Wednesday, June 13, 2012

>Dr Reddy's- Merck Serono biologic partnership

The deal contours present right balance between risks and rewards

Action: Dr Reddy's partnership with Merck Serono is strategically positive
We believe the deal catapults Dr Reddy's as a global player in biosimilars. We believe the partnership provides Dr Reddy's with: a) Merck Serono's development, manufacturing and commercial expertise across markets; b)financial support that can expedite some of Dr Reddy’s development programmes; c) the option of an efficient integrated worldwide product development; d) lower risks as investments in R&D, manufacturing and sales force are lowered and e) reasonable upsides as it gets to keep a share of profits in the most lucrative US market and certain branded markets like India and Russia. We think the deal may not have resulted in any immediate value discovery as there are no upfront and milestone payments disclosed. But the partnership, we believe, is the right strategic move and the deal has struck a right balance between risks and rewards.

Catalyst: Biosimilar remains an interesting opportunity
The deal appears well timed, as some clarity on regulatory pathways has begun to emerge in its developed markets of the US and Europe. With biologic drugs of USD100bn+ in sales going off-patent by 2020, we estimate the biosimilar opportunity in developed markets to record ~50% CAGR to reach USD20bn by 2020F. Also, we expect a 3-fold growth in patient volumes in emerging markets by 2020F as affordability increases on lower prices of biosimilars. Dr Reddy's biosimilar revenue of USD25mn (FY12) is <5% of the overall biosimilar market currently, on our reading.

Valuation: Maintain Buy
The deal does not impact our estimates but reduces risk. At 16x FY13F P/E, the valuations appear reasonable. Our TP implies 19% upside.

To read report in detail: DR. REDDY's LABORATORIES

>DLF LIMITED: Rentco build-out is still subdued

Making the right moves; debt reduction and asset sales remain key rating triggers

We think DLF is taking the right strategic steps in terms of: 1) getting debt under control via asset sales; 2) consolidating land bank back into performing geographies; 3) resolving execution by completely outsourcing to reputed Indian contractors; 4) focusing on improving infrastructure in Gurgaon; and 5)continued investment into select high-value rental assets. Results of this will likely show themselves over a 12-month horizon. In the interim, we see two main catalysts: 1) asset sales of three big-ticket deals; and 2) launch of a highend golf course project in Gurgaon in 2H. Given the macro we would like to wait for gearing to come down before turning more positive. Maintain Neutral.

Asset sales program expanded to Rs100B from Rs60B: DLF has increased the scope of its asset divestiture target to Rs100B. To date it has achieved Rs48B in asset sales and has thus clawed back roughly half of the equity raised in 2007. Currently there are three large deals i.e. NTC, Aman and Wind power, which if crystallize over the course of FY13 could raise additional Rs30-40B thus clearing gearing overhang.

Devco’s FY13 pre-sales target at Rs65B with 10-12msf of bookings: Overall the company is looking to continue with its focus on plotted and high-end launches to mitigate the impact of steep input price increases. This should then help maintain EBITDA margins in the range of 45%-50%. Presales in FY13 will be driven by launch of golf course project (Rs15B), residential launches in Gurgaon/Chennai and plotted developments in rest of the country. Prices in the core markets of Gurgaon/ New Gurgaon region have surpassed our bull-case assumptions despite the macro, in part driven by corporate movement out of Delhi.

Rentco build-out is still subdued given uncertain leasing environment; Cybercity in our view holds potential to show long-term rent growth: Target leasing for FY13 stands at a meager 2 msf (vs. peak levels of 8-10 msf). An uncertain macro and the company’s gearing have constrained growth here. However even at a subdued level we think a 15-20% growth in rentco is still achievable over 2-3 years.

To read report in detail: DLF LIMITED

>Prime Focus: Entered the Animation Services market

Value unlocking on cards
Strong revenue growth on the back of 2D-3D conversion helped the company post 53% YoY growth in revenues in FY12. Healthy operating margins at 30.3% following an increase in global sourcing boosted PAT by 22% during the year. We believe the strong order book in 3D conversion and high growth opportunity from PFT will drive revenues and margins going forward. With an opportunity to unlock value in its subsidiary, we expect the stock to re-rate from current levels. Maintain BUY

Robust Q4FY12 results: Prime Focus posted robust 146% YoY growth in revenues to Rs1891mn in Q4FY12 and 53% YoY revenue growth in FY12 on the back of 89% YoY growth in 2D-3D conversion business. Operating profit in Q4FY12 was up 57%YoY while in FY12 it was up by 39.3%YoY on the back of strong topline growth. Adj PAT was up by 104% in Q4FY12 to Rs209mn while for FY12 this was up by 22.9% to Rs1021mn.

2D to 3D conversion driving growth: During FY12, the company posted Rs3130mn in revenues from 2D to 3D conversion, up 89% YoY on the back of strong slate of movies. During the year the company converted movies such as Transformers, Green Lantern, Ra.One, Immortals, Star Wars-1, Clash of the Titans 2, MIB3 among others. Projects currently under execution include Wizard of Oz, Frankenweenie and Star Wars 2 & 3.

