Thursday, April 22, 2010

>Gauging institutional investor attitudes to Asia

As the world emerges from the worst financial crisis for more than a generation, a shift in economic power from West to East is gathering pace. With many developed countries weighed down with debt and facing years of sluggish growth, corporations and portfolio investors are looking to the dynamic markets of emerging Asia as one of the most promising sources of long-term growth.

This focus on the fastest-growing markets of Asia is mirrored by the rapid development of financial centres in the region, such as Mumbai, Shanghai and Singapore. Global financial institutions continue to increase their presence in these centres to take advantage of strong economic fundamentals, a growing customer base, favourable demographics and deepening financial markets. Overseas investors are also expanding their allocation to Asian asset classes in the hope of better returns and improved diversification, particularly in the context of weak growth in their domestic markets.

The aim of this report, which is written by the Economist Intelligence Unit and sponsored by Fidelity International, is to assess the appetite among international investment managers to deepen their exposure to the Asia-Pacific region. The findings are based on a survey conducted in February 2010 of 109 financial services professionals from across the industry, all of whom have knowledge of their institution’s overall investment strategy and exposure to assets in Asia. Investment banks formed the largest group, with 44% of respondents, while insurance companies accounted for 14%, mutual funds for 13%, and pension and retirement funds for 12%. Just over half of the respondents were based in Western Europe, and just under half were based in the Asia-Pacific region. (Respondents from North America were excluded, although respondents from institutions headquartered in this region accounted for 14% of the total.) Around 50% of respondents represented institutions with global assets in excess of US$50bn. Our thanks are due to all the respondents who took part in the survey.*


Allocations to Asia are set to increase, with major emerging markets grabbing the lion’s share

Asian and longer-term investors haven’t forgotten more mature markets

Equities are the most attractive Asian asset class

Investing in Asia is seen as risky, but balanced by potential rewards

Uncertainty about institutional expertise in Asia does not necessarily equal caution

Concerns linger about transparency and the quality of regulation in Asia.

To read the full report: INSTITUTIONAL INVESTOR


Profitability growth mapping in place…

Rolta India Ltd reported Q3FY10 numbers that were in line with our expectations. The management sounded optimistic about the growth prospects of each of its business segments and emphasised that EGIS will remain as growth as well as profitability driver. The EDOS business is now seeing traction for high value work from various refineries. The EITS business is out of the woods and has reached stability.

In line results but strong growth & profitability outlook
Rolta reported in line Q3FY10 numbers with revenues at Rs 395 crore (5.1% QoQ growth), which was marginally below our expectations. However, on the operating front, it was in line with EBITDA margins at 37.8%. The PAT stood at Rs 67 crore with 7% QoQ growth. The management has highlighted that it will closely be able to meet the higher end of its constant currency guidance of 12- 15% for FY10E. On the profitability front, the management is
confident of scaling up its gross margin by 100-200 bps over the next two years on the back of IP revenues scaling up its contribution from 8% (YTDFY10) to 15% (FY12) and 20-25% FY13 and beyond.

Fund raising on the cards
The management is planning to raise US$100-120 million via QIP, going forward. This is to fund M&A opportunities like the recent OneGIS with consulting capabilities catering to telecom, utilities and government vertical and has inherent IP for mobile telecom.

On the back of a strong order back log of Rs 1769 crore and growing share of IP contribution with strong growth in the EGIS segment, we believe the company will be easily able to grow at 16% CAGR over FY10E-FY12E. Also, IP contribution will aid margins adding to profitability.
We are revising our EPS estimate upwards and valuing the stock at 10x FY12 EPS. This gives us a price target of Rs 226 and STRONG BUY rating.

To read the full report: ROLTA INDIA


The BSE Healthcare Index has increased 5.7% during Q4FY10 compared to the BSE Sensex which remained flat during the quarter. The outperformance has been mainly due to new ANDA approvals, niche opportunities in the US market and domestic formulations showing healthy growth leading to margin expansion and higher profitability.

US continues to remain the mainstay
The large cap space will continue to witness benefits from niche/recurring/one-off opportunities in the US eg. SUN-Pantoprazole, Dr.Reddy's Labs - Omeprazole OTC and Ranbaxy-Valtrex. Other opportunities that may come in during Q1FY11 are SUN-Effexor XR and Dr.Reddy's - Allegra D24. Lupin which has taken the branded formulations route for the US market is expected to lay greater thrust on Antara and launch Allernaze during Q2FY11 in the US market. Cadila Healthcare will see the Hospira venture gaining greater traction going forward.
US remains the mainstay of large cap companies and we believe will continue to remain a formidable market in the near future. The German market will continue to see declining price realisations on account of higher component of market migrating to tender business.

