Tuesday, February 7, 2012

>ICICI BANK: Asset quality remained healthy

ICICI Bank (ICICIBC) 3QFY12 PAT grew 20% YoY and 15% QoQ to INR17.3b (10% above est. of INR15.8b) driven by lower than expected operating expenses, provisioning expenses and higher other income due to maiden dividend of INR1.5b from life insurance subsidiary. Adjusting for dividend, PAT was in line. Key highlights:

 Margins improve QoQ: NIM improved by ~10bp QoQ to 2.7%. International margins improved substantially (~30bp QoQ) to 1.4%, while the domestic margins improved to 2.98% from 2.92% in 2QFY12.
 Loan growth remains healthy: Loans grew ~5% QoQ and ~19% YoY to INR2.46t. Domestic loans grew 6% QoQ and 13% YoY led by strong growth in corporate loan segment (up 22% YoY and 15% QoQ). Growth in international loan book on reported basis was 38% YoY; however, adjusting for currency impact, growth was 16% YoY.
 Average CASA ratio improves: The calculated CASA ratio improved to 43.6% from 42.1% in 2QFY12 on account of strong 21% QoQ increase in CA deposits (due to availability of float for NHAI bonds issue) and 5% QoQ increase in SA deposits. Average CASA ratio improved to 39% from 38.3% in 2QFY12.
■ Asset quality improves: Asset quality improved sequentially with absolute GNPAs declining by 3% QoQ. Gross slippages during the quarter were INR8.77b. Credit cost stood at ~58bp largely stable on a QoQ basis. Net restructured loans increased to INR30b from INR25b in 2QFY12.

Valuation and view: After a period of consolidation over the past two years, focus has shifted to loan growth with corporate and secured retail loans being key drivers. Over FY12/13, domestic business growth will be in-line with industry average while CASA ratio will remain at ~40%. Stable/improving margins, control over cost-to-income ratio and fall in credit costs will ensure RoA of ~1.5% over FY12/13. Maintain Buy.

To read the full report: ICICI BANK

>ZUARI INDUSTRIES: Peru mine buy positive for proposed NPK plant

Zuari Industries (Zuari) has announced backward linkage for its proposed 1mn MT greenfield complex fertiliser plant in Karnataka. The company has acquired effective 9% stake in a Peruvian rock phosphate mine (yet to be developed) and put in place a firm offtake agreement for 100% of the phosphoric acid requirement. We view the development as a positive step for Zuari in terms of enhancing its business prospects as well as its commitment to grow in its core business of fertilisers. Maintain ‘BUY’.

■ Zuari’s JV buys 30% stake in Peru rock phosphate mine
MCA Phosphates (MCA) has bought 30% stake in a Peruvian mine Fosfatos del Pacifico (Fospac) for USD46mn. Singapore-based MCA is a JV between Zuari and Mitsubishi Corp of Japan, wherein Zuari has invested USD20mn for a 30% stake. Fospac has proven reserves of ~200mn MT of rock phosphate and is likely to have an initial production of 2.5mn MT/annum by 2015. Out of this, Zuari has a take–orpay agreement for 1.25mn MT and a right to refusal for 0.75mn MT. The 1.25mn MT rock phosphate will suffice the requirements of Zuari’s proposed 1mn MT complex fertiliser plant. The balance 70% stake in Fospac is held by Cementos Pacasmayo, the second largest cement company in Peru.

Key highlights
• Capex to develop the mine will be ~USD400mn over the next 2.5 years, of which USD200mn will be the equity component. In this context, Zuari’s contribution to this capex equity is likely to be ~USD20mn.
• Zuari is likely to invest ~USD700mn for the integrated facility comprising phosphoric acid facility and complex fertiliser granulation facility. Management indicated a timeline of two years for completion of this project.

Outlook and valuations: Capex cycle to kick off; maintain ‘BUY’ With backward linkage for raw materials in place, capex for the planned NPK plant is likely to kick off and be completed in 2015. We currently have a ‘BUY’ recommendation on the stock with SOTP target of INR907/share.

To read the full report: ZUARI INDUSTRIES

>INDIA WIRELESS: Government Giveth and SC Taketh Away

■ New entrants’ licenses cancelled – SC has today ruled cancelling of the 122 2G licenses issued on/after 10 Jan 08. The licensees include Uninor (22), Videocon (22), Loop (21), Sistema (21), Swan (13), Idea (9), S Tel (6), Spice (4) and Tata Tele (3). This should benefit incumbents with 1) likely traffic re-distribution, 2) lowering competition (esp Uninor, which was seeing operational improvement from its strategy of keeping low tariffs) and 3) increased uncertainty amongst new competition.

