff. The discipline should start from buyers – they should be ready for load shedding if prices rise beyond a particular point. Merchant power rate should move in relation with unscheduled interchange (UI) charges, which have been already capped at Rs7.33/KwHr by CERC.

Power trading margin under review as 4paisa/unit insufficient to cover risk. Currently, CERC is reviewing the 4paisa/unit power trading margin cap and is likely to come out with a draft note. It believes the margin is insufficient to cover risk.

CERC unlikely to take suo motu action against states with alternative power purchase model. Some states are entering into fixed price-power purchase agreements (PPA) with non-PSUs, exploiting loopholes in the Electricity Act, 2003 and Competitive Bidding Guidelines, 2006 – States such as Chhattisgarh and Orissa signed PPAs for less than a year with 5% power at variable cost and 30% at fixed price in lieu of assistance on coal linkage. CERC can not take action suo motu unless there is a complaint and rule implementation is in the state Government’s hand.

To see full report: UTILITIES SECTOR


What G20 means for leverage, credit and growth

The G20 communique and associated BIS announcements demonstrate that the key features of the future financial landscape have already been set

New leverage ratio constraints likely to affect European banks most

Securitization policies, in contrast, more likely a negative for the US

Near-term market impact likely limited: much of any capital shortfall likely to be redressed via retained earnings

However, long-term implication is for higher costs of credit, slower growth, and lower bank returns on equity

To see full report: FINANCIAL SYSTEM


We recently held the conference call with the Management of Usha Martin Ltd. (UML) to get an
understanding of the company’s ongoing capacity expansion programme to increase capacity to ~1mn mt and also to review the status of the captive coal mines. The key takeaways from the interaction were as follows UML is nearing completion of the ongoing capacity expansion to augment capacity by ~2.5x to ~1mn tpa. The same will also be supported by metallic capacity in the form of pig iron and sponge iron and other related infrastructure. The expansion also entails increasing the value added product capacity to maintain its share at ~45-50%. The entire expansion is progressing satisfactorily and is expected to be fully commissioned by Mar’10 (except certain power capacities).

However, delay in commencement of the captive coal mines present an area of concern as the same was scheduled to start production in Q4FY09 and are now expected to start extraction by the end of Q3FY10. UML’s management expects 25% and 100% coal integration in FY10 and FY11 respectively.

At the CMP of Rs54, the stock trades at a P/E of 4.6x and EV/EBITDA of 3.1x, discounting its FY11E earnings. In our view, these valuations do not factor in the degree of value chain post the completion of the ongoing expansions and the commencement of the coal mines. We remain positive on the overall business of UML, and value the stock at 4x EV/EBITDA to arrive at a price target of Rs81/share. We reiterate our ‘BUY’ recommendation on the stock.

To see full report: USHA MARTIN


Steel Authority of India (SAIL)'s annual report for FY09 exhibhits the resilience shown by the company in one of the toughest global economic crisis. With soaring input prices, fluctuating market and the world economy in doldrums, SAIL remained undeterred, increasing its cash levels by Rs46bn even after incurring a capex of Rs64bn during the year. The company managed to save Rs8.3bn on account of the ehancement in operational efficiency by improving techno-economic parameters. The company has been constantly trying to increase the share of value added products (VAP)in overall sales. The company in FY09, achieved its best ever coke rate, specific energy consumption and labour productivity. SAIL's operating margin was negatively impacted by a surge in raw material costs (RM cost/ton of steel increased 46% yoy). Slippage in its mega expansion plan continued. The plants are now expected to be operational from FY12 onwards from earlier estimate of FY11.

  • Large capex plans to turn SAIL into net-debt by FY11E
  • Upgrade recommendation to Market Performer
To see full report: SAIL