Tuesday, November 10, 2015

REPORT : Indian specialty chemicals sector

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-DRRD (Neutral, TP Rs 3500): Warning letters from USFDA derail the story: DOWNGRADE to Neutral: Quick points: For detailed report Click here
Ø  Key issues behind the warning letter were documentation practices, laboratory-testing practices, incident reporting and management, hardware control, and other operating procedures. There were no critical observations relating to data integrity.
Ø  The warning letter said that DRRD is verifying its corrective actions (taken to address USFDA observations) and its overall manufacturing procedures through a third party.
Ø  DRRD management indicated that remedial actions based on the warning letter would be implemented across all its plant, including the problematic ones. Hence, it expects remedial action to take considerable time.
Ø  The Srikakulam API plant is the largest among the three plants with linkages for many of its US marketed drugs and future pipeline. DRRD plans to use its Miryalaguda API unit is for third-party API supply and the Duvvada formulation unit is relatively new with minimal revenue contribution. The plants under warning letter currently contribute about 10-12% of its consolidated sales.
Ø  We see meaningful revenue impact in FY17 due to possible postponement of big-ticket approvals (Gleevec, Copaxone, Aloxi, Xeloda, Diprivan) to FY18.
Ø  Additionally, we believe that the supply disturbance to other markets and unanticipated expenses in corrective actions in three sites, would hit DRRD’s operational performance meaningfully.
Ø  We cut our FY16/17 earnings estimates by 9%/20% to Rs 154.1/159.5. An import alert (on failing to resolve facility issues quickly) would pose a risk to our estimates.
Ø  We cut our target multiple to 22x (from 24x earlier) and value DRRD at Rs 3,500 (from Rs 4,760 earlier), implying no near-term upside. We downgrade our recommendation to Neutral from BUY.

-JK Lakshmi Cement: Earnings at risk with delays in capex: For detailed report Click here
Downgrade to Sell; we see earnings momentum missing in the medium term with delay in capex. Revise price target to Rs 305 (from Rs 483 ) implying EV/tonne of ~US$ 70

+ HPCL& BPCL: Q2 was challenging,  Recovery expected in Q3
Ø  BPCL posted profit vs  , HPCL posted Net loss due to inventory loss on marketing margins
Ø  GRM for BPCL /HPCL came at 3.6$/2.75$, BPCL to have  higher GRM in challenging times
Ø  We expect recovery in Q3 as crude is flat and there should not be an inventory loss . simultaneously we expect GRM to increase to 4-5$/perbarell

++Maruti: Expecting  a BUMPER Diwali, our channel checks conform - Stock  remains our top pick to play a recovery in Indian automotive as: quick Points:
Ø  the company is in the midst of a best model cycle,
Ø  strong new products pipeline,
Ø  demand for newly launched vehicles is very strong with our channel checks suggesting waiting period of upto 3 months for Baleno (total 21,000 bookings since launch
Ø  Festive demand remains strong with the company eyeing over 30% growth on Diwali day
Ø  Nexa, we believe is the best way to capture premiumization story in India
Ø  recovery in urban demand,
Ø  robust margin expansion, and
Ø  market share wins.
Ø  Reiterate Buy with a target price of Rs 4,950

+ARBP (BUY PT Rs 940, ~10% upside): Our TOP pick in the pharma space- Quick points: For detailed report Click here
Ø  2H to see a stronger US biz led by recent approvals(20 ANDA ytd), key product launches like Namenda, Abilify etc
Ø  US to also see pick up in the injectable biz with anticipated big ticket drug approvals.
Ø  EU to see profitable growth in FY17
Ø  We retain BUY with TP Rs 940. We also believe that if company’s performance continues to be on the expected line, stock has the potential to re-rate further.

