Sunday, April 15, 2012

>EXCHANGE TRADED FUNDS: Advantages and Disadvantages

We believe ETFs will receive major inflows as Economic conditions improve and money flows back in to the market. Some of the features are as follows:

 Tax Efficiency: Taxes may be one of most critical and yet overlooked factors in wealth creation over times as they can erode even the best fund’s returns. Because of their unique structure, ETFs, may serve as tax-efficient investment tool for shareholders who wish to defer capital gains until the point of sale.

 Transparency: ETFs report their holdings on daily basis, allowing their investors to regularly see their investments that underpin each ETF share.

 Flexibility: ETFs offer investment flexibility, allowing investors to buy and sell shares through out the day on an exchange. Investors can use ETF to implement advanced trading techniques such as purchasing on margin

 Any time NAV: In mutual funds whenever you put your investment/redemption you will get closing NAV of that particular day but in ETF you can buy it anytime during the trading hours.

 Low Asset Management Cost: As ETF are passive funds they don’t have to incur fund management charges, plus they are sold without intermediaries that keep total cost low.

 International Exposure: If you would like to invest in international markets, ETF is a better way as it gives you diversification benefit in that marked & you also know much about those countries active funds. Globally there are many ETFs which focus on Indian Markets – you can check India ETF List at Onemint.

 Dividends:ETFs may pay dividends in the same way as other companies. The dividends paid are typically based on the value of the dividends paid by the underlying stocks held by the ETF, less the operating expenses of the ETF. Investors are notified of the timing of dividend payments.

Disadvantages Of ETFs
Broker and commission costs: ETF are traded through brokers and hence every time brokerage has to be paid which becomes costly affair if regular trades are done.

Premiums and discounts: An ETF might trade at a discount to the underlying shares. This means that although the shares might be doing very well on the bourses, yet the ETF might be traded at less than the market value of these stocks.



They first came into existence in the USA in 1993. It took several years for them to attract public interest. But once they did, the volumes took off with a vengeance. Over the last few years more than $120 billion (as on June 2002) is invested in about 230 ETFs. About 60% of trading volumes on the American Stock Exchange are from ETFs. The most popular ETFs are QQQs (Cubes) based on the Nasdaq-100 Index, SPDRs (Spiders) based on the S&P 500 Index, iSHARES based on MSCI Indices and TRAHK (Tracks) based on the Hang Seng Index. The average daily trading volume in QQQ is around 89 million shares.

A key reason for their popularity is their convenience. Since ETFs trade and settle like a stock, there is no additional infrastructure or documentation required. By executing a single ETF transaction, an investor can obtain exposure to broad indices or sectors. For example, if an investor needs exposure to Large Cap Technology, he can obtain this exposure by purchasing the Technology Sector SPDR.


>How companies win the confidence of investors (The leadership premium) - Deloitte

We had a simple goal when we started this research. We wanted an easy-to-understand and unambiguous metric for the effectiveness of leadership. Our aim was to enrich the debate on how we can measure something that's been left in the bucket of 'intangible assets' for too long.

To read article in detail: THE LEADERSHIP PREMIUM

>ZUARI INDUSTRIES LIMITED: Demerger (into Zuari Holdings (ZHL) separates agri businesses from unrelated ones

Zuari Industries (Zuari) has demerged its agri‐related businesses into Zuari Holdings (ZHL). The company will continue to hold 30% in ZHL and the balance will be distributed to existing Zuari share holders in 1:1 ratio, with April 10, 2012, as the record date. Post demerger, we arrive at a target price of INR466/share for ZHL, based on 8x FY13E P/E. On the other hand, we arrive at SOTP value of INR238/share for Zuari, even after assuming 60% holding company discount for the investment book, assuming 50% holding company discount for the 30% stake of Zuari in ZHL and assigning 4x P/E for core earnings on FY13E basis. Maintain ‘BUY’ on Zuari.

 Demerger separates agri businesses from unrelated ones
With the demerger, ZHL holds Zuari’s agri related businesses while the other entities (with business interests in furniture, EPC, investments & financial services, oil tanking and real estate) will continue to remain in Zuari (along with 30% stake in ZHL). Zuari management has guided for ZHL listing over the next 3‐6 months.

 Deep value despite 60% discounting of investment book
Post the demerger, even after assuming 60% holding company discount for the investment book (comprising Chambal Fertilisers, Nagarjuna Fertilisers, Texmaco, Texmaco Rail and Engineering), a 50% holding company discount for the 30% stake of Zuari in the demerged fertiliser business (ZHL) and 4x P/E for the core earnings on FY13E basis, we arrive at SOTP valuation of INR238/share.