Increasing number of dossier licensing and supply deals eg. Aurobindo-Pfizer, Torrent-Astra Zeneca, IPCAAstra Zeneca, Indoco- Watson, Aspen lends greater credence to the chemistry and formulations sills of Indian companies in the mid-cap and small-cap space. MNC's are actively looking for outsourcing their R&D activities so as to make it variable in nature. Indian CRAM's space namely Divis, Dishman and Jubilant will benefit owing to completion of destocking by MNC's and increased outsourcing by MNC’s.

The Healthcare Bill in the US lays greater emphasis on lowering healthcare costs will result in higher generic penetration and benefit all the companies in our coverage as they have a sizeable presence in the US market. We believe Lupin and Dr.Reddy who have garnered a reasonable share of the US generic market will witness positive revenue traction in their US business.

Domestic formulations business showing healthy growth

Companies with significant exposure to the domestic formulations business mainly in mid-cap and small-cap space will continue to benefit from the higher growth rates especially in the chronic segments. The Indian pharmaceutical market was worth Rs.400 bn in Dec 2009, had growth rates of 12-13%. The strong growth rates will continue on the back increased penetration of healthcare and insurance amongst the Indian populace.

MNC pharma companies namely GSK and Aventis Pharma have been showing interest in the branded generic space in India and have been expanding their field force and also launched products in the branded generics space in India. With increasing emphasis on semi urban market, foray into the branded generic market, we believe MNC’s should also see better revenue traction in the forseeable future. We have rolled over our price target to FY12E. In the large cap space we continue to like Lupin and Sun Pharma. In the midcap space we like Aurobindo Pharma, Ipca Labs, Unichem Labs and Torrent Pharma. Indoco Remedies remains our pick in the smallcap space.

To read the full report: PHARMA SECTOR

>UNITECH: Non-core spin-off to unlock value (RELIGARE SECURITIES)

Unitech plans to spin off its non-core businesses (construction, telecom, power, SEZs and amusement parks) and focus entirely on real estate. We believe the objective behind the de-merger is to create two separate listed entities that will allow for a sharper business focus. The move will also enable the management to raise funds more easily in the non-core entity as compared to the real estate business. We see value-accretion for investors from the spin-off and hence maintain a Buy on Unitech with a target price of Rs 101.

Non-core line up: We believe the proposed non-core entity would comprise the company’s 40% stake in Unitech Corporate Park (UCP), 50% stake in Unitech Amusement Park, 32.5% holding in Uninor Wireless (telecom), and the in-house construction and power transmission divisions.

Unitech Corporate Park – the SEZ vehicle: UCP – an AIM-listed entity – operates in India’s commercial real estate segment with a focus on IT and IT-enabled services. The company has six properties (five SEZs and one IT park) in the national capital region (NCR) and Kolkata with a total development potential of 21.4mn sq ft (1.05 msf leased out). UCP is a debt-free company with cash of £ 48.3mn as on December ’09. Knight Frank has valued the company’s six assets
at £ 517.7mn; we have built in this figure for our best-case valuation of UCP. Accordingly, the value of Unitech’s 40% stake stands at Rs 14bn (Rs 68/£). Amusement parks: Unitech holds a 50% stake in Unitech Amusement Park which owns two parks, one in Noida and another in Rohini (Delhi). The Noida amusement park is spread over 148 acres in Sector 38. Phase I has been concluded and comprises 20 rides along with 1msf of operational retail space.

The park in Rohini called ‘Adventure Island’ covers 61.7 acres and has 22 rides and 0.2msf of retail space operational under the first phase. We have valued this business based on the leased portfolio, at Rs 5bn in the best case scenario.

Telecom, construction and power: Unitech holds a 32.5% stake in its telecom business – Uninor Wireless, which we have valued at Rs 29.6bn (based on Telenor’s 67.5% stake acquisition in Uninor for Rs 61.3bn). We value the construction business at 4x Market cap/EBITDA (~Rs 1bn) and power at Rs 1bn.

De-merger to be value-accretive for investors: Including subsidiaries and JVs, we arrive at a value of Rs 19.5/share for the de-merged entity in the best case and Rs 12.9/share in the bear case at full dilution (see Fig-1). We expect the spin-off to unlock value for investors and hence maintain our Buy rating on the stock with a target of Rs 101. We reintroduce a discounted value for the realty business on concerns of rising interest rates and escalating realty prices, which affect volumes.

To read the full report: UNITECH


Revenues rise 20.4% yoy due to 18.9% growth in volumes and 1.3% higher realizations.

Lower raw material costs owing to higher degree of ancillarisation at Uttaranchal plant led to 122 bps yoy rise in OPM.

Higher production from Uttaranchal plant drives 10 ppts decrease in effective tax rate.

Rising raw material prices a key concern, however, further increase in ancillarisation to cushion the impact

Upgrade to BUY, with a revised price target of Rs 2,112.

To read the full report: HERO HONDA