>GLENMARK PHARMACEUTICALS (ICICI SECURITIES)

CLEAN UP ACT

Glenmark’s Q4FY09 results were disastrous owing to one-time write-off of Rs1.6bn, including charge-back of Rs1.17bn for generic Trileptal. Excluding these, recurring consolidated PAT collapsed 97% YoY to a paltry Rs74mn, massively below I-Sec and Street estimates. With the management deciding to clean up its opaque and profit-boosting accounting policies (post Satyam fiasco), Q4FY09 results veered from the past trend – EBITDA margin (excluding R&D income) crashed 18pps to 13.6%. Hence, we cut FY10E & FY11E EPS 20% and 27% respectively. With investors’ risk appetite rising in the past three months, Glenmark has been re-rated along with broader indices and is likely to benefit from improving business performance from Q1FY10, a potential R&D deal and 1-2 key ANDA launches in FY10. We believe in Glenmark’s robust business model and world-class R&D pipeline. Glenmark remains our top large-cap BUYs in the sector.

■ Disastrous Q4FY09. After a disappointing Q3FY09, Glenmark shocked the Street with disastrous Q4FY09 results – reported loss of Rs1.2bn on the back of Rs1.6bn one-time write-offs. Recurring consolidate PAT was at Rs74mn versus Rs812mn in Q3FY09, which shows the degree of variance. However, the management expects strong performance recovery in Q1FY10 with improving demand from key markets, absence of one-offs and aggressive cost savings.

■ Despite short-term challenges, we expect Glenmark to succeed. Despite all the concerns, we continue to believe that Glenmark’s business model is among the best in the sector in India. Even after pruning FY09 forecast, Glenmark’s base business revenues and PAT have grown 6x and 8x respectively in the past five years. On the R&D side, it has bagged three world-class deals and earned cumulative ~US$110mn revenues (highest by an Indian pharma company). We expect Glenmark to succeed given its world-class R&D pipeline.

■ Worst may be behind; maintain BUY. We expect investor confidence to be largely restored in the next one year driven by improving visibility of key ANDA launches, recovering base business performance and at least one R&D licensing deal. We remain confident of Glenmark’s robust business model and success in the medium term. Maintain BUY. The stock trades at 13x FY11E P/E of generics business earnings. Our revised 18-month fair value of Rs312 implies 34% potential upside.

To see full report: GLENMARK PHARMACEUTICALS

>TRADE BYTES (IDFC SSKI)

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>IVRCL INFRASTRUCTURES & PROJECTS LIMITED (INDIABULLS)

Stock run-up discounts in the strong growth potential

IVRCL reported a robust revenue growth of 33.0% yoy in FY09, closely in line with our estimates. However, EBITDA margin declined 121 bps yoy due to the losses incurred by the Company on the initial projects in the power T&D space. We believe that the stock run-up post elections factors in the significant growth opportunities that the Company can capitalise on. Hence, we recommend a Hold rating on the stock with a revised target price of Rs. 325.

Robust order book; water and irrigation segment remains the key driver: IVRCL continues to be one of the strongest companies in the construction & infrastructure space. The Company’s order book currently stands at Rs. 145 bn, which provides revenue visibility for 2.5–3 years. The water & irrigation segment accounts for ~65% of the order book, planned spending for which has doubled in the 11th Five Year plan period. Currently, around one-third of IVRCL’s orders in the segment come from Andhra Pradesh (AP); thus, with the Congress back in power in AP, the Company stands to gain from the state government’s continuing thrust on irrigation projects through its ‘Jalayagnam’ programme under which it plans to spend ~Rs. 180 bn p.a. for the next 4–5 years.

EBITDA margin likely to improve from the present levels: EBITDA margin declined by 121 bps yoy to 8.7% in FY09 primarily due to the execution of the low-margined power T&D projects in which IVRCL is seeking to gain prequalifications. However, as the proportion of such projects is likely to decline in FY10, the margin is expected to improve to 9.7%, close to the FY08 levels.

Fairly valued stock: We have revised our target price upwards to factor in the improving fundamentals and the better-than-expected management guidance. Post the general election results in May 2009, IVRCL’s stock has surged 87% compared with a 17% increase in Sensex. We believe that the upside potential remains limited from the present levels. Hence, we recommend a Hold rating.

To see full report: IVRCL INFRASTRUCTURES

>GODAWARI POWER & ISPAT (EMKAY)

4QFY09 Result above estimates

Godawari Power and Ispat Ltd. (GPIL) reported 4QFY09 results, which were above our estimates. Net sales stood at Rs1,718mn (yoy down 34.8%, qoq down 18.9%), EBITDA stood at Rs173mn (yoy down 69.5%, qoq loss of Rs36mn) and Adj PAT stood at Rs79mn (yoy down 76.7%, qoq loss of Rs174mn). During the quarter, GPIL continued to sell surplus power in the merchant market as there was no billets production. In 4QFY09, the average realization of power was Rs6.50/unit. GPIL’s backward integration plan is progressing as per schedule. The 0.6mtpa pelletization plant is expected to be operational by Sep ‘09. The company has commenced Ari Dongri iron ore mine, having reserves of 7mt. GPIL is currently operating mine at a production level of 1,000t per day. GPIL has also received final approval for Borai Tibu iron ore mine and the company expects mine to be operational by 3QFY10. As on 31st Mar ’09, GPIL has net debt of Rs3.2bn at an average cost of 10.5%. At the CMP of Rs117, the stock is trading at 3.5x FY10E EPS of Rs33.6 and at 2.5x FY11E EPS of Rs46.3. On EV/EBITDA basis, the stock is trading at 3.5x FY10E EV/EBITDA and at 2.6x FY11E EV/EBITDA; while on P/B basis the stock is trading at 0.6x FY10E book value and at 0.5x FY11E book value. We maintain BUY on the stock with target price of Rs166 (0.7x FY11E book value).

Other highlights of the concall are as under:-
■ GPIL has commenced Ari Dongri iron ore mine, having reserves of 7mt. The company is currently operating at a production level of 1,000t per day and has target to produce around 0.3mt of iron ore in FY10. GPIL expects to be 50% captive for iron ore in FY10. This is expected to generate savings of around Rs3,500/t of iron ore as the cost of extraction is around Rs1,000/t and the current landed cost of iron ore for GPIL is around Rs4,500/t.

■ GPIL has also received final approval for Borai Tibu iron ore mine, having reserves of around 7-8mt. The company expects the mine to be operational by 3QFY10. The estimated capex for the mine development is around Rs150mn. The expected annual capacity for both the mines is around 0.6mtpa each.

■ During the quarter, the company continued to sell surplus power in the merchant market as the production of billets and ferro alloys has been temporarily discontinued due to low demand and better margins from power sales. The management has guided that production will be maintained at a very low level in for next few quarters. In 4QFY09, the average realization of power was Rs6.5/unit.

■ As per the management there will not be any production cut for HB wires and the company will purchase the billets required, from the market which is currently available at Rs21,000/t.

■ GPIL’s backward integration plans are progressing as per schedule. We expect 0.6mtpa pelletization plant to be operational by Sep ’09.

■ As on 31st Mar ’09, GPIL has total debt of Rs3,550mn and cash balance of Rs350mn, implying net debt of Rs3,200mn at an average cost of 10.5%.

■ In first FY09, GPIL has incurred capex of Rs1,700mn and expects to incur Rs850- 1,000mn in FY11.

To see full report: GODAWARI POWER