 Outlook and valuations: Deep value; maintain ‘BUY’
Zuari management guides that most of the company’s debt will be moved to ZHL’s balance sheet as it pertains to the buyer’s credit on account of the fertiliser business. On the other hand, the investment book will be retained in Zuari. While we await the breakup of profit and loss statement as well as balance sheet for new entities, we continue to present financials for erstwhile Zuari. We believe this demerger will enable
rerating for the fertiliser business and we value ZHL at INR466/share, based on 8x P/E on FY13E basis. On the other hand, we value Zuari at INR238/share based on SOTP. We maintain ‘BUY’.

To read report in detail: ZUARI INDUSTRIES LIMITED

>YES BANK: Insulated from exposure to stress sectors

  Moving in-line with Version 2.0 targets
Yes Bank unveiled a plan, named Version 2.0, on 29th April 2010, wherein, it aimed to grow its Balance Sheet, Advances and Deposits at a CAGR of 32%, 35% and 36% over FY10-15 to INR 1500 bn, INR 1000 bn and INR 1250 bn respectively. As of Dec 2011, it has been able to grow the same at a CAGR of 45%, 32% and 38% to INR 711 bn, INR 359 bn and INR 469 bn respectively from FY10.

In the near term, the management is focussing more on asset quality and margin maintenance over growth. It aims to grow 500-750 bps higher than the system growth rates over the next couple of years aided by expanding distribution base and gaining market share. One of the biggest beneficiaries of savings rate deregulation Banking on the savings rate deregulation, Yes Bank was among the first banks to raise interest rates on savings accounts to 6% initially and later to 7%, resulting in 99.2% YoY and 40.0% QoQ growth in savings deposits in Q3FY12 (leading to 160 bps QoQ improvement in CASA ratio to 12.6%). It has successfully tapped
several salary accounts and the account opening rate has grown by ~4x the pre-deregulation regime (earlier it was attracting ~6000- 7000 customers a month, now it is almost at ~25,000 a month). The management remains confident on the traction that it has been witnessing on CASA mobilization and aims to improve its CASA ratio by ~1-1.5% each quarter for the next few quarters. The company is targeting a CASA ratio of 30% by FY15.

 Change in lending mix to improve yields
Yes Bank is looking to increase its presence in high yielding segment by targeting to tab more mid-sized corporate and SME/retail. It is aiming to change the proportion of large corporate, mid-sized corporate and SME/retail from 63%, 21% and 16% in Dec 11 to 40%, 30% and 30% of its total advances book in FY15. This would lead to improvement in yields, as yields in the mid-corporate and SME segment are higher by ~75 bps and ~150 bps respectively than
large corporate yields.

 NIMs to improve in long term
Yes bank expects NIMs to improve to ~3.6% by FY15 from 2.8% in Dec 11. This will be aided by improvement in yield on advances led by increased penetration in the mid corporate & retail segments and reduction in cost of deposits helped by rapid branch expansion (from 331 in Dec 11 to 750 by Mar 15) and sharp mobilization of low cost CASA deposits.

 Outlook & Valuation
Yes Bank has superlative asset quality and well diversified balance sheet mix. It has a strong track record of consistently delivering superior returns. The main focus areas of Yes Bank at this point of time are driving CASA deposits, growing fee income and branch expansion.
Currently the stock is trading at 2.9x its TTM BV of INR 129.5, which is reasonable for a bank that has grown its NII & Profit at a CAGR of 56% & 54% respectively over FY08-11. Asset quality of Yes Bank remains among the best in the industry with gross NPA of 0.20% and
also has one of the best return ratios (RoA of 1.5% and RoE of 23.0%).

To read report in detail: YES BANK

>PHARMACEUTICAL SECTOR: Increased sales from US generics to propel growth

  Domestic formulations in a recovery phase
We expect the domestic pharma industry (DPI) growth to rebound to mid teens (14%-15%) during FY13, from low double digit growth during FY12. Over the medium term, we believe 14% growth to be sustainable. Our assumption is based on market share gains in life-style related products; increased pace of new product launches and higher penetration in tier III cities and rural markets.

We have observed sales force attrition levels to have come off their peaks while our channel checks indicate gradual absorption of underlying inventory (anti-infectives in particular). We expect Lupin and Sun Pharma to sustain market outperformance (>16-17% growth) while others, Torrent and IPCA in particular, to witness a stronger FY13E (albeit on low base) on the back of higher MR (marketing representative) productivity and increased focus on faster growing segments. The National Pharmaceutical Pricing Authority (NPPA) / Drug Price Control Order (DPCO) stance to expand the drug coverage list for pricing control and recovery of arrears remains an overhang.

