Monday, March 12, 2012

>TORRENT PHARMACEUTICALS LIMITED: Supplier of Citalopram and second largest supplier of Zolpidem for the US market; Maintained its dominant position in domestic Cardiovascular (CVS) and Central Nervous System (CNS) segment with new product launches

■ Established in 1994, Torrent Pharmaceuticals Ltd is a flagship company of Torrent group. While its 36 brands lead in their respective molecule segments, six brands of the company appear in India’s top 300 pharma brands.

Torrent has successfully maintained its dominant position in domestic Cardiovascular (CVS) and Central Nervous System (CNS) segment with new product launches. In line with industry trend, Torrent has maintained its tilt towards chronic profile over acute.

 By entering into regulated as well as emerging markets, Torrent has successfully increased its footprint in International markets, which contribute ~51% to the total revenue of the company in FY11. With 27 successful drug launches, Brazil contributes majorly (32%) to company’s international division. Torrent has been the largest faster exports to drive growth for Torrent supplier of Citalopram and second largest supplier of Zolpidem for the US market.

In 9MFY12, Torrent recorded sluggish performance mainly in the acute therapy segment, due to increasing competitive pressure. To get back the company on growth path, management has taken corrective action in terms of addition and improvement in efficiency of field force.

■ Apart from regular 25-30 drug launches in domestic market every year, the company is planning to enter into new therapy segments like oncology and infertility to widen its offerings. Similarly in its existing international market, new launches in Brazil and U.S are expected to propel growth.

Therefore, we initiate coverage on Torrent Pharmaceuticals Ltd. with a BUY rating and a target price of `660 per share.

T read full report: TORRENT PHARMA

>OIL & MONEY: Quantitative Easing(QE). Emerging Markets(EM) and Monetary Policy

 Higher oil prices reflect both supply concerns and rising global demand
 QE is adding to oil price increases as well by ‘turbo-charging’ EM growth
 Higher oil prices will imply more monetary easing from the west but EM will respond by quantitative tightening

Oil prices are edging up again. Why are prices rising?
Western policymakers have been accused of stoking oil and wider commodity price rises through quantitative easing. We believe that oil price increases are still a function primarily of higher emerging market demand and supply side concerns especially related to Iran. Our analysis shows only limited impact of direct speculative activity on oil prices, but QE is playing a role in pushing oil prices higher as well by turbocharging
EM world growth.

What will be the impact of further oil price rises? The historical link between a slump in developed economy growth and lower oil prices globally has been broken, since emerging markets now account for nearly half of oil consumption. Higher global oil prices lead to a drop in nonenergy consumer spending in developed economies. In many emerging economies, the biggest threats are inflationary.

What should the policy response to higher oil prices be?
Developed world monetary easing has been ineffective to the extent that it has stoked oil price increases, resulting in an unfavourable growth-inflation trade-off. But we expect monetary easing including QE to remain the main response to oil price increases. The costs to slow growth are much higher than the risk of runaway inflation in an environment of high unemployment and low wage increases.

For a number of emerging markets, inflation will ultimately be the main concern, which will favour monetary tightening albeit unconventional tightening. The first line of defence is likely to be fiscal policy, in particular price controls and subsidies, with monetary policy aimed at preventing second round effects on inflation. In terms of fiscal health, it would seem that Asia is better placed than other regions to deal with an oil price shock.

Oil’s worth

Globally, the US and other economies seem to be showing signs of stabilisation, raising hopes that this year will be the start of a real period of recovery for the western world. But we’ve been here before, at the start of 2011 when the growth outlook seemed similarly rosy. That optimism faded quickly as the world economy was buffeted by the impact of the tsunami and earthquake in Japan but more importantly by the surge in oil prices that followed the loss of oil supply from Libya.

Undoubtedly, stable or falling oil prices in 2012 would be a boon, with inflation set to ease as the energy component falls out of the equation. This in turn, would allow authorities more room to focus on growth.

To read full report: OIL & MONEY

>ONGC: 5% ONGC stake sale through auction – Again opened GOI divestment programme

The sale of ONGC shares is part of the Indian government's divestment programme and other state-run companies in which it has to reduce its holding includes NFL, Neyveli Lignite, RCF, STC, Coal India, NMDC because of "minimum public shareholding guidelines".

ONGC is one of the faster growing E&P stocks in Asia with impressive 3-year production CAGRs of 7% in oil and 6% in gas. It is also attractive at PE of 10.8 while Asian Peers are quoting at 17.5 PE. ONGC is quoting at deep discount. In EV/BOE multiple stock is less than half of its global peers .We are positive for the stock.

