>RANBAXY LABORATORIES: Exceptionals wipe off operating gains

Ranbaxy’s 4QCY11 numbers were a mixed bag. The company capitalized on its launch of generic Lipitor and AG version of Caduet to clock net sales slightly ahead of our estimates at Rs37.3bn (up 79.2% YoY). While operating EBITDA was up 273.6% YoY at Rs8.6bn, the pre-exceptional PAT of Rs5.0bn was more than offset by extraordinary items – the DoJ settlement provision of Rs26.4bn and loss on derivative positions of Rs8.3bn - resulting in a net reported loss of Rs29.8bn.


We raise CY12 EPS estimates to Rs36.6 due to higher market share garnered in generic Lipitor (currently at ~42%) and introduce our CY13 EPS estimate at Rs29.9. This assumes Ranbaxy will be able to launch generic Provigil and Diovan during CY12. We upgrade the stock from a Sell to a Hold with a target price of
Rs419, valuing the company at 14x CY13.


Key highlights
■ Ranbaxy wrote off inventory amounting to Rs621mn during the quarter. Other expenses increased significantly by ~123% YoY to Rs14.3bn, as a result of payments made to Teva in connection with generic Lipitor sales (details not disclosed). However, the impact on EBITDA was mitigated by higher margin sales from FTF opportunities. The company recorded an impairment charge on a fermentation facility of Rs820mn, which resulted in depreciation spiking up by 63.2% YoY to Rs1.6bn.


■ Sales in the domestic market were up 16% YoY to Rs3.9bn i.e. marginally above market growth. The OTC business, which is 16% of total domestic sales, grew at a brisk 20% YoY during CY11; however, Ranbaxy saw lower than anticipated growth in its anti-infectives portfolio.


■ The North America region sales grew at a staggering 201.5% YoY to US$407, on the back of generic Lipitor and Caduet sales. Management stated that price erosion in Lipitor was ~65% and the company had a market share of ~42% at end-CY11.


■ Pursuant to its consent decree with US FDA/ Department of Justice (DoJ), Ranbaxy made a provision of Rs26.4bn and agreed to forfeit three FTF opportunities. However, management claimed that the loss of these opportunities would not impact sales growth significantly.


RISH TRADER

>Commercial Engineers & Body Builders Company (CEBBCO): Largest player in outsourced body building fabrication of commercial vehicles (CVs) in India

■ Beneficiary of increasing demand for FBVs: Commercial Engineers & Body Builders Company (CEBBCO) is the largest player in outsourced body building fabrication of commercial vehicles (CVs) in India. The company stands to gain as fleet operators are increasingly in favour buying fully-built vehicles (FBVs), as against the earlier practice of buying a chassis and getting the body built by vendors in the unorganised market. The share of FBVs in total CVs has risen from 12% in FY10 to ~25% in the current fiscal. Our interaction with players in the industry leads us to believe that this would rise further, as in addition to better product quality, fleet operators can obtain complete financing for vehicles through the FBV route.

Organised body-building to spur growth

■ Railway segment to drive incremental growth: CEBBCO recently forayed into wagon manufacturing after a successful entry into the wagon refurbishing market, where it has garnered a market share of 20% over a two-year period. We expect the railways segment to contribute 20% of total revenues by FY14, up from 11% in FY12, post commencement of wagon production at its new plant in Deori, Jabalpur in Mar12. Moreover, given the higher margins in the segment, we expect blended EBITDA margins to improve by 40bps in FY13 and 30bps in FY14 to 13.7% and 14% respectively.


■ Outlook and valuation: CEBBCO’s operating performance post its IPO in late 2010 was adversely impacted as its largest client, Tata Motors’ (TTMT) realigned production to meet new, changed emission norms. However, we consider this an aberration; its fundamentals remain strong, as seen by its 1HFY12 results, wherein it posted a PAT of Rs164mn, against a PAT of Rs57mn for FY11. Going forward, we expect CEBBCO to grow revenues at CAGR of 32.2% over FY12-14, backed by the increased demand for FBVs (spurred by strong demand in the tipper segment) and higher revenues from railways segment. This robust growth in revenues, combined with better EBITDA margins should result in earnings CAGR of 31% over FY12-14. We value the company at a P/E of 10x FY13 EPS of Rs7, given the cyclical nature of the industry and lower entry barriers in the body fabrication business. We initiate coverage on CEBBCO with a Buy rating and a target price of Rs70.


To read the full report: CEBBCO
RISH TRADER

>KPIT CUMMINS (TATA SECURITIES)

Revenues increase 4.6% sequentially: KPIT’s consolidated revenues grew by 4.6% in 1QFY11 to Rs2,061mn. In US$ terms, the growth was 5 .6%. The growth in 1QFY11 was driven by a 3% volume growth and around 2.5% increase in realisations. The increase in realisation was on account of higher share of revenues from SAP and auto businesses, which have a higher average
realisation. In 1QFY11, the SAP business grew by 9.6% sequentially, with auto and engineering business growing by 4.8%. The company also commented there were some early starts to the projects resulting in higher-than-expected revenue growth in 1QFY11.