 Details - The ruling will become operational after four months during which time TRAI needs to make recos for grant of license and allocation of spectrum (through auction). The Govt will have one month to take a decision post this. The ruling doesn’t exclude operators whose licenses have been cancelled to participate in the re-auction though it is silent on return of license fees paid by them (Rs16.5bn for a pan-India license across 22 circles). In the meantime, operators can continue business as usual and also file a review petition in the SC.

 Who loses? – Uninor, which was seeing operational improvement while constraining incumbents from taking further hikes (keeping tariffs at disc), is most impacted amongst new entrants. The other new entrants had done a soft launch. The nine circles of Idea contribute ~4% of revs; 1% in the case of Tata Tele. Meanwhile the ruling doesn’t impact Bharti, Voda and RCOM.

 Setting of reserve price for auction is critical as well as challenging – Reserve price would be critical in deciding mkt structure, i.e. whether Telenor participates. Meanwhile, while market value of 2G should be lower than 3G given the lower no. of operators & higher spectrum availability, politically it may be challenging for the Govt to fix a reserve price lower than the 3G winning bid.

 What happens next? – Idea is likely to participate in the auction under almost any scenario. Assuming all other licensees exit and traffic gets re-distributed (bulk of new entrants’ subs are dual-SIM), Bharti’s, Idea’s and RCOM’s FY13E wireless EBITDA improves 4-7%. Idea will gain at the net level even after paying for spectrum at 3G prices. The sector would also benefit from better pricing power (Uninor should toe incumbents line given its B/S will get constrained if it decides to participate in auction/acquisition) - 1p increase in rev/min increases Bharti/Idea/RCOM’s FY13E wireless EBITDA by 6-9%. Meanwhile the auction price is likely to be used for calculation of excess spectrum charges and license renewals.

 We view these developments as structurally positive for the incumbents and sector due to 1) better pricing power (lower competition), 2) traffic re-distribution (reduction in multi-SIMs) and 3) higher visibility of 2G spectrum. Maintain Buys on Bharti, Idea and RCOM.

To read the full report: INDIA WIRELESS


■ 3QFY12 earnings were substantially below ours and street estimates at INR2 bn (down 66% YoY), mainly due to one-off provision of INR3.5bn on restructuring of a telecom sector exposure. Stock ended 2.8% below its yesterday’s close.

■ Operational review: UNBK’s results were actually in line with our estimates, had it not been for the one-off provisions on restructured loans. Loan growth picked up after no growth in 1H, growing 6% QoQ and 17% YoY. CASA, too, improved marginally by 45 bps to 32.5%. NIMs improved by 10 bps to 3.31% helped by higher yield on funds, while other income growth was steady at 20% YoY. Chunky pension-related expenses pulled down operating profit growth to just 2%. Asset quality was a mix bag with sequentially falling slippages on one hand but higher restructured loans on the other. Bank restructured INR 20.4 bn loans, of which INR15 bn was a telecom infra company exposure taking an NPV loss of INR 3.5 bn.

 Earnings outlook: While UNBK has limited exposure to the high risk sectors of aviation and SEB, we are still building in higher slippages at 2.5-3% levels upto FY14e. Also, margins likely to come off slightly in down-trending rate environment and therefore, we cut our earnings by 18.6% for FY12, 14.6% for FY13 and 13.3% for FY14.

■ Valuations: Stock is currently trading at 5.7x PE and 0.8x PB (12-mnths rolling) vs its 5-yr average of 6x PE and 1.2x PB and trades at 4% discount on PE and 21% on PB to peers (ex-SBI). We believe that UNBK has taken a lot of asset quality stress upfront in the past few quarters. Going forward, asset quality risks could be relatively lower than peers, given it has a no exposure to high-risk aviation sector, while its exposure to SEBs is largely limited to profit making SEBs. Thus, the stock’s significant discount to peers could potentially close, particularly in 2HFY13E once restructurings abate. We retain our target multiples of 5x PE and 0.8x PB, while rolling forward our earnings, giving us a target price of INR236 (INR250) and implying a potential return of 18%. Retain OW. Key downside risks: 1) weak asset quality trends 2) negative margins surprise 3) management change.