Company Description
It is one of the largest Asia-based oil and gas exploration and production companies, and produces around 77% of India's total crude oil production (and around 30% of total demand) and around 81% of natural gas production. ONGC is one of the largest publicly traded companies by market capitalization in India and the largest India-based company measured by profits. ONGC was founded on 14 August 1956 by the Indian state, which currently holds a 74.14% equity stake. Post auction GOI holding will come down to 69%. It is involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India, and owns and operates over 11,000 kilometres of pipelines in the country. In 2010, it was ranked 18th in the Platts Top 250 Global Energy Company Rankings and 413th in the Fortune Global 500.

During the fiscal year ended March 31, 2011 (fiscal 2011), the Company had a crude oil production of 34.04 million metric tons and natural gas production of 28.02 million metric tons. On April 16, 2011, the Company’s subsidiary ONGC Videsh Limited (OVL), added one asset in its portfolio of exploratory assets by signing agreements with KazMunaiGas (KMG), the national oil company of Kazakhstan for acquisition of 25% participating interest in Satpayev exploration block. Its subsidiaries include ONGC Videsh Limited (OVL), Mangalore Refinery & Petrochemicals Ltd., ONGC Nile Ganga BV (ONGBV), ONGC
Nile Ganga (Cyprus) Ltd., Jarpeno Limited, Imperial Energy Corporation Plc, Imperial Energy Limited and Imperial Energy Kostanai Limited 

Subsidy burden 
ONGC has historically shared ~30% of its overall subsidy burden. The highest share it has ever borne a subsidy share of 34.5%, which caps its domestic prices realization to US$60/bbl. CRISIL Research, India’s largest independent integrated research house, expects an upward pressure on crude oil prices due to the ongoing geo-political tensions in Iran. As a result, average crude oil prices will remain firm in the range of $110-120 per barrel during 2012, higher than the earlier estimates of $100 per barrel, despite a weak global economy.

This will compel the government to hike the retail selling prices of regulated fuels at least by 10-15% in 2012-13 in order to rein in the mounting under-recoveries. This will release some burden from ONGC’s shoulder.

Strong production growth ahead
After virtually stagnating for the last five years, ONGC is expected to increase its overall oil & gas production at a CAGR of 6 -7% over F2012-15e, driven by increased production from its joint venture with Cairn, and fields in western offshore. Having spent US$20bn in domestic E&P capex over F2008-11, ONGC is expected to spend another US$18bn over F2012-14. 

5% ONGC stake sale through auction – Again opened GOI divestment programme
The government will sell 5 percent of its holding, or about 428 million shares, in the offering and the floor price for the issue has been set at 290 rupees a share. Only Institutional Investors would be able to participate in the auction in the same way as in the previously used follow-on share offering, the owner of a company would save significant cost and time in the auctioning process. Unlike earlier divestments, retail investors will be kept out of this sale. The auction is open only to institutional investors.

The Union Finance Ministry came out with the "minimum public shareholding guidelines" on June 4, 2010, which was later revised in August 9, 2010 that PSUs are expected to maintain minimum public shareholding of 10 per cent within a period of three years. So companies have time till June 3, 2013 to comply with this requirement. SEBI on 4th Jan 2012 allowed government holding more than 90% in PSUs to reduce their shareholding through an auction to institutional players.

>MERCK: Oxynex plant modified

Merck has reported disappointing results for Q4CY11 due to sharp decline in pharma business. The company’s pharma business declined by 16%YoY whereas the chemical business grew by 40%YoY. During the quarter, the company’s revenues declined by 1%YoY, EBIDTA margin by 1100bps and net profit by 118%YoY. The company’s flagship brands Evion and Nasdivion grew by 24% and 25% respectively during the year. These are likely to contribute significantly from CY12 onwards. We reiterate Buy rating on the scrip with a revised target price of Rs705 (based on 14x CY13 EPS).

■ Pharma business disappoints: During the quarter, Merck reported 1%YoY decline in total revenues from Rs1.29bn to Rs1.27bn. Its pharma business declined by 16%YoY
from Rs958mn to Rs809mn. The company’s chemical business grew by 40%YoY from
Rs359mn to Rs503mn.

 EBIDTA margin declines sharply: Merck’s EBIDTA margin declined sharply by 1100bps YoY from 7.6% to -3.4% due to sharp rise in the material cost and personnel expenses. Material cost went up by 660bps from 41.3% to 47.9% of total revenues due to the rise in cost of imported raw materials and lower sales of pharma products. Personnel expenses went up by 390bps from 12.6% to 16.5% due to rise in salary and annual increments. Other expenses grew by 50bps from 38.5% to 39.0% due to slow sales growth. Merck’s other income grew by 73%YoY from Rs71mn to Rs123mn. The company’s net profit before EO items declined from Rs89mn to Rs-16mn. Net profit after EO items grew by 177%YoY from Rs46mn to Rs127mn.

