>PFIZER: benefits from restructuring (Q4FY12 RESULTS)

Pfizer’s Q4FY12 results were below our expectations. The company reported 17%YoY sales growth against 15% for the industry. The results of the two quarters are not comparable as the previous quarter of 4m period ended 31st March’11. Pfizer’s EBIDTA margin declined by 400bps YoY from 22.8% to 18.8% due to sharp increase in imported material cost with the depreciation of rupee. Pfizer has written off stocks and sales returns of Rs150mn of its insulin formulations. The company’s other income grew by 15%YoY from Rs206mn to Rs237mn. Net profit grew by 2%YoY. The company has hived off its animal healthcare (AHC) business into a 100% subsidiary for Rs4.4bn in line with the global divestment. Pfizer is a debt-free company and has cash per share of Rs290. We have retained Buy rating for the scrip with a target price of Rs1364 (based on 17x FY14E EPS of Rs80.2).

Strong revenue growth: During the quarter, the pharma business (80% of revenues) grew by 15%YoY, AHC (13% revenues) grew by 11% and services income (7% revenues) grew by 17%. The growth of pharma business was in line with the market growth of 15%. Pfizer has written off stocks and sales returns of ~Rs150mn of its insulin business.


Margin under pressure: Pfizer reported 400bps drop in EBIDTA margin from 22.8% to 18.8% due to sharp increase in material cost. Pfizer’s material cost increased by 670bps from 26.6% to 33.3% of revenues due to the increase in cost of imported raw materials, with the depreciation of rupee. The PBIT margin of pharma business dropped by 200bps YoY from 27.0% to 25.0%. PBIT margin of AHC declined by 980bps from 28.3% to 18.5%. However, the PBIT margin of services income grew by 190bps from 8.0% to 9.9%.


New products to drive growth: During the quarter, Pfizer introduced 7 branded generic products. With this the company has launched 21 branded generic products in the domestic market. These products are likely to be future growth drivers of the company.



Hives off AHC business: Pfizer has hived off its AHC business into a separate 100% subsidiary for a consideration of Rs4.4bn. Around 250 MRs will be transferred along with the business. The company will pay long-term capital gains tax of ~21% on this transaction. AHC is a low margin business and hence the overall margin is likely to improve.


Attractive valuations, Reiterate Buy: We expect Pfizer to benefit from the launch of branded generics and hiving-off of low margin AHC business. We have revised the EPS estimates downwards by 9% for FY13 and 13% for FY14. At the CMP of Rs1164, the stock trades at 16.4x FY13E EPS of Rs71.1 and 14.5x FY14E EPS of Rs80.2. We retain the Buy rating for the scrip with a target price of Rs1364 (based on 17x FY14 earnings of Rs80.2).





RISH TRADER

>SINTEX INDUSTRIES

For 4QFY2012, Sintex reported a 30.1% yoy decline in its net sales to `1,024cr. The company’s EBITDA declined by 45% yoy to `160cr and its EBITDA margin contracted by 415bp yoy to 15.6%. PAT came in at `91cr, down 46% yoy. We maintain our Buy recommendation on the stock.


Lower monolithic segment’s revenue impacts earnings: Sintex’s consolidated net sales declined by 30.1% yoy to `1,024cr during 4QFY2012, lower than our expectation. The decline in revenue was mainly led by the monolithic segment, which reported a dip of 54% yoy to `264cr; and flat performance by the storage tanks segment at `59cr. The domestic custom moulding segment reported 22% yoy growth to `266cr, while the overseas custom moulding reported a 71% yoy decline in revenue to `91cr. Sintex’s 4QFY2012 consolidated EBITDA stood at `160cr, down 45% yoy. OPM for the quarter stood at 15.6%, down 415bp yoy (up 158bp qoq) on the back of margin expansion in all segments. During the quarter, Sintex booked other income of `12cr (up 35% yoy). Consequently, PAT came in at `91cr, down 46% yoy, significantly below expectation.


Outlook and valuation: We have downgraded our earnings estimates for FY2013E and FY2014E on account of slowdown in the monolithic segment. Sintex will have low net debt/equity of 0.7x, by FY2014E. The stock is currently trading at 3.3x FY2014E EPS and 0.4x FY2014E P/BV only, which we feel is very attractive. Over the last five years, Sintex has traded at an average one-year P/E of 11.4x, which makes current valuations attractive. Moreover, further integration of foreign subsidiaries and acquisition in the monolithic segment will act as key catalysts for the stock. We maintain our Buy recommendation on the stock with a target price of `79.



Plastic segment pull downs EBITDA margin on a yoy basis
During the quarter, the plastic segment’s EBIT margin declined by 434bp yoy but\ improved by 102bp qoq on account of a better product mix. EBIT margin in the textile segment contracted by 525bp yoy but expanded by 203bp qoq owing to pick-up in demand for high-end fabrics and better pricing. In our view, quarterly margins are not a fair indicator of the company’s performance due to lumpiness of its business.