To read the full report: UBI

>Germany / Allemagne: A large fall in industrial production

Industrial production fell by 2.9% m/m in December 2011 after remaining unchanged the previous month. Output fell in all sectors, but it sharply dropped in construction sector. Manufacturing production also fell by 2.7% m/m (after -0.3% m/m in November). All in all, manufacturing production dropped by 2.3% q/q in Q4 2011. However the development in manufacturing orders (-1.4% q/q in Q4 2011, after -3.7% q/q in Q3 2011) suggests a less unfavourable development of manufacturing activity at the beginning of 2012.

Repli marqué de la production industrielle

La production industrielle a enregistré une baisse de 2,9% m/m en décembre dernier (après 0% m/m). L’activité s’est contractée dans l’ensemble des secteurs, mais elle a particulièrement faibli dans le secteur de la construction. La production manufacturière a également affiché une nouvelle baisse (-2,7% m/m), enregistrant ainsi un repli de 2,3% t/t au dernier trimestre. Toutefois, l’évolution des commandes manufacturières (-1,4% t/t au T4 2011, après -3,7% t/t au T3 2011) annonce une évolution moins défavorable de l’activité manufacturière en début d’année 2012.

 Industrial production fell by 2.9% m/m in December 2011, its largest decrease since January 2009, after remaining unchanged the previous month. Output fell in all sectors but it sharply dropped in construction sector (-6.4% m/m) after benefiting from a mild start of the winter. Manufacturing production also fell by 2.7% m/m (after -0.3% m/m in November).

 Output fell for the fifth month in a row in the intermediate goods sector (-2.4% m/m) and recorded an impressive decrease in capital goods sector (-3.6% m/m, after -0.4% m/m in November). Output fell by 2.5% q/q in both sectors in Q4 2011, whereas it dropped by 1.3% q/q in the consumer goods sector. All in all, manufacturing production dropped by 2.3% q/q in Q4 2011 (after +1.9% q/q in Q3 2011).

 However the development in manufacturing orders suggests a less unfavourable development of manufacturing activity at the beginning of 2012. The manufacturing new orders rose by 1.7% m/m in December (after -4.9% m/m in November) despite the decrease in domestic orders (-1.4% m/m) and the impressive fall in orders from the Eurozone for the second month in row (-6.8% m/m, after -4.4% m/m in November). Indeed orders from outside the Eurozone soared by 12.3% m/m (after -10% m/m in November). All in all, they rose by 3.9% q/q in Q4 2011 (after -6.6% q/q), whereas orders from the Eurozone dropped by 5.4% q/q in Q4 2011 (after +0.1% q/q in Q3 2011).

 Manufacturing orders are volatile principally because of important change in transport orders, but the downward trend eased. All in all, manufacturing orders fell by 1.4% q/q in Q4 2011 after having decreased by 3.7% q/q in Q3 2011. The ongoing difficulties of some Eurozone countries with respect to their public debt should still have a negative impact on German exports, which account for around 50% of GDP, in the coming months. However foreign demand from outside the Eurozone should support manufacturing activity. Likewise, both the January IFO index and manufacturing PMI (at 51, after 48.4 in December) point to a small improvement at the beginning of 2012.



Above is the Daily chart of NCDEX Guar seed futures. In the last few months Guar seed futures have staged a smart rally and now the rally seems to have run out of steam. Technically speaking, a Double-Top formation is observed, which is formed between Rs 12700 and Rs 12730. This will now act as a strong resistance.

Since the DOUBLE TOP formation, prices have fallen below the Extreme Short Term rising trend line but on very high volumes, which is shown as small circle on the bottom of the Chart. This to us is an initial sign of bearishness. Another observation shows that there was a strong fractal base at Rs 11035 and the price has been consolidating within between Fractal support of Rs 11035 and Rs 12730. This formation at the top generally suggests distribution. An attempt has been made to anticipate the price movement between the consolidation zone of Rs 11035 and Rs 12730 and this is shown by the zig-zag pattern in the chart above.

Hence in our view, a breach and close below this support level of Rs 11035 would be negative and a point which would mark the beginning of Downward Rally. Our analysis suggest that a move lower could result in a test of Rs 10010, Rs 9035 and Rs 8300, sequentially.