PFT- future growth driver: During the year this business contributed Rs336mn in revenues, up 205% YoY on the back of strong order book. Recent client wins like Associated Press, British Films Institute, Sony Music, Netflix, Viacom, and National Geographic Channel have given strong visibility for FY13 and FY14. We expect this business to contribute Rs798mn and Rs1381mn in revenues for FY13 and FY14

Other highlights: 1) Company entered the Animation Services market in Q4 FY2012 after it bagged a large animation T.V. project (an entire network season) by a leading global toy manufacturer. 2) It has launched a new full-service, creative post-production facility in New York. 3) Promoters have converted 10mn warrants into equity shares at a price of Rs. 55.47 per share.

Maintain estimates; Strong BUY: The stock is currently trading at 5.4x and 4x FY13E and FY14E EPS of Rs8.76 and Rs11.9 respectively. Prime Focus trades at a significant discount to its Indian M&E peers even though it has higher revenue growth, high RoE, higher margins and leadership in domestic operations along with strong global presence. We value Prime Focus at 8x FY14E EPS of Rs11.9 and arrive at a target price of Rs95, 100% upside from current levels.



4QFY12 in line with expectations —BGRL’s 4QFY12 PAT at Rs672mn down 32% YoY was in line with CIRA at Rs677mn. In FY12 sales were down 27% YoY, margins expanded 234bps and PAT at Rs2.2bn was down 31% YoY.

B/S stress visible — While W/C intensity (measured by [NCA – Cash] Days of Sales) has improved to 210 days vs 289 days at the end of 1HFY12 it has deteriorated vis-àvis that of 103 days at the end of FY11. The company CFO was -3.5bn in FY12 vs - 2.2bn in FY11. We expect the B/S to deteriorate further as the company embarks on the construction of the BTG factories from July 2012. It is pertinent to note that this might not have a P&L impact till FY16E when these facilities get comissioned.

Guidance for FY13E and visibility for FY14E — BGRL expects Rs43bn of sales in FY14E. The company has Rs103bn of orders and expects the remaining bulk orders of Rs48bn soon, taking the tally to Rs151bn. Out of these bulk orders, Rs85bn will not be booked revenues in FY13E. Of the remaining Rs66bn, Rs43bn will be booked in FY13E, and Rs23bn will be booked in FY14E. 10% of bulk orders (Rs8.5bn) could be booked in FY14E, taking FY14E revenue visibility to Rs31.5bn currently.

Targets Rs150bn of orders in FY13E — BGRL already has Rs48bn of orders in the bag. Beyond this the company expects to win an additional Rs100bn of orders out of the 5.3GW (Rs220bn) pipeline by Dec12 and the 3.3GW (Rs138bn) pipeline by Mar13.

Maintain Sell (3H) — Given we expect: (1) margins to decline structurally (314bps in next three years), (2) structurally declining RoEs FY11 - 39% to FY15E – 15%, (3) EPS decline of 8% over FY11-14E vs 55% growth over FY08-11.

Target price cut to Rs252 — From Rs272 earlier to factor in (1) EPS cuts of 11-18% over FY13E-14E, (2) target P/E of 8.5x (v/s 8x earlier) and (3) P/E pegged at average EPS over FY13E, FY14E and FY15E (v/s FY13E earlier).


>Info Edge (India) Ltd.

India Summit: Management Meeting Takeaways

Quick Comment: Management indicated that its internal targets would be lower than actual performance last year and it needs to wait and watch 1Q trends to get better picture of fiscal 2013 revenue outlook. Management maintains its cautious outlook on the recruitment business and indicated that the outlook for collections in Naukri remains uncertain. 4Q revenue growth was a positive surprise and could have been driven by market share gains. Management expects 99 Acres revenues to keep growing even in the current uncertain environment, due to low penetration. Stable margin outlook if revenue growth momentum continues: Management believes that margins could remain stable if revenues grow by 20%+ yoy in FY13e.
Info Edge has so far invested Rs1.32bn and owns between 38% and 48% of its various investee companies. It is seeking co-investors in few of its investee companies.

Our view: Despite the weak macro, we believe recruitment revenues should be able to grow ~20% yoy with stable margins in FY13e. Overall, we forecast consolidated revenue growth of ~22% yoy with EBIT margins of 28% (+80bps yoy) and net income growth of 11% yoy in FY13e due to our assumption of lower non-op income and lower gains from associates companies.

Maintain EW: The stock is already trading at rich multiples of 38x FY13e and 36x FY14e EPS for earnings CAGR of 15% over FY12-14e, which limits any material upside from the current levels in our view.

Risks: Slower than expected revenue growth in recruitment or higher / lower than expected losses contributed by either its other verticals or subsidiaries, are the key upside/downside risks to our estimates.

