Tuesday, August 3, 2010

>Healthcare in Asia Pacific

Healthcare sector comprises of many segments, which include hospitals, medical infrastructure, medical devices, clinical trials, outsourcing, telemedicine, and health insurance. The global economic slowdown has affected many segments of the economy. However, as comparison, the
healthcare sector has outperformed the broader market.

Such phenomena is more significant in Asia Pacific as the meltdown of the economy has not hit the Asia Pacific region as severely as in the developed countries such as the US and Europe. Moreover, amidst the crisis, Asia Pacific was the gainer as healthcare companies in developed countries are under remarkable cost pressures. The recovery of the markets, especially the strong growth in Asia has been identified as the main driver of healthcare industry.

Alongside with the recovery of various markets since the end of 2009, Asia has become an important market for healthcare besides serving as an outsourcing hub. Mergers and acquisitions are falling apart in the West but Asia is expecting restructuring of its markets. In January 2010, Frost & Sullivan had forecasted that the region's healthcare market is set to reach new heights of USD 276 billion this year, from USD 246 billion in 2009, up by 12.2%. Asia Pacific's current contribution of 24% of global healthcare revenue is also expected to grow to 40% by the end of 2015. Strong economic recovery in Asian countries like India and China, rising investment in hospital infrastructure and healthcare facilities by global companies are among the positive factors.

According to the World Health Organization (WHO), private per capita expenditures on health increased by more than 15% in the last 5 years in emerging markets such as Malaysia, Vietnam, Indonesia and India. Moreover, based on medical claims analysis, premium costs in Asia will double in the next five years. Healthcare spending in Asia Pacific have been encouraging. In 2009, majority of healthcare spending was attributed by spending on treatment, which was as high as 85% of the total healthcare spending in Asia Pacific.

The rising number of aging population and the growth of chronic diseases in Asia had changed the trend and growth of healthcare industry. Such trend is more significant in Japan as the aging population (over 60 years old) is expected to mark about 42% of the country population by the end of this year. Japan’s population also tops the list with over 40% of its population having 1 or more chronic diseases in Asia.

To read the full report: HEALTHCARE INDUSTRY


Indian Overseas Bank (IOB) posted net profit decline of 33.6% yoy and robust growth of 57.2% qoq to Rs200cr, above our estimates, because of better-than estimated NII growth and lower provisioning expenses. In-line operating performance along with signs of improvement in asset quality was the key highlight of the result. We recommend a Buy rating on the stock.

Initial signs of improvement in asset quality: At the end of 1QFY2011, advances were up by 7.9% yoy and by 2.7% qoq to Rs82,951cr. Deposits grew by 8.6% yoy but were down by 1.2% qoq at Rs1,09,461cr. NII grew 17.9% yoy and 10.5% qoq to Rs906cr. CASA deposits grew 22.9% yoy to Rs36,232cr at the end of 1QFY2011. Management is targeting advances and deposits growth of 22% and 20%, respectively, in FY2011E. For the quarter, gross NPAs were down by 1.1% qoq to Rs3,571cr, while net NPAs declined 10.1% qoq to Rs1,794cr. Gross and net NPA ratios improved to 4.3% (4.5% in 4QFY2010) and 2.2% (2.5% in 4QFY2010), respectively. The provision coverage ratio including technical write-offs was at 57.9%. Provision for NPAs declined 67.6% qoq to Rs154cr, leading to an 83.3% qoq decline in total provisions during the quarter. The bank’s CAR stood at 14.2%, with Tier-I capital of 8.3% (forming 58.5% of the total CAR).

Outlook and valuation: At the CMP, the stock is trading at attractive valuations of 0.82x FY2012E ABV of Rs140 (v/s a five-year range of 1.1x–1.4x and average of 1.3x) compared to the bank’s peers which are trading at 1.0x FY2012E ABV. IOB has a CASA ratio of 33.1%, one of the highest among its peers, which is especially favourable given the rising interest rate scenario. We have assigned a target multiple of 0.95x on FY2012E ABV, considering the potential improvement in asset quality, earnings and RoE going forward, along with IOB’s structurally strong deposit franchise relative to peers. Hence, we recommend a Buy rating on the stock with a Target Price of Rs133, indicating an upside potential of 15.3%.

To read the full report: INDIAN OVERSEAS BANK

>ALEMBIC: Result Update: 1QFY2011

Alembic reported below expectation numbers for 1QFY2011 impacted by de-growth on the export API front. The domestic formulation sales grew by 5.5% yoy on the back of the restructuring exercise undertaken by the company over the last one year, which improved working capital management resulting in lower debt levels. We maintain a Buy on the stock as de-merger of the company into - Alembic and Alembic Pharma - is a long-term positive as it will unlock value for both the businesses and pave the way to rope in future investors.