To read report in detail: SINTEX INDUSTRIES

>PETROL PRICE HIKE: Heralding Stagflation? (May 24, 2012)

State-owned oil companies increased petrol prices by Rs7.50/litre with effect from Wednesday midnight. They hiked petrol prices by Rs6.28/litre excluding local sales tax or VAT. The price hike came just a day after Prime Minister Mr. Manmohan Singh called for implementation of strict measures to help the economy. The government had decontrolled petrol prices in June 2010 and since then they were hiked just once in November 2011. While the hike was on the cards and expected, the quantum of the hike has surprised all. While the move may bring some short-term reprieve for oil marketing companies (OMCs) grappling with higher under-recoveries, it would lead to inflationary pressure as other administered prices would also increase even as Wholesale Price Index (WPI) in April 2012 stood at 7.2% YoY and food inflation at 10.5%. We have factored in such price hikes for our FY13 WPI inflation estimate of
8.5%. The immediate inflationary impact may be limited on account of petrol having a lower weight in WPI.


The hike in petrol prices by state-owned oil companies should not merely be viewed in isolation but as part of a broader strategy of increasing administered prices and reducing subsidies. The petrol hike will have no impact on fiscal deficit and hence we can expect diesel, public distribution scheme kerosene, domestic liquefied petroleum gas (LPG), urea, and electricity prices also to be hiked in future as the government wants to align domestic prices with global prices. Such a strategy, policy makers believe, will result in short-term spike in inflation but will thereafter result in higher GDP growth. We believe the rise in administered prices will result in higher inflation, higher interest rates, and decelerating demand with no assurance of laying a foundation for future economic growth. Indeed, stagflation may be the likely fallout of such a policy. We reiterate our negative stance on the banking sector and view this development as a major setback for sustained efforts by the Reserve Bank of India (RBI), which has been struggling to contain inflationary pressures.


Oil & Gas: The steep petrol price hike could bring some respite to the financials of OMCs, but what is important is the intention behind the price hike – is it meant to ease the financial stress on OMCs or is an indicator of forthcoming bold decisions for other regulated petroleum products. India is currently facing a double whammy of elevated crude oil prices and a sliding rupee and in such a state, without a hike in the prices of regulated petroleum products, the overall under-recoveries may touch Rs2,000bn(US$36.36bn) in FY13E compared to Rs1,385bn(US$28.76bn) in FY12. The government, in the 2012-13 budget, mandated only Rs430bn of oil subsidy for FY13E and showed its intention to rein in subsidy to 2% of GDP and so keeping in mind the strain on government finances, we believe the hike in the prices of regulated petroleum products is imminent. We have already factored in Rs5/litre hike in the price of diesel, Rs50 hike per LPG cylinder and Rs3/litre hike in kerosene in our FY13E under-recoveries estimate. We believe the petrol price hike and restricting upstream companies’ subsidy burden at ~40% in FY12 could bring some semblance of positive undertone for companies in our coverage universe, but we will review our ratings and target prices only after the likely revision in the prices of regulated petroleum products.


To read report in detail: PETROL PRICE HIKE

>RAMKRISHNA FORGINGS

RKFL results were almost in-line with our estimates. It reported net sales of INR 1428 mn, up by 14.5% YoY  and 10.9% QoQ & profit of INR 80 mn, up by 5.9% YoY and 43.1% QoQ. EBITDA margins at 16.01% contracted  by 83 bps YoY, led by higher fuel expenses. We introduce FY14 estimates & roll-forward our valuations by  12 months and retain our BUY recommendation.



Results in-line with our estimates
In Q4FY12, RKFL has reported net sales of INR 1428 mn, up by 14.5%  YoY & 10.9% QoQ. PAT at INR 80 mn was up by 5.9% YoY & 43.1% QoQ. Overall capacity utilization improved to 90.6% in FY12 vis-àvis 77.3% in FY11. Its steel forging unit is operating at full capacity utlisation levels. Utilization in case of ring rolling (which is a high  margin product) has improved to ~79% vis-à-vis ~69% in FY11. It has also taken a small price increase in Q4FY12 to offset increase in input costs.



Contraction in EBITDA Margins
EBITDA margins at 16.01%, contracted by 83 bps YoY & were up  by 40 bps QoQ. Foreign exchange losses of INR 15 mn on exports  receivables reported in Q3FY12 has also been reversed in this quarter. Raw material to sales stood at 53.5%, up by 282 bps YoY & down by 367 bps QoQ. Power &  fuel expenses increased to 9.2% of net sales increasing by 197 bps YoY & 37 bps QoQ.



Capacity expansion plans
RKFL is looking to further enhance its product portfolio with  plans to manufacture front axle beams & crankshafts used in CVs. Total investment in the project would be INR 5000 mn, which would be financed through debt-equity ratio of 65:35. RKFL expects financial closure of the same to come by the end of June 2012 & expects the capacity to become operational by FY15.


Exports
RKFL has tied up with two new players in Turkey & Mexico for exports in Q4FY12. This will lead to better utilization of its ring rolling capacity leading to improved realizations. We expect exports to contribute ~10% in FY13E & ~12.5% in FY14E vis-à-vis 9% in FY12.


Outlook & Valuation
We expect growth in H2FY13 to be better than the 1st half. Given the expected slowdown in the CV segment, we expect the top-line growth to slow to ~10% in FY13E & 12.5% in FY14E. With current capacity almost getting exhausted, tepid outlook of the CV sector in the near term & 2 years time for new capacities to become operational, we retain our BUY recommendation with a revised target of INR 189 in 18 months, implying a discount of 5.5x FY14E EV/EBITDA & 10x FY14E earnings.


To read report in detail: RKFL
RISH TRADER