  Increased sales from US generics to propel growth
The key regulated markets - US and EU - are due to witness continuing mass generic penetration. The upcoming patent cliff coupled with pro-generic healthcare reforms places the US generic market in a sweet spot. On the contrary, stringent price control interventions and intense competition makes Europe less a profitable market. Our research highlights that CY12 will see the largest wave of US patent expirations (for drugs worth USD 33.6bn) and Indian players - Dr. Reddy’s, Sun Pharma and Lupin - are well-prepared to capitalize on a majority of these opportunities. Despite intense competition and other growth constraints, we expect these companies to be major beneficiaries (Refer Annexure - Generic Opportunities).

  Favourable currency movement adding to conviction
The Rupee depreciation against the Dollar (14% in FY12) works in the favour of most of these drug makers on account of higher realization on their export receivables (eg. Sun Pharma, Dr. Reddy’s, Divi’s Labs, etc.). At the same time, select companies will see this benefit being offset by high MTM losses on their forex liabilities (eg. Ranbaxy, Cadila, Glenmark, etc.).

  MNC Tie ups for EMs to aid topline growth FY13E onwards
Looming patent expiries (blockbuster products) and low R&D productivity (poor visibility on product pipeline) has led to MNC companies increasing their thrust on branded generics. The frequency of long-term supply deals with local generic manufacturers as a result has increased. We anticipate revenue contribution from some of the past deals entered into (Cadila – Abbott; Torrent- Astrazeneca) to aid topline growth in FY13E and scale up thereafter.

To read report in detail: PHARMACEUTICAL SECTOR

>Max India’s proposed deal with Mitsui Sumitomo Insurance (MSI)

MSI deal at significant premium to current fair value estimate. Max India’s proposed deal with Mitsui Sumitomo Insurance (MSI) values MYNL at 4.7X invested capital, likely the highest benchmark in recent times. This is almost at a 50% premium to our valuation estimate for the life insurance business (Rs69 bn). Capital gains from the deal will likely add Rs24/share (12% of the current market price). After this deal, based on recent transactions of the hospitals business and our valuation of MYNL, we estimate the fair value of Max India at about Rs238/share.

Sumitomo to replace NY Life in life insurance business
Max India has announced that Mitsui Sumitomo Insurance (MSI) proposes to acquire 26% stake in Max New York Life Insurance (MNYL). MSI will acquire 16.6% from New York Life and 9.4% from Max India. NY Life will exit the business and Max India will buy residual 9.4% stake from NY Life at Rs1.9 bn (close to book value). Thus, Max India’s stake in the business remains unchanged. Implied valuation high

The deal (Max India with MSI) implies a valuation of Rs105 bn for the life insurance business. This compares with Rs69 bn value of the insurance business, which works out to 3.2X FY2011 EV. Max reported APE of Rs12.6 bn over April2011-February 2012, down 17% yoy (against 27% decline reported by the private sector). Assuming NBAP margin of 11%, the valuation implies 1X EV+45X NBV FY2012E. We value Max NY Life at Rs69 bn, which is 1XEV + 17.6X NBV (assuming 10.5% NBAP margins).

The recent deal between Reliance Life with Nippon Life values their insurance business at about Rs120 bn, or about 4X the invested capital.

Deal adds Rs24/share
MSI would acquire 9.4% stake from Max India at Rs9.8 bn against book value of about Rs2 bn.
On a post-tax basis, these capital gains will add Rs24/share per share for Max India.

Valuation of Max India
While we don’t have coverage on Max India, we use recent deal benchmarks for the hospitals business to arrive at its fair value.

Scenario 1: Valuation estimate of Rs238/share
In this scenario, the businesses is valued as follows

1. Life insurance at Rs69 bn – KIE estimate
2. Capital gains of Rs24/share from the proposed deal
3. Max Bupa at Rs8/share – book value
4. Max Healthcare at Rs32/share – based on deal with Warburg. If we use the benchmark of deal with Life Healthcare Group- fair value estimate increases by Rs20/share; fair value estimate increases to Rs258/share in this case.
5. We do not cover Max Healthcare and Max Bupa

Scenario 2: Valuation estimate of Rs340/share
In this scenario, the businesses is valued as follows
1. Life insurance at Rs105 bn – benchmark of this deal
2. Capital gains of Rs24/share from the proposed deal
3. Max Bupa at Rs8/share – book value
4. Max Healthcare at Rs52/share – based on deal with Life Healthcare Group. If we use the benchmark of deal with Warburg, fair value estimate falls by Rs20/share; fair value estimate increases to Rs320/share in this case.
5. We do not cover Max Healthcare and Max Bupa


