>DR. REDDY'S LABORATORIES (FIRST GLOBAL)

What Happened Last Quarter…

Dr. Reddy’s Laboratories Ltd.’s (DRRD.IN/REDY.BO) performance in Q4 FY09 and the full year FY09 was impacted by an exceptional charge related to impairment of goodwill and intangibles. However, excluding the exceptional charge, DRL’s overall results for Q4 FY09 as well as FY09
were ahead of our expectations, driven by strong sales recorded by generic Imitrex. DRL recorded a net loss of Rs.12.6 bn and Rs.9.2 bn for Q4 FY09 and FY09 respectively, primarily on account of the exceptional charge of Rs.14.6 bn related to the Betapharm acquisition. Excluding the exceptional charge, the company’s net profit for FY09 was up 24% Y-o-Y to Rs.5.5 bn, which was higher than our estimate of Rs.4.8 bn. The company’s topline was up 49% Y-o-Y to Rs.19.3 bn in Q4 FY09 and grew 38% Y-o-Y to Rs.69.0 bn in FY09, which was well ahead of our estimate of Rs.65.0 bn for the full year FY09, driven mainly by the successful launch of the authorized generic version of Imitrex in late November 2008, which recorded sales of Rs.6.8 bn. Excluding generic Imitrex sales, DRL’s topline was still up a healthy 24% Y-o-Y. The company’s EBIDTA margin for FY09 improved by 210 basis points to 19.2%.

Management has guided for a topline growth of 10% in FY10, which is exactly in line with our
earlier expectation. In view of the company’s performance in FY09 and management’s guidance for FY10, we have raised our revenue and EPS estimates for FY10 from Rs.70.7 bn and Rs.35.4 to Rs.74.8 bn and Rs.37.0 respectively. Since we upgraded DRL to ‘Moderate Outperform’ in April 2008, the stock has outperformed the NIFTY by 9 percentage points. Also, the recent approvals received by DRL for its FTF applications, Prilosec OTC and Arixtra, have resulted in improved visibility of its near term big product opportunities. Moreover, management’s recent decision to trim DRL’s global operations clearly indicates that the company is focusing on sustaining its base business growth and improving its margins & RoCE. The realignment of Betapharm (i.e. shifting of most of its manufacturing activities to India), trimming of global operations, reduction in fixed overheads, and improvement in R&D productivity will help bring down DRL’s operating costs. Plus, DRL’s future revenue growth will be driven by at least one ‘FTF opportunity’ that the company expects to enjoy each year for the next 3-4 years. At 15.5x, the stock trades almost in line with the industry average of 15-16x. We reiterate our ‘Moderate Outperform’ rating on DRL.

Key Quarterly Highlights

The company’s topline growth
was driven by the successful
launch of the authorized generic
version of Imitrex in late
November 2008, as well as on
account of a strong performance
from Russia/CIS and favourable
currency movements.

■ DRL recorded a net loss of Rs.12.6 bn and Rs.9.2 bn for Q4 FY09 and FY09 respectively, primarily on account of an exceptional charge of Rs.14.6 bn related to the impairment of goodwill and intangibles in Q4 FY09 arising from the Betapharm acquisition.

With the market now moving to a tender supply model and due to the change in the market drivers, the goodwill had to be evaluated for impairment. As a result, the company took a non-cash charge of $213 mn. Post these charges, the carrying value of Betapharm intangibles and goodwill in DRL’s books stands at approximately €50 mn and €160 mn respectively.

■ Excluding the exceptional charge, the company’s net profit for FY09 came in at Rs.5.5 bn, up
24% Y-o-Y and higher than our estimate of Rs.4.8 bn.

■ In Q4 FY09, the adjusted net profit was up 60% Y-o-Y to Rs.2 bn (excluding write down charges of Rs.14 bn and Sumatriptan exclusive sales).

■ The topline was up 49% Y-o-Y to Rs.19.3 bn in Q4 FY09 and grew 38% Y-o-Y to Rs.69.0 bn in FY09, which was well ahead of our estimate of Rs.65.0 bn.