 Growing slower than the market: As per IMS MAT-Dec’11, Merck grew at 10.5% against the industry growth of 14.9%. The slower growth is attributed to lower growth of its two major brands, Neurobion (gr. Rate 7.7%) and Polybion SF (gr. Rate -2.6%). 􀂁 Nasivion- future growth driver: Merck achieved good growth for its brands Evion and Nasivion. As per IMS MAT-Dec’11, Evion grew by 23.8% whereas Nasivion grew by 25.0%. Evion is the market leader in vitamin E segment and is expected to maintain the high growth rate. Nasivion is outside the price control and an OTC brand. Merck is advertising this product on TV to gain market share.

 Oxynex plant modified: During CY11, the company modified Oxynex plant assets and commenced the manufacture of alternate products. The company has reversed the provision of Rs143mn impairment charges on account of revised estimated value of its use.

 Reiterate Buy: We have revised downwards our CY12 EPS estimates by 29% and CY13 estimates by 30%. We expect the company to benefit from the strong growth in vitamin E segment and OTC products. At the CMP of Rs620, the stock trades at 14.9x CY12E EPS of Rs41.6 and 12.3x CY13E EPS of Rs50.4. We reiterate Buy with a revised target price of Rs705 (based on 14x CY13E EPS).


>Index of industrial Production for January 2012 (CARE RESEARCH)

Index of Industrial Production (IIP) for the month of January 2011 improved to 6.8% compared with 7.5% for the same period last fiscal. This comes on the back of strong growth in manufacturing of 8.5% which counters the low growth of 3.2% in electricity and -2.7% in mining.

Cumulative growth in FY12 in Apr- Jan 2012 stands at 4.0% (8.3%). The IIP growth for the month of December has been revised to 2.5% from the previously reported 1.8%.

IIP growth for January comes at higher than CARE’s own estimate of 3.5%. The growth of 6.8% is mainly driven by non-consumer durables segment which grew by 42.1% (92.6% growth in food products and beverages which accounts for 7.2% weight in the IIP).

Cumulative Picture: (Apr-Dec FY12 over Apr-Dec FY11)
 The cumulative growth in the ‘mining and quarrying’ sector fell to -2.6% versus 6.3% seen for the same period last fiscal
 Activities in the ‘manufacturing’ sector have slowed down to 4.4% from 8.9%.
 Production in the ‘electricity’ sector has been improving with 8.8% growth compared with 5.3% seen for the same period last fiscal.

 In the manufacturing sector, 15 out of 22 industries have shown positive growth during Apr- Jan FY12.

  • ‘Food products’ (28.3%), ‘publishing, printing & reproduction of recorded media’ (24.2%) and ‘fabricated metals’ (13.8%) have registered healthy growth.
  • ‘Motor vehicles’ and ‘other transport equipment’ grew by 12.1% and 14.3% respectively
  • ‘Non-metallic products’ and ‘petro related products’ had moderate growth of 5.0% and 3.0% respectively.
  • Electrical machinery, textile products, apparel, chemicals, rubber products, machinery, office equipment and furniture showed negative growth.

■ As per the Use-based classification, corrosion is seen in growth rates in the ‘capital goods’ (-2.8%) industry as well as the ‘intermediate goods’ (-1.0%) industry.

  • Capital goods production has been affected by slowdown in infrastructure activity as well as investment which may be attributed to higher interest rates prevailing during the year.
  • Basic goods grew by 5.7% for Apr-Jan FY12 compared with 6.0% for the same period last year.
  • Consumer durable and consumer non-durable goods have witnessed growth of 3.9% and 10.2% respectively, with the overall growth in Consumer goods being 7.4% for Apr-Jan FY12. Growth in non-durables however, increased by 42.1% in January while that in durables was negative 6.8%.

Movers this month
Contrary to low growth registered by the manufacturing sector in the past few months, the sector has grown at a considerably high rate of 8.5%. This high growth is mainly driven by substantial growth of 92.6% in the food products and beverages and 56.1% in Publishing, printing & reproduction of recorded media industries.

Excluding these two industries, manufacturing would register a growth of negative 1.4%. This high growth can hence not be perceived as a rebound in the manufacturing sector a sit is not broad based.

Core Industries Performance
Production in core industries, which is considered as a lead indicator to overall industrial production, displayed subdued performance in January this year.

Four out of eight industries registered positive growth in the month. Cement production has seen high growth in the month of January while fertilizers performance has been stable. Industrial production for natural gas, crude oil, petro refinery and steel has displayed some lag registering negative growth in January.