WOCKHARDT LIMITED: US business to grow on the back of robust product portfolio and FTF opportunities

We initiate coverage on Wockhardt Limited (Wockhardt) as a BUY with a Price Objective of ` 978 (target 10.0x FY14 P/E). At CMP of ` 565 the stock is trading at 3.4x and 5.8x its estimated earnings for FY2013E & FY2014E representing a potential upside of ~73% over a period of 18 months. With the contingent liability concerns addressed and bulk of FCCBs already repaid, the sale of nutrition business will lead to a substantial increase in cash which could be used to draw down debt or pursue organic / inorganic grow opportunities. Further its portfolio of high margin niche products and impressive FTF launches should provide for strong growth in revenues (12.3% FY11-14 CAGR) to ` 5311.2 crore and earnings (123.6% FY11-14 CAGR) of ` 97.8 /share by FY14. During the period 2003 through 2008, Wockhardt has traded mostly in line with the 1 Year forward PE multiple of its peers viz: Sun Pharma, Cipla, Lupin and Glenmark. However, post its derivative losses, Wockhardt’s EPS turned negative. Now that the balance sheet is all cleaned up and all contingent liabilities addressed, we expect that going forward, Wockhardt will catch up with its peers leading to a substantial re-rating of the stock.

Integrated assets, niche positioning and monetization capability to heighten growth pace
Wockhardt’s revenues are expected to grow at a CAGR of 12.3% to ` 5,311.2 crore by FY14 on the back of strong traction in high margin niche product sales and FTF product launches in the rewarding markets of EU and the US. Driven by gradually improving operational efficiencies on the back of better raw material sourcing, cost optimization and increasing contribution of high margin products and FTF opportunities, we expect margins to improve by 540 bps to 29.6% in FY14. Consequently earnings are expected to grow at a CAGR of 123.6% to ` 1,070.1 crore over the forecast period. Further, strong focus on R&D and development of complex products would ensure future sustenance of this growth trajectory.

Strong traction in revenues from regulated markets to boost profitability Currently, Wockhardt’s sales mix is tilted towards the regulated markets with US and EU markets contributing a significant 66.5% of the revenues. With strong FTF opportunities emanating from these markets over the next couple of years, we expect the sales mix to tilt further in favour of these markets with US and EU contributing 73.8% (US- 38.2% and EU-35.6%) of the overall revenues in FY14.

US business to grow on the back of robust product portfolio and FTF opportunities The growth in the US markets is driven by its niche product portfolio consisting of Metaprolol (CVS), Divalproex (CNS), Flonase (Respiratory) and a slew of FTF opportunities in Stalevo (CNS), Comtan (CNS) and Lunesta (Anti Depressant). We expect these niche products and FTF opportunities to contribute ` 768.3 crore and ` 424.4 crore to the revenues in FY13 and FY14 respectively. Further, the base business contribution is expected to be ~ ` 1152.0 crore and ` 1497.6 crore to the US revenues in FY13 and FY14 respectively.

Strong presence in EU markets to drive growth Wockhardt has a strong presence in the EU markets through its subsidiaries Wockhardt (UK), Pinewood Healthcare (Ireland) and Negma Laboratories (France). Wockhardt (UK) has a strong foothold in the exports and CRAMs segment and is one of the major suppliers of healthcare products to the Retail Pharmacy and Hospitals in the UK as well as European markets. Growth in Wockhardt (UK) is supported by its strong product pipeline in key high growth therapeutic segments of diabetes, oncology, pain management, anti infectives and anti-coagulants coupled with numero uno position in Animal Insulin. Pinewood, too, continues to deliver robust numbers driven by the successful launch of product Nexazole (GI) and strong growth in the hospital business. However, performance of Negma remains under pressure on account of lost patent cover of ART 50. In order to address the underperformance of the French unit significant restructuring initiatives are being implemented in addition to enhanced focus on novel drugs. We expect these initiates to lead to positive outcomes in the medium term. On the back of the strong business model in place, we expect the European business to contribute ` 1,719.7 crore and ` 1,891.6 crore to the overall revenues in FY13 and FY14 respectively.

Two way growth strategy to drive domestic business Wockhardt’s domestic business (sans Nutrition segment) is expected to outperform the industry growth and grow at a CAGR of 13% to ` 1,118.9 crore in FY14 on the back of its entry into the high margin chronic therapy product portfolio and enhancement of its field force strength. Operational efficiencies and effective funds management to drive margin expansion Driven by gradually improving operational efficiencies on the back of better raw material sourcing, cost optimizations and increasing contribution of high margin products and FTF opportunities, we expect EBITDA margins to expand by 540 bps to 29.6% in FY14. Already the margins in Q3FY12 have improved by 200 bps over Q2FY12 on account of strong performance of high margin product Toprol XL in the US markets. The net margins are also expected to improve by 1750 bps to 20.1% over the forecast period as the impact of settlement of contingent liabilities, repayment of debt and better funds management kicks in.