■ The company’s topline growth was driven by the successful launch of the authorized generic version of Imitrex in late November 2008, as well as on account of a strong performance from Russia/CIS and favourable currency movements. Excluding generic Imitrex sales, the topline was still up by a healthy 24% Y-o-Y. Sumatriptan recorded sales of around Rs.3.5 bn in Q4 FY09.

■ On the back of strong revenues from Sumatriptan, DRL’s US sales were up 192% Y-o-Y in Q4 FY09. Excluding Sumatriptan sales, the company’s US sales grew 44% Y-o-Y (organic growth of 35% Y-o-Y).

■ The EBIDTA margin for the full year FY09 was up 210 basis points to 19.2%, partly due to a decline in SG&A expenses.

To see full report: DR. REDDY'S LABORATORIES

>BHARTI AIRTEL LIMITED (INDIABULLS)

Rating downgrade due to competitive headwinds
In Q4’09, Bharti Airtel Limited (Bharti) posted a revenue growth of 25.6% yoy and 2% qoq, gaining from better-than-market ARPU of Rs. 305 while facing more-than-anticipated drop in share of net adds. Bharti’s share in net adds fell to 17.5% in Mar’09 (our estimates of 20%), as RCOM and other new entrants notched up subscribers with under-cutting in tariffs while rolling out their services in new circles. Moreover, Bharti’s overall market share plunged to 24% in Q4’09 from 24.7% in Q3’09. While we believe that Bharti can easily sustain its EBITDA margins in the near term at ~39%, retention of high-end Metro subscribers is a key challenge for the Company. Besides, the recent surge in the stock price has pushed it above our fair value estimate. Hence, we downgrade our rating to a Hold.

Customer retention is a key challenge
Bharti derives around 40% of its revenues from 11% subscribers, who are present in Metro circles. As newer mobile players are aggressively targeting these subscribers through value added services and attractive tariffs, subscriber retention has become a key challenge for Bharti in order to maintain its market leadership and profitability in the near term.

Scaled up operations and cost rationalization to help maintain margins
Bharti maintains a significant cost advantage over its competitors supported by its scaled up pan-India network and established brand equity. Besides, the Company is constantly keeping a check on its SG&A and payroll costs which is likely to help offset the increasing network operating costs due to rise in rural penetration. Thus, we expect Bharti to maintain its EBITDA margin to around 39% for FY10-11E.

Maintain our estimates and target price
We forecast revenue and EPS CAGR of 18% and 15% for FY09-11E, respectively (excluding associate contribution from Indus towers). Based on DCF valuation, we arrive at a target price at Rs. 817 implying a P/E multiple of 14.6x FY11E EPS.

To see full report: BHARTI AIRTEL LIMITED

>STOCKS UPDATE (KARVY)

■ Patel Engineering (Rs309)
BUY - Target price: Rs395

■ Torrent Pharmaceuticals (Rs155)
BUY - Target Price: Rs210

PATEL ENGINEERING
During the quarter ending Mar 09, we expect the company would report the net sales growth of 11.5% to Rs. 8.1bn in Q4FY09 from Rs. 7.26bn in Q4FY08. We expect EBIDTA would go up by 19.5% to Rs. 1.25bn and EBIDTA margin would improve by 100bps to 15.5% on account of higher contribution from high margin order book. We expect RPAT would go up by 36.3% to Rs. 726mn.

During the quarter, the company has bagged an order worth of Rs 7.99bn from the Narmada Valley Development Authority for Bargi Diversion Project in joint venture with SEW Construction Ltd. The company's stake in the project would be around 60% which will translate the order inflow of Rs. 5bn. The project would be executed in three years and provide the EBIDTA margin of around 15%. PEL has an order book position of Rs.71bn as on 31st Dec., 2008 which works out to 3.1x of book to bill ratio at FY09 earnings which is providing strong revenue
visibility for next 3years.

