Monday, April 26, 2010

>Pan-European Pharmaceuticals (MERRILL LYNCH)

Competitive analysis of major therapeutic classes
We provide a monthly competitive market share and growth analysis of the major therapeutic drug classes of interest to investors for the US market. We use monthly prescription data for retail and mail order pharmacies sourced from IMS.

New product approvals and patent expiries
We highlight key upcoming product approvals, patent expires and other events that could impact class dynamics.

Market shares, growth rates and sales forecasts
We highlight category market shares, total prescription growth rates and, where applicable, BofA Merrill Lynch sales forecasts.

U S drug market 4.1% in March (actual), 1.8% (adjusted)
On an actual basis, the US prescription drug market was up 4.1% in March, versus down 0.5% in February and 2.7% 12 month MAT growth. On an adjusted basis (which takes into account the number of days in a given month for a yearon- year comparison), March volumes were up 1.8% versus February volumes down 0.5%.

Key Highlights this month
Key highlights this month include the following:
1) Cozaar / Hyzaar- FDA approved the first generic equivalents of Merck’s ARBs Cozaar (Losartan Potassium) and Hyzaar (Losartan Potassium/HCTZ combo) 6 April 2010. Whilst Teva has 180-day exclusivity for its generic Cozaar and Hyzaar, Sandoz launched authorised generics of both in the US on 8 April 2010.

2) Bydureon (Byetta LAR) – Amylin’s partner (Lilly) submitted an MAA to the European Medicines Agency for Bydureon on 18 April 2010. Following the FDA CRL for Bydureon in March, Amylin expects to make its response imminently.

3) Duodart - GSK's fixed dose combination of Avodart/Flomax was granted European approval 31 March 2010. The Flomax patent expires on 27th April 2010.


>JAIPRAKASH ASSOCIATES: Proxy for infrastructure play… (ICICI DIRECT)

Jaiprakash Associates (JAL) is a leading infrastructure conglomerate in India. The company has set aggressive expansion plans across its business. With aggressive capacity addition plans in the cement division, we expect JAL’s market share across India to increase from 4.1% in FY09 to 7.6% in FY12E. In the power division, JAL is set to add 10,350 MW taking its total capacity to 11,050 MW by FY16E. In the construction division, the strong order book of Rs 10,608 crore
(excluding Ganga Expressway) and in-house EPC opportunities from power projects provides strong revenue visibility over the next couple of years. Additionally, monetisation of the real estate development from the development for Yamuna Expressway bodes well for JAL. Hence,
we are initiating coverage on JAL with BUY rating and a price target of Rs 180 based on the SOTP valuation methodology.

Cement division – market share to almost double by FY12E
JAL is a leading cement player with a strong presence (~30% market share) in the central region. We expect its cement capacity to almost double to 26.8 MTPA during FY09-12E. Consequently, we expect the volume of JAL’s cement division to grow at a CAGR of 35.2% to 18.9 MTPA in FY12 against industry average of 10.4% during the same period leading to expansion in market share to 7.6% in FY12 from 4.1% in FY09.

Power division capacity to grow exponentially
JAL through its subsidiary JPVL (merged entity) has installed capacity of 700 MW as at the end of December 2009. The company has an ambitious growth plan and is targeting capacity of 13,470 MW. Out of these, ~1,500 MW is expected by FY12E and 10,350 MW is expected by FY16E.

■ Construction division – huge opportunities from in-house project
JAL has a strong order book of Rs 10,608 crore, 2.0x FY10E construction division revenues. Furthermore, we expect significant in-house order inflow opportunities from the power division (~Rs 12,000 crore). Hence, we expect revenues of the construction division to grow at a CAGR of 34.7% during FY09-FY12E.

Yamuna Expressway – Monetising on land bank
JAL is monetising very well on the Noida land parcel, which was received along with 165 km development of the Yamuna Expressway road project. Till date, the company has sold 19.9 million sq ft at an average realisation of Rs 3,480 psf and collected Rs 1,991 crore from its customers.

At the CMP, the stock is trading at 23.3x FY12 earning estimates and 3.3x FY12 P/BV. We value the stock at Rs 180 per share based on the SOTP methodology. We are initiating coverage on JAL with BUY recommendation.

To read the full report: JP ASSOCIATES

>ESCORTS: Strong trends continue (EDELWEISS)

Strong quarter: Profits well ahead of estimates
Escorts’ Q2FY10 PAT, at INR 444 mn (up 1093% Y-o-Y; 90% Q-o-Q), was well ahead of our estimates (INR 244 mn). The strong performance reflects improved profitability and volume growth in the core tractor segment.

■ EBITDA margins up 120bps Q-o-Q
The top-line growth of 37% Y-o-Y was led by 51% Y-o-Y volume growth in tractors. Raw material costs declined 87bps Q-o-Q, largely on price hikes taken at the beginning of the quarter. Staff and other costs showed a downturn (down 210bps Y-o-Y; 33bps Q-o-Q) as benefits of operating leverage kicked in. Net interest income was positive (INR 9 mn vis-à-vis interest outgo of INR 45 mn in Q1FY10) on account of interest refunds from banks (~INR50mn).

Repurchases debentures in construction subsidiary
In April 2010, Escorts redeemed the convertible debentures held by DAMF Equipment Holdings (DARBY) in Escorts Construction Equipment (ECEL: a wholly owned subsidiary of the company) for INR 1.3 bn. Had these debentures converted, equity of the subsidiary would have diluted by ~25%. This indirectly values ECEL at ~INR 5bn.