+Ashoka Buildcon Results along expected lines; orderbook strong : For detailed report, Click here
Ø  The management alluded to a healthy order pipeline from NHAI, MORTH, and various state governments – confident of winning Rs 15-20bn of incremental orders in 2HFY16.
Ø  It expects an EPC topline of Rs 20-21bn in FY16 and strong growth of 20-25% in next two years based on the strong orderbook.
Ø  EPC margins have benefitted from lower commodity prices in the last two quarters; it expects them to stabilise in the usual range of 13-14% over the next two years.
Ø  Toll collections should improve at its Sambalpur project by 15-20% on complete CoD and mining activity picking up in the region.
Ø  The company has a fundamentally superior profile and strong execution track record in the roads segment.
Ø  Its recent QIP (Rs 5bn) places it in a highly comfortable situation in terms of funding the new projects that it expects to win. With its recent order wins, the concerns on inferior orderbook have also been adequately addressed.
Ø  We have cut our FY16/17 EPS estimates by 0%/7% primarily to incorporate real-estate sale, lower EPC revenues, and partial stoppage of toll collection on two projects. Our price target of Rs 204 (earlier Rs 210) offers 24% upside from current levels. We maintain BUY.

+/- GNP IN: Glenmark got USFDA nod for Lotrisone cream, To Add+1.5% to Earnings, Maintain Neutral with TP rs 1090
Ø  Glenmark got USFDA nod for Lotrisone cream, which is therapeutic equivalent of Lotrisone Cream, of MSD with market size of $ 82.4mn.
Ø  Since this drug is a limited competition (Four players like Actavis, Fougera, Taro etc) opportunity but already generic since long, 
Ø  W estimate Glenmark can generate incremental revenue/ PAT of US$ 9mn/ US$ 3mn from the drug in FY17, implying ~1.5% incremental earnings (EPS of Rs 0.8/share).
Ø  Considering a potential slippage in US sales estimates in the near term due to price correction and delay in approvals like gWelchol.

+/-OIL India: Cheap Valuations, but lacks  immediate upside trigger :
Ø  Posted lower then exp profits led by lower gross realizations.Quoting at cheap valuation of 8x but lack upside trigger

+Havells India – Operationally Stable: Buy rating with TP of Rs 297 on the stock, we believe that our FY16 numbers should be met comfortably
Ø  Sylvania posted an EBIDTA of € 3.9bn (lower by 15% yoy). While European operations were lackluster, Latin America contributed the entire operating profit in 2QFY16.
Ø  Strong volume growth in the cables business facilitated a gross margin expansion of 140bps yoy. Sales volumes have been strong in both frontline segments viz. Cables & Wire and Switchgear.
Ø  However, a delay in the festive season saw ad spends getting absorbed on a lower revenue base, hence OPM improvement was limited. A build up in working capital in anticipation for a better 2HFY16 saw interest costs rising in the quarter.
Ø  This, coupled with higher tax provisioning resulted in PAT declining 16% yoy on a standalone basis.
 Our Take:
1.       Company is talking about a slight recovery on the ground given that stocking at the depot level is proving to be inadequate currently.
2.       Infrastructure creation (Roads, buildings) is driving demand. Organised real estate remains tepid.
3.       No capitalization of Sylvania, its cash flows will suffice debt repayment.
4.       Capex not curtailed, newer product lines in Wire & Cable are being added.

+Hindalco : Novelis Q2FY16 results – strong operational performance, Profit Outlook improving
Ø  Core PAT improve due to Auto shipment for recent commissioned plane which has high margins
Ø  Volume ramp up on capacity expansion from Europe and Germany has started, which we expect should continue sequentially
Ø  Capex during the quarter stood at US$ 75. The company has guided its capex of ~US$ 400mn for FY16 and expects positive free cash flow for FY16. The company has also began commissioning its 3rd automotive line in US and German auto facility much ahead of its schedule. 
Ø  Net debt stood at US$ 4.96bn as on September 2015 as US$ 5.10bn as on June 2015.

-BOI ( Rating under review)- Reports a disastrous 2Q : Rating under review , would update post analyst meet
Ø  Bank of India reported loss of Rs 11.3bn against our and consensus estimate of Rs 2.3bn and Rs 3.6bn respectively due to higher provisions made on NPAs.
Ø  Slippage during the quarter was Rs62.5bn (1.64%) Vs Rs29.7bn (0.76% in Q2FY15). Consequentially, the GNPA/NNPA increased by 75bps/20bps QOQ to 7.55%/4.31%.  Due to high provision on impaired asset, the PCR improved 293 bps qoq to 55.08%
Ø  NII growth remained flat yoy at Rs30.2bn as loan book declined 3% yoy, NIM declined 2 bps yoy, but improved 17 bps to 2.29%.
Ø  Advances declined 2.9% yoy to Rs 3817bn due to de-growth in corporate, SME and foreign loan book which declined by 1.1%/1%/10.3% yoy.
Ø  Non-interest income declined 22.7% yoy to Rs7.78bn driven by 17% yoy decline in core fee income
Ø  Pre provision profit declined 31% yoy to Rs 14.6bn compared to our estimate of Rs 20.7bn
Ø  Provisions increased to Rs 32.4 bn (Rs 9.6bn in Q2FY15). Of which provisions for NPA was at Rs 30.3 bn (Rs 7.9bn in Q2FY15).
Ø  Fresh restructuring was Rs1.9bn. The outstanding standard restructured asset book declined qoq to Rs187bn (-3.7%).