Valuation: At the current market price of Rs 309, the company is trading at PER multiple of 10.2x and EV/EBIDTA multiple of 5.8x on FY10E earnings. We have valued the core business of the company using EV/EBITDA methodology at 6x. Real estate division at 75% discount to value of raw land. Looking at the easing liquidity situation and expected robust order inflow post stable government; we maintain our BUY rating with revised price target of Rs395.

TORRENT PHARMACEUTICALS
The net revenues for the quarter delivered decent growth of 24.3% y-o-y to Rs.4050mn compared to our estimates at Rs.3768mn mainly on back of strong growth witnessed from key markets like Europe, Heumann and rest of the world as well as better than expected results from contract manufacturing business.

Despite reporting strong growth rate in revenues, the company's EBITDA margins dropped to 13% compared to 15.82% in Q4FY08 due to net forex loss to the tune of 15.8mn, higher staff expenses on account of a new extra urban division, higher R & D expenses and bad debts of Rs75mn in Q4FY09. The tax expense (-Rs.22.3mn) includes MAT credit entitlement to the extent of Rs.159.6mn pertaining to first three quarters of the previous year. The exceptional item of Rs.0.1mn is one time expense towards settlement of a research contract claim for out-ofcourt settlement. The profit after tax for the quarter de-grew by 18.8% to Rs.360.9mn over Q4FY08 mainly due to lower operating profit margins and lower other income reported during the quarter.

View & Valuation: We are revising our FY10 net revenue estimates upwards by 3.3% to Rs.18943.6mn on account of better than estimated revenue growth reported for FY09 and improved revenues from Europe, Brazil, US, Russia and RoW markets. We are downgrading our EBITDA margin estimates for FY10 by 80 basis points to 16.9% mainly due to lower margins reported in FY09 (15.9% on account of forex loss of Rs412mn). We are marginally increasing
our FY10 earnings estimates by 1.94% mainly on account of improved revenue traction and better margins compared to FY09. Currently, the stock is quoting at PE of 5.9x on FY10 EPS at Rs.26.3. We continue to rate the stock as 'BUY' and upgrade our price target by 5 % to Rs.210 based on 8x on FY10 basis.

To see full report: STOCKS UPDATE

>MARKET ANALYSIS COMMENT (MERRILL LYNCH)

A spring haircut but only a trim

■ Market in a confirmed correction - should be limited to 10%
The market remains in a base- building process, now going into its eighth month. In the process, the S&P 500 has rallied nearly 40% from the March 6 low (666) and is currently down 5.5% off the May 8 high of 930. It still appears to us the S&P 500 is forming a right shoulder of a head and shoulders bottom (see chart in report). To anticipate a directional change in the market we have overlaid a 40- day moving average and 150-day moving average, and the 40-day is just approaching the 150-day. A sustainable cross of the 40-day above the 150-day would be a positive sign that this correction should remain limited. Additionally, cash levels remain elevated, and AMG inflows into domestic equities are not excessive, and levels are supportive of additional recovery highs.

■ Short levels remain elevated in mega caps and financials
Short levels did fall in late-April by 5% for the first time since December, but levels remain elevated in mega cap stocks and financials. We have adjusted for hedging (selling short) against recent financial equity offerings and short levels are still elevated.

■ Commodities spring back to life
Energy, grains and soft commodities are positioned to continue their rally. Crude oil is in a confirmed rally and natural gas is just breaking to the upside from a Vbottom. A rally is under way in sugar, soybeans and coffee - and wheat and corn could be next. The correction in the US dollar confirms the commodity rally.

■ Levels to watch:
First support on the S&P 500 is 845-825 and this range is within a 10% correction. First support on the DJIA is 7900-7750. Should this be a more sizable correction the second level of support on the S&P is 815-780 and on the DJIA 7435-7260. Our upside targets remain intact with S&P at 1055-1065.

To see full report: MARKET ANALYSIS COMMENT