>SUGAR SECTOR: Q1SY12 Results Preview

Profits to remain under pressure
We expect the profitability of sugar companies to remain under pressure impacted by higher sugarcane costs. The Uttar Pradesh government increased the SAP (State Advised Price) for Sugarcane to Rs240/quintal for SY12 against Rs205/quintal in SY11. Higher cane costs will impact the profit of UP based mills adversely and we expect them to report losses in SY12E. Average sugar price (S grade Mumbai) during the quarter was up 5.9% QoQ to Rs29.9/kg. Going forward, we believe that the increase in sugar production to 25.5mt in SY12E against 24.2mt in SY11 will lead to an increase in inventory levels, which in turn, will put pressure on domestic sugar prices leading to subdued profitability of companies. Post a steep correction of 35-53% in the stock prices since our sector initiation in September ’11 and cyclical-low valuations, we had upgraded our coverage universe (Triveni- from Hold to Buy and Bajaj Hind- from Sell to Hold) post Q4SY11 results. However, there can be near-term challenges due to higher than expected sugar production, which may put pressure on sugar prices. The triggers for upside would be a) building up of cane arrears in this crushing season b) further allowance of exports by the government c) higher than expected sugar price and d) decline in area under sugarcane cultivation for next crushing season.

 Sugar price remained high in this quarter: Sugar price (S grade Mumbai) during the quarter increased 5.9% QoQ to Rs29.9/kg. Current sugar price (S grade Mumbai) is at Rs2,956/quintal. Going forward, we believe that sugar price will be under pressure due to our expectation of increase in inventory levels (7.2mt by SY12-end against 5.8mt in SY11-end).

 Export of 1mt allowed during the quarter: The government allowed 1mt of sugar exports under OGL (Open General License) quota in this quarter, which will help the companies generate additional profits.

 Decline in global sugar price: Global sugar price declined by 20% YoY and 8.6% QoQ to US$596/tonne during the quarter. The decline in global price was driven by the expectation that decline in Brazilian production would be offset by higher sugar production in India, Thailand and Russia.

 Valuations attractive though near-term challenges persist: Post a steep correction of 35-53% in the stock prices since our sector initiation in September ’11 and cyclical-low valuations; we had upgraded our coverage universe (Triveni- from Hold to Buy and Bajaj Hind- from Sell to Hold) post Q4SY11 results. However, there could be near-term challenges due to higher than expected sugar production, which may put pressure on sugar prices. Current sugar price at 30-31/kg is higher that our expectation of Rs28/kg in SY12E and we would review our price assumption as the crushing season progresses. We maintain Buy on Triveni Engineering & Industries and Shree Renuka Sugars. We have a hold rating on Bajaj Hindusthan.

Bajaj Hindusthan (Hold, Target Price: Rs31, CMP: Rs28.7)
􀂁 We expect the company to sell 3.3lakh tonnes of sugar in the quarter with an average
realization of Rs30/kg. Net sales of the company is expected to decline 25.1% YoY (but, increase 3.1% QoQ) to Rs11bn
􀂁 EBITDA is expected to decline 14.8% YoY (but, increase 14.6x QoQ) to Rs2.2bn. EBITDA margin in the quarter is expected to be 20% against 17.7% in Q1SY11 and 1.4% in Q4SY11
􀂁 Interest cost is expected to increase 21.5% YoY to Rs1.3bn
􀂁 Profit is expected to decline 79.8% YoY to Rs117mn. In Q4SY11, the company had reported loss of Rs1.2bn.

Shree Renuka Sugars (Buy, Target Price: Rs46, CMP: Rs30.3)
􀂁 Consolidated revenue is expected to decline 7.2% YoY and 10.7% QoQ to Rs20.8bn in the
quarter. Sales volume of the company is expected to be 2.8lakh tonnes in India at an average
realization of Rs28.4/kg. Sales volume in Brazil is expected to be 2.1lakh tonnes.
􀂁 EBITDA is expected to increase 16.5% YoY and 43.5% QoQ to Rs3.5bn mainly because of higher realizations in Indian markets
􀂁 EBITDA margin is expected to be 16.8% vs 13.4% in Q1SY11 and 10.5% in Q4SY11
􀂁 Adjusted PAT is expected to decline 19.7% YoY to Rs533mn

Triveni Engineering (Buy, Target Price: Rs23, CMP: Rs16.3)
􀂁 The company is expected to sell 1.16lakh tonnes of sugar in the quarter at an average
realization of Rs30/kg. Revenue is expected to decline 25% YoY (but, go up 16.7% QoQ) to
Rs4.4bn. The results are not comparable on YoY basis, due to the de-merger of turbine business
in April ’11.
􀂁 EBITDA is expected to decline 35.5% YoY and 11.4% QoQ to Rs449mn. EBITDA margin in this quarter is expected to be 10.1% against 11.8% in Q1SY11 and 13.3% in Q4SY11
􀂁 Adjusted PAT is expected to decline 84.1% YoY to Rs38mn

To read report in detail: SUGAR SECTOR