Tuesday, January 31, 2012

>POWER SECTOR: Excerpts of Section 62 of Electricity Act, 2003 – Determination of Tariff

Only regulators have the power to cap prices and only for a limited period

  • We see no merit in recent reports claiming there are plans to cap power tariffs for projects with captive mines
  • As per the Electricity Act, only regulators have the power to put a price ceiling in certain circumstances and for short durations to ensure reasonable electricity prices
  • Historically, only once has CERC capped prices and only under short-term trades for 45 days, independent of fuel source

1. The Appropriate Commission shall determine the tariff in accordance with provisions of this Act for

a. supply of electricity by a generating company to a distribution licensee: Provided that the Appropriate Commission may, in case of shortage of supply of electricity, fix the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement, entered into between a generating company and a licensee or between licensees, for a period not exceeding one year to ensure reasonable prices of electricity;
b. transmission of electricity;
c. wheeling of electricity;
d. retail sale of electricity. Provided that in case of distribution of electricity in the same area by two or more distribution licensees, the Appropriate Commission may, for promoting competition among distribution licensees, fix only maximum ceiling of tariff for retail sale of electricity.

2. The Appropriate Commission may require a licensee or a generating company to furnish separate details, as may be specified in respect of generation, transmission and distribution for determination of tariff.

3. The Appropriate Commission shall not, while determining the tariff under this Act, show undue preference to any consumer of electricity but may differentiate according to the consumer's load factor, power factor, voltage, total consumption of electricity during any specified period or the time at which the supply is required or the geographical position of any area, the nature of supply and the purpose for which the supply is required.

4. No tariff or part of any tariff may ordinarily be amended more frequently than once in any financial year, except in respect of any changes expressly permitted under the terms of any fuel surcharge formula as may be specified.

5. The Commission may require a licensee or a generating company to comply with such procedures as may be specified for calculating the expected revenues from the tariff and charges which he or it is permitted to recover.

6. If any licensee or a generating company recovers a price or charge exceeding the tariff determined under this section, the excess amount shall be recoverable by the person who has paid such price or charge along with interest equivalent to the bank rate without prejudice to any other liability incurred by the licensee.

Excerpts of Section 63 of Electricity Act, 2003 – Determination of tariff by bidding process
Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government.

To read the full report: POWER SECTOR

>RANBAXY: Resumption of review of ANDAs from Paonta and Dewas is subject to Ranbaxy

■ Consent decree seeks permanent injunction: US has filed consent decree of permanent injunction requesting court to a) permanently restrain and enjoin Ranbaxy under the Act, 21 USC from manufacturing, processing-distribution and related activities at all three sites including Paonta Sahib, Dewas and Gloversville; b) order that FDA be authorized to withhold review of any applications from any of these affected sites c) award damages and other equitable relief as deemed fit. As known, Paonta and Dewas have been under import alert since 2008 and Gloversville liquid formulation facility was closed in Oct-11.

■ Resumption of review of ANDAs from Paonta and Dewas is subject to Ranbaxy a) hiring a third party expert to conduct a internal review and audit applications b) implement procedures and controls sufficient to ensure data integrity and c) withdraw any applications that might contain data irregularities or that may make false claims. Ranbaxy relinquishes 180 day exclusivity for 3 small ANDAs, and could affect bigger exclusivities if certain requirements are not met. In addition, it prevents the company from participating under PEPFAR (for AIDS relief) program and allows FDA to cover additional facilities under decree if there is breach of compliance.

■ Base business recovery to take time, downgrading to UW: While company has set aside USD500mn provision for payment of fines, consultant and other fees, exact amount of fine payment is not discussed in decree. Since the announcement of consent decree stock has rallied c17% with expectation of gradual approval of affected products from the facilities. However, based on our understanding from consent decree we believe product approvals will take at least 1.5-2 years. We haven’t built any material recovery in base US sales, possible risk to exclusivities warrant us to lower our target multiple to 18x (from earlier 20x), 20% discount to other large caps. At 18x Sep-13 EPS of INR20 with reduced para-IV value of INR40 (from INR53, discounting due to higher price erosion in Lipitor) our new TP is INR400 (from earlier INR454). We downgrade to Underweight.

■ Valuation and risk
We change our valuation of the base business from 20x Sep-13 EPS to 18x Sep-13 EPS of INR20.03 (discounting RBXY 20% to other large caps like SUNP, LPC) given slower expectation of recovery in US and further delay in resolution of FDA issues. We additionally reduce para-IV value on back of higher than anticipated price erosion in Lipitor in first six months. We reduce para-IV value from earlier INR53 to INR40. Our new TP is INR400.

We believe with slower recovery in US there could be some pressure on recurring earnings in mid-long term which could result in earnings cut across the street. At current market price stock is trading at rich valuations of c22x CY12e EPS.