How does one read these numbers?
First, based on the CSO estimates, manufacturing is to grow by 3.9% in the last quarter of the year. The present number of 8.5% does help it improve the average for the quarter given that the base effect will come in March.

Second, while the overall growth has been propped up, the fundamental problems in industry remain such as low investment and demand.

Third, the volatility in IIP growth is a concern because the December numbers have been revised upwards to 2.5% which is quite significant. Also given that the small scale sector contribution is understated, there could be some further revisions in the overall IIP numbers by March.

Fourth, so far this year there has been an anomaly between negative growth in mining and high growth in electricity. This has been reversed in January. There is concern that this may be replicated in the coming months.

Policy stance
The RBI in this financial year has raised rates by 175 bps in a bid to control inflation. Inflation is still high between 6.5-7.5% depending on the WPI or CPI. With industrial growth looking steady in January, there is no immediate need to view growth as a problem requiring attention in this policy notwithstanding the fact that growth is not broad based. This could prompt the RBI to maintain key policy rates in the March 15, 2012 Monetary Policy Review meeting.


>MPHASIS: Direct Channel and HP Channel (Q1FY12 Results - Key Highlights)

■ Mphasis posted a topline growth of 4.1% to ` 13.67 bn from ` 13.13 bn on sequential basis and an increase of 10.8% from ` 12.33 bn on YoY basis on account of the rupee depreciation of 7.3%. In dollar terms, revenue declined by ~3%. Strong Direct Channel (DC) growth (14.4% QoQ) helped them to change the composition (HP:DC) significantly to 58:42 in Q112 vs 62:38 in Q411. On industry basis, the strong growth was led by insurance (7.4%) & Information Technology, Communication & Entertainment (ITCE 8.3%) and Banking & Capital Market (BCM 4.5%). On service wise, Infrastructure management services (IMS) grew by 8.7%, owing to strong demand seen in DC side of IMS. On geographical mix, Asia Pacific and Japan (APJ) increased by 15.6% on QoQ basis.

■ EBITDA improved by 7.4% to `2.52 bn from `2.35 bn on QoQ basis. Notably, the margin bunked the declined trend with an improvement of 57 bps to 18.5% from 17.9%.

 PAT remained flat with a slight positive bias of 1.1% to `1.85 bn from ` 1.83 bn (QoQ).

■ Direct Channel and HP Channel: Direct Channel continued its strong momentum by growing 14.4% on QoQ, taking the current revenue proposition to 42% vs 38% in Q4FY11 and 32% in Q1FY11. In particular, DC’s emerging market jumped by 27.2% and DC’s mature market increased by 11.2% on QoQ basis. During the quarter, Mphasis added 28 new clients, in that 17 clients in DC and rest 11 in HP Channel. Since Q1FY11 (strategic changes), Mphasis added 128 clients, in that 82 clients in DC channel and rest 46 clients in HP Channel. HP remained sluggish (-4% growth in $ terms QoQ) due to HP annual shutdown and certain project related impact. The management trimmed its Non-ES guidance to $75-80 mn vs $100 mn for FY12E.

 Operating Metrics – In application business, Mphasis gained 5% in offshore pricing on QoQ ($21 vs $20), on account of optimal deployment of resources leading to efficient project execution Whereas they lost 3% in onsite pricing to $67 vs $69 in Q411 on account of current fluctuation adjustments. Even though, the management attributed no pricing discussions with HP in this quarter, but hinted that if anything, it would be inline with industry standard. On headcount basis, Mphasis has witnessed a decline for the third consecutive quarter to 38798 in Q112 vs 41739 in Q211. We believe there is little room for further margin improvement on utilisation front (ITO: 81% in Q112 vs 73% in Q211; App: 77% in Q112). However, management is quite confident of maintaining the EBITDA margin in the 18-21% range.

Outlook & Valuation: The management’s strategy of transforming the company into more direct business-oriented has started to show positive results, which is a good sign for Mphasis from medium to long-term perspective. We trimmed our earnings modestly by 1.5% and 3% for FY12E and FY13E to factor in the slightly below results. On the back of the attractive valuation during Q411, sizeable cash on the BS, market expectations of buyback & improving DC sentiments made the stock rally ~35% in YTD. However, overhang on HP business and increasing risk of price cuts from HP would keep the upside capped. Currently, Mphasis trades at a consolidated P/E of 10.9x and 9.2x on its FY12E and FY13E earnings of `37.2 and `43.9 respectively. We think that it might take couple of quarters of stable performance to restore investor’s confidence in the management and growth prospects. We continue to value Mphasis at 9x on its FY13E to arrive at a price target of Rs.395.2 and maintain our Neutral rating.