+Pennar Industries : Inline Numbers
Ø  Revenue up 17% to Rs 3.38, 4% higher than estimates.
Ø  Industrial component revenue up 29% to Rs 167mn and systems and project grew by 49% to Rs 637mn. Steel product revenue down by 8% yoy to Rs 922mn.
Ø  EBITDA up 37% yoy to Rs 333mn, EBITDA margins improved 140bps to  9.8% in Q2FY16 vs 8.4% in Q2FY15.
Ø  PAT increased by 40% Rs 89mn vs estimates of Rs 95mn mainly due to higher tax provision of 45% during the quarter.
Ø  Conference call today at 11.45am; Dial in No: 022-39381073/022-67468358

Our latest Stock Ideas
+ ITD Cementation- Buy TP Rs130 (+26%) a Turnaround story with
* B/S develeraging
* FCF+ve by CY17 
* Rev/EPS CAGR of +34%/99% by CY17 driven by surging order book (4× sales)
+ Margin expansion of 420bps & ROE & ROCE to hit 20%/16% by CY17.
+ PNC Infratech Rs610 (+19%),
* Strong execution track record aided by Strong B/S (D/E to be 0.1x)
* Orderbook focused on Roads & Northern/ Eastern belt -85% of NHAI orders to come in this region
* Rev/PAT CAGR to gr +25%/+33% ovr FY14-17.
+ Print Media to see revival in Advt rev growth in H2FY16 driven by
* Continued ad spent by FMCG; more in print media
* ECom co's to spend Rs2000cr vs 1400 in CY14- print media to gain here too
* Auto with new launches and
* Telecom for 4G launch have to spend on print media.
Thus we expect 12% ad rev CAGR by FY17 leading to 20% earnings CAGR.
Best Buy is the leader,                                                            
*DB (trades @12.5x FY17, TP422/, 40% Upside) & HMVL ( trades at 9x Fy17, TP 327/)
+VRL Logistics Ltd:IC Buy with TP Rs 442(+18%). CMP Rs 374 - Hitting the growth highway- BUY For detailed report Click here
 (1) predictable and strong operating margin, (2) scale up in operating cash flows, (3) healthy return ratios, and(4) high earning visibility (CAGR of 33% , FY15-17).
Outlook and valuation :
At its CMP of Rs. 374, the company trades at a FY16/17 P/E of 26.9x/21.2x.
* Over FY15-17. We expect CAGR of Rev/fleet addition + 12% to Rs 21bn /+ 6%.
* Revenue growth would primarily come from goods transport business (13%CAGR) while bus operations should see 9% CAGR.
* Higher RoCE, RoE, and FCF of Rs 1.5/1.7bn in FY16/17 should lead to a re-rating.
* We assign a P/E of 25x to our FY17 earnings to arrive at our TP of Rs 442.
+HAVL: BUY, TP 297, 15% upside.
*Pan India presence, sizeable mfg operations & wide reach & savvy mktg.
*Has strong cash conversion by securitising domestic receivables.
*Near zero delinquencies, leads to the co. having a -ve working capital cycle.
*Assign a 28X to the stand alone FY17 profit of Rs. 6 bn & a 6X EBITDA of Rs. 475mn to Sylvania's FY17.                                            
+Finolex: Buy Value at 18X FY17, TP of 323, 39% upside
*One of largest dist networks in domestics Electric Wires & Cables (EWC).
*Planned 1.25 bn capex in FY16 for fans & expansion of core EWC capacity.
*Finolex should  be able to leverage its extensive channel network to grow revenues & cashflows.
*Derivatives contract losses behind. Value at 18X FY17, TP of 323, 39% upside.      

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