To read the full report: RANBAXY

>SIEMENS INDIA: Driven largely by margin erosion in the Energy business (most notably in Power Transmission)

■ Siemens AG’s Q1 results underline the weakening outlook: Siemens AG (parent company of Siemens India) reported a weak set of Q1 results yesterday. Most notable was the decline in order inflows from the Asian regions, particularly from India, where the order intake declined c59% y-o-y (adjusted for currency movement). This came in significantly below our expectation of c5% y-o-y growth for Siemens India orders and was driven largely by the non-repetition of large energy orders. Revenue growth in India stood exactly in line with our expectations at c8% y-o-y (adjusted for currency), supported by execution of prior years’ large orders and continued strength in short-cycle businesses.

■ Group EBIT falls c23%; India margins may disappoint: Siemens reported c23% fall in its sector profits (EBIT), driven largely by margin erosion in the Energy business (most notably in Power Transmission) owing to charges related to project delays. While it is difficult to gauge the impact on the Indian business, it is possible that the weak margins reported last quarter by Siemens India in Power Transmission business may persist in Q1 as well. As such, it seems likely that Siemens may miss our expectation of c400bp q-o-q recovery in margins to c12.1% in Q1.

■ Downgrade to UW (from N); maintain TP of INR765: As we highlighted in recent notes, we believe Siemens’ earnings growth will moderate significantly over the next couple of years, driven by weakening sales growth and likely margin erosion. If the company reports weak Q1 results, which now appears likely, the stock may witness significant de-rating and warrant consensus downgrades. We note that, at c27.3x FY12e PE, Siemens remains expensive compared with peers such as Areva T&D (and Crompton), which we believe offers a much better earnings growth profile. Hence, we downgrade our rating to UW (from N) and advocate switching to Areva T&D (ATD IN, INR178.4, OW, TP INR205) going into the results.

We highlight the key risks related to our investment case for SIEM:
Upside risks

  • Significant order wins
  • Better-than-expected improvement in margins
  • Continued strength in short-cycle orders
To read the full report: SIEMENS INDIA

>Q3FY12: Pfizer has established a 100% subsidiary to hive off its animal healthcare (AHC); Merger with Wyeth; Successfully launched insulin brands in domestic market

Lower sales growth, better margins
Pfizer’s Q3FY12 numbers were below our expectations due to 4%YoY sales growth. The company’s EBIDTA margin improved by 70bps and net profit grew by 11%YoY. Pfizer has realigned its marketing team with the addition of 200 MRs from Wyeth and created a new marketing team for the diabetes segment. The recently introduced insulin brands are doing well in the domestic market. Pfizer has established a 100% subsidiary to hive off its animal healthcare (AHC) business in line with the global re-structuring of AHC business. We reiterate
Buy with a target price of Rs1483 (based on 19x FY13 EPS).

 Lower sales growth of pharma division: During the quarter, Pfizer reported 4%YoY growth in total revenues from Rs2.61bn to Rs2.71bn due to lower sales from the pharm division. The results are strictly not comparable as the previous quarter ended Nov’10. Pharma sales (81% of revenues) grew by 6%YoY from Rs2.06bn to Rs2.18bn. AHC sales (12% of revenues) grew by 13%YoY from Rs302mn to Rs340mn. However, clinical services (7% of revenues) revenues declined by 27%YoY from Rs249mn to Rs183mn.

 Margin improves by 70bps: Pfizer reported 70 bps YoY improvements in EBIDTA margin from 18.5% to 19.2% mainly due to the decline in material cost and other expenses. Its material cost declined by 240bps YoY from 32.8% to 30.4% of total revenues due to the change in product mix. Its personnel cost increased by 270bps YoY from 15.1% to 17.8% of total revenues due to the addition of field force and transfer of 200 MRs from Wyeth. Pfizer’s other expenses declined by 100bps YoY from 33.6% to 32.6% due to improvement in productivity of field force. The company’s net profit grew by 11%YoY from Rs436mn to Rs483mn due to margin improvement & rise in other.

■ Good upside from insulin products: Pfizer has successfully launched two insulin brands in the domestic market. The company sources these products from Biocon. Pfizer has created a dedicated field force for the anti-diabetic segment and has plans to launch more products in this segment. It is also giving a thrust to its hospital business and rural marketing.

 Growing in line with the market: As per IMS MAT-November’11, Pfizer grew by 14% in line with the market growth of 14%. Eight of the company’s products appear in the list of top 300 brands in the domestic market. Pfizer’s Lyrica and Claribid grew by 28% and 37% respectively in the domestic market.

 Hives off AHC business: In line with the international re-structuring to focus on pharma business, Pfizer has created a 100% subsidiary to hive off its AHC business. The AHC business contributes around 12% to the consolidated revenues.

 Merger with Wyeth: In line with the international merger, Wyeth would merge with Pfizer in India. The merged company would rank 9th in the domestic market and 4th among MNC pharma companies in India. The merged company would have 13 products in the top 300 products (8 from Pfizer and 5 from Wyeth).

 Reiterate Buy: We have maintained our EPS estimates for FY12 and for FY13. We expect the company to benefit from good growth of its brands, launch of new products in the domestic market and expected merger of Wyeth. At the CMP of Rs1224, the stock trades at 18.8x FY12E EPS of Rs65.2and 15.7x FY13E EPS of Rs78.0. We reiterate Buy with a target price of Rs1483 (based on 19x FY13E EPS).

To read the full report: PFIZER