Contingent liabilities stand resolved
The contingent liabilities have been bought down to zero after addressing the claims in full of Rs 240 crore of liabilities with Deutsche Bank and a USD 24 mn with Lehman Brothers. This balance sheet clean up exercise should help boost investor sentiment and lead to further re-rating of the stock.

Sale of non-core assets to ease debt pressure burden
Post sale of its nutrition business to Danone, we expect significant liquidity to be injected in the company helping it tide over the current debt issues and pursue other organic and inorganic growth opportunities. Out of the proceeds of its divesture, we expect Wockhardt to settle the remaining FCCB dues and reduce the debt to ` 1052.1 crore in FY14 from the current ` 3,849.5 crore thus deleveraging the balance sheet considerably. Post clearance of the contingent liabilities, we foresee no major hindrance and expect the deal to be completed in the stipulated time frame.

Valuations: Re-rating of the stocks on cards
At the CMP of ` 565, Wockhardt is trading at 3.4x and 5.8x its estimated earnings for FY13 and FY14. We initiate coverage on Wockhardt Ltd as a BUY with a Price Objective of ` 978 (10x FY14 EPS) over a period of 18 months. Currently, Wockhardt weighed by high debt is trading at a considerable discount to peers. However with the contingent liabilities settled, repayment of FCCB debt on track and the sale of the nutrition business, we expect the stock to be re-rated substantially in the medium term. Wockhardt is trading at a significant discount of 54% to the industry average, and we expect the discount to narrow down substantially over time.


>Ranbaxy settled with Cephalon for April 2012 launch of Provigil along with Mylan and Teva

Was Provigil forfeited by Ranbaxy? Uncertainty over monetization of near-term FTFs
has increased post the recent episode of Provigil, in our view. We find it surprising that
Ranbaxy has not taken any step to reinforce its FTF status on Provigil, despite having
settled its patent challenge with Cephalon for a certain launch in April 2012. Ranbaxy’s
response is that Provigil was a unique case and had its own commercialization
challenges, which begs the question – will Ranbaxy launch this product post FTF in Sep
2012? In light of this, we remain unsure over near-term FTF launches —Actos (Aug 17,
2012 launch) and Diovan (September launch). We believe the loss of FTF status is a key
risk to the stock as post FTF sales are critical to recovery of base business in US. SELL
with TP at Rs380.

Ranbaxy settled with Cephalon for April 2012 launch of Provigil along with Mylan and Teva
Ranbaxy had FTF status on Provigil (US$1.1 bn sales in US) as per Cephalon (see excerpts from the annual report below). Also as per Bloomberg analyst speak, Teva’s 2012E profit guidance did not include sole FTF status on Provigil.

“In March 2003, we filed a patent infringement lawsuit against four companies—Teva
Pharmaceuticals USA, Inc., Mylan Pharmaceuticals, Inc., Ranbaxy Laboratories Limited and Barr Laboratories, Inc.—based upon the abbreviated new drug applications ("ANDA") filed by each of these firms with the FDA seeking approval to market a generic form of modafinil. In late 2005 and early 2006, we entered into settlement agreements with each of Teva, Mylan, Ranbaxy and Barr.

As part of these separate settlements, we agreed to grant to each of these parties a non-exclusive royalty-bearing license to market and sell a generic version of PROVIGIL in the United States, effective April 2012, subject to applicable regulatory considerations.”

We find it surprising that Ranbaxy has not taken any step to reinforce its FTF status on Provigil
With Teva having been accorded exclusivity by FDA on April 5 and exclusivity having started from March 29 (the date of launch of authorized generic version), we find it strange that Ranbaxy has not taken any step to protect its FTF, like Mylan has. Mylan sued FDA on April 5 seeking a ruling that Teva holds no exclusivity for generic Provigil. Ranbaxy’s response is that Provigil was a unique case and had its own commercialization challenges, which then begs the question – will Ranbaxy be able to launch this product post FTF in September 2012? We believe the loss of FTF status is a key risk to the stock as post FTF sales are critical to recovery of business in US.

Uncertainty over commercialization of the other two near-term FTFs remains
In light of above, we refrain from including FTF value/share in our target price. We maintain target price at Rs380 (18X 2012E base business earnings); stock trading at 24X 2012E base business earnings.