Results below estimates: Alembic reported revenues of Rs279.1cr (Rs290.6cr), down 4.0% yoy on the back of subdued performance in the export API segment and lower-than-expected growth in the domestic formulations segment. Alembic reported lower-than-estimated OPM of 9.9% (10.3%). Net profit came in at Rs11.5cr (Rs12.3cr), down 6.4% yoy on account of lower sales during the quarter. On a positive note, interest cost decreased by 45.4% yoy to Rs4.4cr (Rs8.1cr) as debt levels stood lower at Rs360cr from Rs408cr in FY2010.

Outlook and Valuation: We have valued Alembic on SOTP basis, with a Target Price of Rs74 valuing Alembic Pharma at Rs47 per share. Alembic’s 30% stake in Alembic Pharma has been taken at Rs11 per share and the loss-making API business at Rs5 per share. We have conservatively valued the land asset of 70 acre at Rs500/sq. ft resulting in Rs11 per share.

To read the full report: ALEMBIC

>APOLLO TYRES: Result Update 1QFY2011

Apollo Tyres reported modest results for 1QFY2011, despite a sharp jump in rubber prices and lockout at one of its plant. Standalone top-line registered a decline of 5% yoy to Rs1,121cr (Rs1,180cr) in 1QFY2011. Tonnage sold for the quarter declined 20% qoq to 66,000MT on account of the lockout at its Permabra facility due to labor unrest. The Perambara plant shut down resulted in revenue loss of around ~Rs300cr (15,000MT of production loss) during the quarter. On
the operating front, the company reported 603bp yoy contraction in operating margin at 10.4% (16.4%). During 1QFY2010, net profit registered a substantial decline of 57.1% to Rs40.6cr (Rs95cr).

Decent consolidated performance: The company however, reported healthy performance at the consolidated level with both the subsidiaries reporting good growth and also supported the company’ overall OPM. On a consolidated basis, the company recorded 11.4% yoy jump in top-line and marginal 1% increase in net profit at Rs74cr. Consolidated tonnage volume for the quarter was 93,000MT. Operating margins at the consolidated level stood at 10.9% (12.6%) in 1QFY2011.

Outlook and Valuation: The tyre industry, during FY2010, benefited largely from the substantial decline in raw material prices and spike in replacement demand. Going ahead, we are positive on the sector as the OEM off-take is expected to improve on better overall auto industry volume growth. The recent run up in raw material prices is however, a concern and expected to exert pressure on OPMs. We expect the company to clock EPS of Rs7.9 in FY2011E and Rs9.8 in FY2012E. We believe that strong demand, prevailing high capacity utilisation levels and higher investment requirements, would help the Indian tyre Industry to arrest the sharp decline in margins despite the upward move in input costs (rubber and carbon black). Thus, we maintain a Buy on Apollo Tyres, with a Target Price of Rs79, at which level the stock would trade at 8x, 5x and 1.4x FY2012E EPS, EV/EBITDA and P/BV, respectively.

To read the full report: APOLLO TYRES

>HERO HONDA: Result Update 1QFY2011

For 1QFY2011, Hero Honda (HH) reported decent performance on top-line front, while operating performance and bottom-line came in below expectation. OPM was impacted largely due to higher input cost, which in turn resulted in poor bottom-line performance. We revise our OPM estimates downwards to account for margin pressure due to the increasing raw material prices. Owing to the recent decline in the price, we recommend an Accumulate on the stock.

Top-line in line, net profit dips on input cost pressure: For 1QFY2011, HH registered 12% yoy growth in net sales to Rs4,297cr (Rs3,822cr), which was in line with our expectation. The growth was largely aided by the 10.3% yoy jump in volumes and marginal 1.5% yoy increase in net realisation (owing to hike in excise duty). HH reported 7.3% yoy dip in operating profits, where OPM fell by a substantial 298bp yoy on input cost pressure. OPM came in below expectation,
with raw material cost increasing by 345bp yoy. Thus, net profit came in below our expectation at Rs492cr, on lower-than-expected OPM.

Outlook and Valuation: We maintain our volume growth estimate and model the company to record around 12% CAGR in revenues over FY2010-12E, aided by around 9% CAGR in volumes during the period. We revise our OPM estimates downwards to account for margin pressure due to the increasing raw material prices. We expect net profit to register moderate CAGR of 7% over FY2010-12E on account of the tax benefits availed by HH at its Uttaranchal plant. However, we believe that this will not be able to compensate for the drop in market share and leaves limited room for earnings upgrade. We recommend an Accumulate with a Target Price of Rs1,966, at which level the stock would trade at 15.3x FY2012E earnings (10% discount to our Sensex target multiple of 17x).

To read the full report: HERO HONDA