■ Balance sheet strength shines
The company’s balance sheet remains strong with greater profitability leading to an increase in cash balances. The net debt currently stands at INR 246mn, implying a negligible D/E of 0.02x. The working capital position remains comfortable. These factors were reflected in the recent credit upgrade from ICRA.

Outlook and valuations: Going strong; maintain ‘BUY’
We believe the company has successfully resolved balance sheet related issues, and is now firmly focused on its core businesses. While the tractor business is on track, we are also enthused by the company’s focus on segments in the infrastructure space. With the strong performance, we revise our estimates for EPS for FY10 and FY11 by 9.7% and 15.7%, respectively. Despite the recent run-up (up 30% in the past three months), the stock is trading at P/E of 11.8x FY10E and 9.7x FY11E, respectively, considerably lower than its peers. Also, upsides from the construction business could be substantial. We maintain ‘BUY’ on the stock.

To read the full report: ESCORTS


Marginally below estimates led by lower GRM, higher depreciation: RIL's 4QFY10 reported EBITDA was Rs91.4b, marginally lower than our estimate of Rs94.6b (up 68% YoY and up 16% QoQ), led by lower GRM and lower E&P profitability. PAT was Rs47.1b (v/s our estimate of Rs48.6b), up 22% YoY and 18% QoQ.

Lower than expected GRM; petchem strong: Reported GRM was lower than our estimate at US$7.5/bbl (v/s our estimate of US$8/bbl), against US$9.9/bbl a year earlier and US$5.9/bbl in 3QFY10. Petchem EBIT margin was 14.4% against 17.7% in 4QFY09 and 13.9% in 3QFY10. Petchem made the highest ever quarterly EBIT of Rs22.2b, led by strong volume and margin growth.

E&P profitability hit by higher depletion; ramp-up contingent to GAIL de-bottlenecking: E&P EBIT margin continued to decline led by higher depletion and was 39.4% against 64.3% in 4QFY09 and 41.8% in 3QFY10. KGD6 gas volumes averaged 60mmscmd in 4QFY10 (v/s 48 in 3QFY10, 32 in 2QFY10 and 19 in 1QFY10) and a further increase is contingent on GAIL's HVJ-DVPL debottlenecking. MA oil production ramped up significantly and is producing 30kbpd (no clarity on a further ramp-up).

Clarity on timelines for other E&P blocks yet to emerge: The management did not provide specific guidance in terms of the exploration/appraisal/development plan for its other key blocks. We believe clarity on the development plans for NEC-25, satellite fields would be key to clarity on medium-term E&P earnings growth.

Valuation and view: We model GRM of US$7.6/8.5/bbl in FY11/FY12. The key things to watch in the near term would be (1) resolution of its court cases with RNRL and NTPC; (2) ramp-up of KG-D6 gas, and (3) deployment of its increasing cash on the balance sheet. Adjusted for treasury shares, RIL trades at 12.4x FY12E adjusted EPS of Rs87.9. Our SOTP-based target price for RIL is Rs1,133/share (including upside potential of Rs205/share). Buy.

To read the full report: RIL


Incumbency may confer a strategic advantage in the 3G auctions because of the infrastructure, customers and cash flows of the large companies. All the winners in 3G may find reasons to observe price discipline and tone down the tariff war. Another force that may end the tariff war would be exhaustion of spectrum with new operators after Mar11. Number portability may act differently in India because the forces triggered by it in other parts of the world have existed here
for some time; portability may actually be good for incumbents. Underperformance of telecom stocks for five quarters suggests that 3G and the tariff war are priced in. However, a rebound may not be round the corner due to the risks to FY11f earnings. We initiate coverage on BHARTI (Hold), IDEA (Add) and RCOM (Hold).

■ Incumbents hold the edge in 3G auctions
The strategic advantage of large incumbents arises from their infrastructure, customer relationships and cash flows. Winners could quickly lift quality of service in 2G. Later, they could tap the high‐ARPU segments to identify customers for 3G offerings. A potential positive spin‐off from the 3G auctions is the return of pricing discipline. Incumbents with a superior quality would not need to resort to aggressive pricing. A new provider who wins a 3G license may only obtain funding with covenants that prescribe superior returns on capital.

■ Tariff war could end after Mar11
Aside from the influence of 3G a potential inflection point may emerge after Mar11 when new operators begin to exhaust their spectrum. Exhaustion of spectrum with large incumbents since 2007 had slowed the decline in tariffs. However, the tariff war resumed in 2009 because new entrants used the pricing tool to grab incremental market share. We believe the situation in FY11
would be similar to that in 2008 with a high probability of bottoming out of tariffs.

■ MNP may add little to the high ambient competition in India
Global precedents indicate that onset of portability leads to high churn rates, loss of market share by incumbents and a cut in ARPU. Much of these effects have been present in India for 5 quarters. Portability may be favorable to incumbents in India due to extensive network coverage, distribution reach, customer service and brand.

■ Near‐term downside risk to earnings may delay a re‐rating
Across the globe, winners in 3G auctions had seen consequent erosion in market value. In India this phase may be over. Underperformance of telecom stocks to the Nifty after Dec08 correlates with concerns over 3G and the tariff war. Yet, stocks may not rebound soon as net profits for FY11f face potential downside arising from the persistence of low tariffs and the possible rise in financing costs. FY12 may have more positives such as the likely return of price discipline and payback in some projects where investments were made till FY10. We initiate coverage on BHARTI (Hold), IDEA (Add) and RCOM (Hold).

To read the full report: TELECOM SECTOR