Operating results in-line, lower tax rate boosts PAT

India Cements’ Q3FY12 results were in-line with our estimates on operational parameters with Revenues at Rs9.4bn, 1.1% below our estimates of Rs9.5bn and EBITDA at Rs1.9bn, 2.8% below our estimates of Rs2bn. The company reported EBITDA margin of 20.7% against our estimates of 21%. However, lower tax rate of 9.2% vs. est. 33.3% resulted in higher-than-estimated profits of Rs563mn (est. Rs495mn). Though the despatches growth improved in Q3 in the South region (In Q3 demand grew 3.3% YoY against decline of 4.3% reported in 9MFY12), the management believes that demand was primarily on the back of low base effect of last year and demand by private sector housing. Demand from infrastructure sector and government related projects have not yet improved, as per the management, but it believes that demand will be robust for next 4-5 months as busy construction period sets in. The management remains confident of passing on any cost push to the consumers. EBITDA margin of the company is expected to be in the range of 21-23% over the next two years against 12.1% in FY11. We roll forward our valuation to FY14 and maintain Buy rating on the stock with revised price target of 118 (earlier: Rs101), an upside of 25% from CMP.

 Higher realization and sales volume leads to improved performance: Revenue of the company increased 20.6% YoY to Rs9.4bn driven by a) 15.8% YoY increase in cement realization to Rs4,245/tonne and b) 7.1% YoY increase in cement sales volume to 2.19mt. Improvement in realization and sales volume led to 54.1% YoY growth in EBITDA and 2.6x increase in PAT to Rs563mn.

 Increase in operating costs offset by steep increase in realization: Operating cost for the Cement division increased 9.2% YoY to Rs3,380/tonne due to increase in energy costs, freight cost and raw material costs. Raw material cost increased 12% YoY to Rs584/tonne due to increase in fly ash and gypsum price. Freight cost increased 4.9% YoY to Rs783/tonne due to increase in railway freight charges and diesel price. Energy cost increased 7.2% YoY to Rs1,221/tonne due to a) increase in Electricity charges by Tamilnadu and Andhra Pradesh SEBs, b) increase in domestic coal price and c) higher usage of imported coal in the quarter. Despite higher operating costs, EBITDA margin improved 4.5pp YoY to 20.7% primarily driven by steep 15.8% increase in cement realization/tonne. EBITDA/tonne of cement increased 43.8% YoY to

 Management remains confident of cost push to consumers: Cement price in the South region has increased significantly over the last one year despite low demand and ~60% utilization rate. The management remained confident of passing on any cost increase to the consumers.

 Rolling valuations to FY14, maintain Buy: At the CMP, the stock trades at 6.8x FY14E EPS, 4.6x EV/EBITDA, and EV/tonne of US$77.8. The company is set to benefit from commissioning of power plants (50 MW power plant in Sankarnagar has been commissioned the trial run is going on) and coal procurement from its mines in Indonesia. We roll forward our valuation to FY14E and maintain Buy on the stock with revised price target of Rs118 (earlier: Rs101), an upside of 25% from CMP.


Bajaj Finance’s net profit grew 57% yoy, driven by strong AUM growth, up 74% yoy, expansion in NIM (on AUM) in 3QFY12 over the last quarter and lower loan-loss provisioning. We expect loan growth to slow down due to the high base, and margins to decline from FY13 due to the altered loan mix. On the lower profitability expected in FY13/14, we maintain a Sell.

 Robust loan growth; unlikely to sustain. AUM grew 74% yoy (18% qoq) to `11.9bn, driven by strong growth in loans against property and infrastructure loans. We expect loan growth to moderate in FY13/14 due to the high base and slower economic growth.

 NIM declined ~370 bps yoy. NIM fell ~370 bps yoy on the change in composition of loans in favour of secured assets (which constituted 51% of AUM in 3QFY12 vs. 39% in 3QFY11) and the increase in borrowing costs. With the rising proportion of infrastructure loans and loans against property, we expect NIM to be flat in FY13/14.

 Asset quality robust; we expect credit cost to increase. In 3QFY12, asset quality was robust, with gross and net NPAs declining respectively 8% and 20% sequentially. Loan-loss provisions (0.3% of AUM) in the quarter were the lowest since FY09. We expect the NPA provisions to rise given the slower economy and high proportion of unsecured assets.

■ Valuation. Slower loan growth, flat margins and high credit costs are likely to lead to lower profitability in FY13/14 than in FY12. We estimate a 250bps slip in RoE over FY12-14. At a price target of `712, the stock would trade at FY12e and FY13e PBV of 1.5x and 1.2x, respectively. We maintain a Sell. Risks: higher-than-expected loan growth, margin improvement and stable asset quality.