EBITDA margins decline by 310bps: In line with expectations, KPIT’s EBITDA margins declined by 310bps in 1QFY11 on account of a) Salary increases of 12% offshore and 2% onsite and b) Addition of more than 400 employees in 1QFY11. Going forward, we expect margins could improve on account of a) Economies of scale and b) Improving utilisation as the freshers
hired in 1QFY11 start getting billed in the quarters ahead.

Net profit declines by 6.8%: Though the company’s EBIT declined by 15.6% sequentially, the net profit declined only by 6.8% to Rs194mn. This was mainly on account of a) Lower forex losses as the INR appreciated by 1% in 1QFY11 and b) Lower taxes.

To read the full report: KPIT CUMMINS

>THERMAX LIMITED (TATA SECURITIES)

Strong bounce back in order inflows; current valuations stretched
Armed with a robust order book, Thermax started FY11 with a sharp bounce back in growth during 1QFY11. Revenues grew by 45%, while PAT grew by 42% during the quarter. More pertinently, the standalone order backlog increased to Rs63bn (96% growth YoY), with an across-the-board improvement in order inflows.

An improvement in the macro environment and a pick-up in the capex cycle enhances the visibility in order flows for the company’s base boiler and captive power divisions. This apart, the new technological tie-ups in the power and environment space is expected to result in strong order accretion in FY11. Despite the increased visibility for growth, valuation has got stretched on account of the sharp run-up in the stock’s price. Thermax currently trades at 22x, a premium to the large cap companies in the capital goods space. Hence, we downgrade the stock from Buy to Hold.

Key highlights
Across-the-board improvement in order accretion: Order inflows during the quarter improved significantly with a 70% growth to Rs17bn. All the divisions of the company witnessed a growth in order flows. In the captive power segment, Thermax won large orders of Rs5.8bn for a 72 MW combined cycle gas based power plant. Even after excluding this large ticket order, the order flows remained strong. The closing order backlog at a standalone level stood at Rs63bn, a growth of 96% YoY. The key industries contributing to the order backlog include power, refineries, ferrous metals, paper, cement and mining.

Update on JVs: Thermax has started negotiations with state governments for acquiring land for the boiler plant under the JV with B&W. The company expects the process to be completed well in time to bid for the NTPC tender for 800 MW supercritical sets. The manufacturing plant is expected to commence operation by Feb-Mar11. The team under the JV with SPX has been formed and has already generated order enquiries worth Rs5bn. The order accretion in this venture is expected to commence in 3QFY11.

To read the full report: THERMAX LIMITED

>OIL MARKETING COMPANIES:Fueling fiscal prudence

Moving Towards Market Driven Price Regime:
Over the years the Indian Government has followed the policy of Administered Price to shield
the consumers from severe fluctuations in the international oil prices. This protective policy has
not only added to burgeoning fiscal deficit, but also resulted in huge under recoveries on the part
of Oil Marketing Companies (OMC’s). Sowing the seeds for moving from a controlled regime to
decontrolled regime, the administered price mechanism (APM) governing prices of auto fuels
was completely dismantled in April 2002. However, given the sharp increase in crude oil and
petroleum product prices over the past 5-6 years, the government continued to play a significant
role in the determination of auto fuel prices. However, now the Government has a target to
reduce fiscal deficit to 4% of GDP by FY12 from the current levels of 6.8% of GDP. In this
context, the move to deregulate petrol prices and allowing it to be determined by the market is
significant.

Impact on OMC’s:
Market driven price regime is expected to ease the pressures on OMC’s by reducing their under
recoveries. The pre-price revision, total estimated under-recovery on cooking and auto fuels is
estimated at Rs 801 bn. Out of this, the total under recovery for petrol would have been to the
tune of Rs 70 bn and for diesel Rs 230 bn for the whole year, if the prices would not have been
decontrolled. Under-recovery in auto fuels is expected to reduce from Rs 3.8 per litre (before
price revision) to Rs 1.9 per litre (after price revision) in 2010-11. Similarly, the estimated under- recovery on cooking fuels is likely to fall from Rs 465 bn to Rs 398 bn in 2010-11. The total under-recovery is estimated to fall to Rs 565 bn post price rise.

Impact on Consumers:
From now onwards, the fluctuations in international markets would get directly reflected in the
domestic market. However, the price hike will be done in a phased manner. Further, the
Government is expected to intervene, in case of very volatile increase in international fuel prices.
As of now, the government has approved the increase in the price of petrol, diesel and LPG. The
Empowered Group of Ministers (EGoM) has decided to permit Oil Marketing Companies
(OMCs) to raise the retail-selling price of petrol by Rs 3.5 per litre, diesel by Rs 2 per litre. For
an average car user the increase in petrol price would add a burden of Rs.150 per month while
for a motorcycle user the burden would be Rs.30-35 per month.