>Cholamandalam Investment and Finance: 3QFY12: Robust loan growth, stable asset quality; Buy

Cholamandalam Investment and Finance’s net profit grew 515% yoy, driven by robust loan growth, up 46% yoy, and expansion in NIM in 3QFY12 . We expect strong loan growth, better NIM and lower provisioning to drive RoA to 1.6% by FY14 (from 0.7% in FY11). We maintain a Buy.

 Robust loan growth, better NIM. Disbursements grew 55% yoy (10.7% qoq) to `22.8bn, driven by 65.4% growth in vehicle-loan disbursement. CIF commenced disbursements in the gold-loan segment in Dec ’11. We expect a 34% CAGR in the loan book over FY11-14, led by strong branch expansion and the scaling up of new products. NIM improved 10bps qoq to 6.6%, as the share of higher-yield used-CVs in the vehicle-finance portfolio rose to 29% at end-3QFY12 (from 27% a quarter ago). With the rising proportion of higher-yielding products, we expect NIM to be 6.5% over FY12-14.

 Stable asset quality. With the gross NPA down 3.5% qoq, asset quality improved. NPA coverage, at 81%, is adequate for incremental delinquencies. With limited exposure to personal loans and stable levels of gross NPAs in the vehicle and mortgage businesses (respectively, 0.7% and 1%), credit cost over FY12-14e is expected at 0.9% of loans.

 Fund-raising to aid robust loan growth. CIF’s capital adequacy, at 17.8%, with Tier 1 of 9.7%, is lower than its peers’. CIF’s board has approved raising `2.1bn in equity, diluting it by 11.1%, at `160 per share on a preferential basis to private equity investors. This is likely to aid the NBFC sustain its robust loan growth over FY12-14e.

 Valuation. At our price target of `181, the stock would trade at FY12e and FY13e PBV of 1.8x and 1.5x, respectively. Risk: Slower-than expected rural economic growth could impact loan growth.


Shriram City Union’s net profit grew 42.5% yoy, driven by strong AUM growth, up 62% yoy. The net spread declined 40bps due to the higher cost of funds and back-ended loan growth. We expect strong loan growth and better margins to support profitability in FY13/14. We maintain a Buy.

 Robust loan growth. AUM grew 62.1% yoy (15.7% qoq) to `11.6bn, driven by robust disbursements in gold loans, up 57% qoq, and SME loans, up 26% yoy. We expect the loan-mix to alter in favour of highyielding more-secured gold and SME loans in the next 1-2 years (~75% of AUM, vs. 60% as of Dec ’11). Off-book loans jumped 90% qoq due to assignment of small business loans by the company.

 NIM declined ~197bps qoq due to the increase in cost of funds and change in computation of interest expenses – brokerage and commission paid for borrowings are now taken as a part of interest expenses. With the rising proportion of high-yielding loans and softening wholesale borrowing costs, we expect NIM to improve in FY13.

 Asset quality robust. In 3QFY12, asset quality was robust, with gross and net NPAs largely flat despite the 15.7% rise in AUM, sequentially. SCUF prudentially provided for higher credit cost (33% increase qoq) in order to improve the NPA coverage and to build a buffer for the proposed change in NPA norms by the RBI. NPA coverage (including technical write-offs) was 80%+ as of Dec ’11. With the increasing proportion of secured assets, we expect NPA costs for FY13 and FY14 to be well under 3% of average assets.

 Valuation. At our price target of `680, the stock would trade at FY12e and FY13e PBV of 2.2x and 1.8x, respectively. Risks: higher-than expected loan growth, margin improvement and stable asset quality.


>LUPIN: US outlook strong on c25 launches in FY13 – Geodon, Combivir, Tricor and oral contraceptives – Yaz, Yasmin

OW: Higher costs and tax clip upside
  • Sales beat our estimates by c7% largely because of favourable rupee depreciation. India up 30%, US 24% and Japan 43% yoy
  • US outlook strong on c25 launches in FY13 – Geodon, Combivir, Tricor and oral contraceptives – Yaz, Yasmin
  • Costs remain high, tax to increase. Maintain OW, TP unchanged at INR560

■ Lupin’s reported 3QFY12 net profit of INR2.35bn was up c5% yoy, in line with HSBCe (c3% lower than consensus) and affected by a higher tax rate in the quarter. Net sales at INR18.2bn were 6.4% higher than our estimate, essentially because of favourable currency. 3QFY12 also included the integration of recently acquired I’rom pharma in Japan for one month. This, along with the increase in salesforce, R&D and depreciation, limited overall net profit growth. Sales include a forex loss of INR260m.

 India growth solid, US outlook strong: India formulation sales grew 30% for the quarter, assisted by recovery in the anti-infectives segment and improved traction from Lilly and new launches. US grew 12% yoy on constant currency, in line with our estimate. Suprax grew 21%, whereas Antara was up 8% yoy on constant currency. Within generics, the company expects to launch c25 products this year including generic Geodon, Combivir and oral contraceptives. Additionally, Lupin is entitled to launch generic TriCor in the next fiscal year, as per settlement. Though the exact timeline is not known, we expect it to be around mid-2012. The company has filed three ANDAs this quarter.

 Maintain OW and TP of INR560: We make changes to our currency assumptions from INR45 to INR48 for FY13 and reduce sales from Fortamet, oral contraceptives, while at the same time increase India and Japan. We incorporate I’rom numbers, which add cUSD70mn to sales in Japan, though at the same time increase costs. We additionally increase our tax rate assumption to 20% for FY13 as per guidance. The net impact is EPS changes of c2% and -2% in FY13 and FY14, respectively. We continue to value Lupin at 22x September 2013e EPS of INR25.4 to derive our TP of INR560. The near-term catalyst is the launch of generic Geodon in March 2012. The key risk is earlier-than-anticipated entry in Suprax and continued higher costs resulting in subdued margin expansion. Additionally, incremental generics in June in atorvastatin could affect sales from simvastatin.

Conference call highlights
1. India formulations: Domestic sales were stronger in 3QFY12 because of a recovery in antiinfectives sales and the contribution from the newly set-up metabolic division (includes Eli Lilly’s business). Lupin is doing cINR90-100m per month under the Lilly deal. All key therapies like CVS, diabetes, gynaecology and anti-asthma grew well in the quarter.

2. US formulations: On a constant currency basis, US sales grew 12% yoy for the quarter with 9% growth in the generics business and 18% growth in the branded business.

a. Branded business: Robust growth seen in the Suprax franchise (suspension constitutes 60% and tablets form the rest of the total prescription) with tablet form growing 32% yoy and suspension form growing 21% yoy in the quarter on a constant currency basis. Antara grew 8% in 3QFY12 and gained market share in the last few weeks. Management does not foresee generic competition in Suprax in the near term; 9M branded sales were cUSD100m. AllerNaze launch remains uncertain.

b. Generic business: Generic outlook remains strong for FY13 with nearly 25 generic launches planned, including 10 oral contraceptives. Big launches include generics of Geodon in March 2012 and Combivir in May 2012. The company expects four players in generic Geodon (including authorised generic). Generic launch of TriCor and oral contraceptives, including bigger OCs such as Yaz and Yasmin, are also expected in the next fiscal year. The company has gained c20% market share in Ultram ER generic. On Fortamet, Lupin has appealed the injunction and is waiting for a hearing. It is also yet to launch generic Solodyn in the US market.

3. Kyowa growth was strong in Japan. The company expects an incremental margin improvement to come from the bulk transfer to India for Japan formulations.

4. R&D for the quarter was INR1.4bn at 7.9% to net sales. The company has filed three ANDAs in the quarter – cumulative 156 ANDAs. Seven ANDAs were approved in 3QFY12.

5. Capex was INR1.45bn for 3QFY12. The company expects to pay a tax rate close to MAT (minimum alternate tax) in FY13.

Valuation and risks
We continue to value LPC on PE methodology and use 22x one-year forward PE multiple for its core earnings. Given that LPC is one of the fastest growing companies in domestic market, where the slowdown is hurting its peers, we think a higher valuation at c20% premium to the sector average is justified. Under our research model, for stocks without a volatility indicator, the Neutral band is 5 percentage points above and below the hurdle rate for Indian stocks of 11.0%. Our target price of INR560 provides a potential return of 26.5% including a forecast dividend yield of 0.8%, above the Neutral band of our model; therefore, we rate the stock Overweight. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.

The key risk is earlier-than-anticipated generic entry in Suprax and continued higher costs resulting in subdued margin expansion. Additionally, incremental generics in June in atorvastatin could affect sales from simvastatin.