To read the full report: OMC

>CAPITAL GOODS - POWER'FUL' AGENDA (TATA SECURITIES)

Power generation space would continue to offer significant opportunities to equipment manufacturers for the next few years as the country grapples to manage the huge peaking shortages that is currently faced. We believe the ever-increasing electricity consumption also requires a quantum jump in power generation capacities. Apart from the huge market opportunity, the consistent order flows along with the superior return ratios enjoyed by the equipment companies, make the power generation space one of the most attractive segments in the capital goods industry, in our view. The Central Electricity Authority’s (CEA) planned capacity addition target for the XIIth Five Year Plan translates to a market opportunity of Rs4-4.5tn (about US$100bn), which we expect can materialise over the next three to four years.

Key investment highlights
■ To contain the peaking shortages and to meet the incremental demand, CEA has targeted a capacity addition of 1,00,000 MW in the XIIth Five Year Plan, a growth of 27%. We believe the plan targets would continue to increase going forward. The shelf of the projects planned for the XIIth Five Year Plan stands strong at 1,38,000 MW.

■ Private sector utilities are expected to account for around 50% of the capacity additions in the XIIth Five Year Plan. With private sector utilities’ better execution capabilities, a better visibility exists for equipment companies, as more projects would take off.

■ Power plants based on supercritical technology are expected to dominate the capacity addition plans in the XIIth and the XIIIth Five Year Plan. Hence, in our view, companies with technological tie-ups and faster indigenisation in manufacturing over the next two to three years would have an edge.

■ Going by the past trend, equipments order for projects related to a five year plan are placed one to two years ahead of the beginning of the plan period. Of the shelf of 1,38,000 MW for the XIIth Five Year Plan, orders for around 43,000 MW have been placed, while orders for the balance equipments are expected to be placed in the near to medium term.

■ We expect this to translate into robust growth for the power generation equipment companies and drive a strong growth in their order book, revenues and profits. We are positive on the industry and initiate coverage with an Overweight rating on the sector and a Buy recommendation for BHEL, BGR Energy and Thermax.

To read the full report: CAPITAL GOODS

>NTPC (TATA SECURITIES)

Losing Steam

NTPC, India’s largest power producer is facing huge delays in most of the plants under construction. Delays in capacity addition resulting in lower rate of return on core business, coupled with rich valuations of 3.1xFY10E BV and 25X FY10E EPS makes the stock richly valued. In addition, the free-float adjustment in Nifty is expected to bring down the stock weightage in the index by around 550 bps is a key negative for NTPC. We believe that the above market valuations and slow earnings growth do not justify the current price. We initiate coverage on NTPC with a SELL rating.

Key Highlights

■ Delayed execution: Of the 22,430 MW (inc. JVs) power generation capacity targeted to be added during 11th five year plan ending 2012, only 3,740 MW has been commercialized. Of the 17,430 MW under construction, we expect NTPC to commission only 9,560 MW by FY12. Poor execution resulting in idle CWIP earning zero returns and inefficient utilization of cash generated through operations is expected to suppress NTPC’s ROE.

■ Rich valuations overweigh tariff regulations gains: Though, the new tariff regulations are positive for NTPC, the current valuations more than overweigh the gains from new tariff regulations.

■ Reduced weightage in Nifty: From June 26th 2009, NSE is expected to move to free-float market capitalization basis from the current method of full market capitalization basis for the index constituents. NTPC, with free float of only 10.5%, will be severely impacted with a 550bps fall in weightage in the Nifty.

■ Valuation: We ascribe 1-year forward value of Rs161 per share to NTPC‘s generation business based on DCF approach and Rs16 per share for equity investments and cash & cash equivalents to arrive at our 1-year forward target price of Rs177 per share. At current market prices Rs229, NTPC is trading at 3.1xFY10E BV of Rs74.3 and 25XFY10E EPS of Rs9.1, a steep premium to the market valuations. We initiate coverage with a SELL.

To see full report: NTPC

>BHARTI AIRTEL (TATA SECURITIES)

Bharti & MTN merger - Where is the value?

Bharti has renewed its talk with MTN for a possible partnership with the intent of an eventual meeger of the two companies. The two companies have exclusivity until 31st July 2009 to conclude deal. Upon the conclusion of the deal, Bharti will hold 49% of MTN, while MTN would hold 25% of Bharti and MTN shareholders would hold 11% of Bharti through GDR issue. As per our estimates, Bharti is paying a premium of 44% to MTN's Friday's closing price.

KEY HIGHLIGHTS

• Merger of Equals
• Acquisition to be EPS dilutive in short term
• Synergies, if any, will be back ended
• We see little value
• Valuation

PROPOSED DEAL STRUCTURE
■ Bharti will acquire 36% stake from existing shareholders of MTN (673 mn shares) for a consideration of ZAR86 per share (totalling to USD 6.9bn) and 0.5 Bharti GDRs for every MTN share held (issue of 336mn Bharti GDRs)

■ MTN will issue 467mn additional shares to Bharti such that Bharti would hold 49% of the post-issue shares. Bharti will hold 1140mn shares of MTN; MTN's equity will go up from 1,869mn shares to 2,336mn shares.

■ Bharti will issue 745mn new shares to MTN such that MTN would have 25% of Bharti, post the deal. Bharti equity will be increased to 2,979mn shares. MTN would also pay cash of USD2.9bn to Bharti.


To see full report: BHARTI AIRTEL