Investor's Eye: Update - Torrent Pharmaceuticals (Growth revives), Automobiles - (Tracking winning bets in a slowdown); MF - Sharekhan's top equity mutual fund picks, Sharekhan's top SIP fund picks

 

Investor's Eye [September 20, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Torrent Pharmaceuticals Cluster: Ugly Duckling Recommendation: Buy Price target: Rs760 Current market price: Rs678 Growth revives Key points Favourable currency and focus on developed markets help to revive growth in FY2012: Torrent Pharmaceuticals (Torrent Pharma) reported an impressive rise of 22.3% in the net sales to Rs2,594 crore in FY2012. The growth was achieved mainly on a 39% rise in the revenues of the international business because of new product launches and favourable currency movement. The revenue growth was better than that in the previous four years. The operating profit margin (OPM) expanded by 260 basis points to 17%, which was better than the five-year average of 15.7%. The adjusted net profit jumped by an impressive 57.7% year on year (YoY) to Rs391.4 crore, which was the highest in five years.  Weaker performance in domestic market; management expects growth to pick up in FY2013: The company reported a revenue growth of 8% from the domestic formulation business, which accounts for nearly one-third (34%) of its operating income. The growth was weaker because of an industry-wide slowdown in the acute segments, which constitute 38% of the domestic portfolio. However, the growth is expected to pick up in FY2013, as the industry has shown a better growth in the acute segments in the recent months.  Strong operating performance helps achieve stronger return ratios: A healthy rise in the profits, tighter working capital and relatively lower capital expenditure (capex) during the year resulted in stronger cash flows from operations and investments. This, in turn, also helped the return on capital employed (RoCE) to jump to 29.1% in FY2012 from 21.8% in FY2011. The return on equity (RoE) jumped to 35.3% in FY2012 from 26.8% in FY2011. These ratios are comparable with those of the other large-cap companies. Pricing policy and forex are key risks: The implementation of the new pharmaceutical (pharma) policy in its current draft form, which substantially covers chronic drugs, would hurt the company's domestic business materially. As the company hedges its foreign exchange (forex) exposure through forward contracts, a change in the forex rate is a key risk for the company.  We maintain estimates, price target and recommendation: We maintain our earnings per share (EPS) estimates of Rs52.3 and Rs65.5 for FY2013 and FY2014 respectively. We maintain our price target of Rs760 (implies 13x FY2014E EPS) and Buy rating on the stock.    SECTOR UPDATE Automobiles Tracking winning bets in a slowdown We believe that investors would be better off focusing on those automobile companies that are able to hold and protect their market share when the broader industry slows down. These companies would be better off in a medium-to-long run once the demand revives.  We also focus on new disruptive products/segments that, on the one hand, tend to outperform the traditional categories but, on the other hand, reveal the emergence of new leaders in the niche categories or even indicate the formation of future mega categories. Top sectoral picks: Maruti Suzuki, Mahindra and Mahindra (M&M); top company to avoid: Hero MotoCorp Passenger cars: Maruti Suzuki (Maruti) is the preferred player because it seems most prepared to ride the diesel car boom with a 1.3-lakh order backlog. The launch of an 800cc car around Diwali and the new CNG-petrol dual variants across products would provide additional growth impetus. We have a target of Rs1,364 on the stock, but recommend Hold on it as the stock faces short-term risks of a poor Q2FY2013 performance, increased wage bill after the lock-out, volatile yen and stress on petrol cars. Two-wheelers: Honda Motorcycle and Scooter India (HMSI) is experiencing polarised demand in the slow growing domestic motorcycle industry. While the excitement around the Dream Yuga was understood, we found the rub-off effect on Honda Shine and Honda Unicorn in the 125-150cc range as well, thereby taking away significant share from Hero MotoCorp. Bajaj Auto, on the other hand, is faced with the customer downtrading issues. Avoid Hero MotoCorp; We have a Hold reco Bajaj Auto. MHCV-trucks: Tata Motors underperformed the overall medium and heavy commercial vehicle (MHCV) truck segment in the first four months but recovered sharply in August 2012 across categories, barring the 7.5-12 ton category. The August 2012 performance needs to be monitored because it may turn out to be an aberration. The other key competitors, Ashok Leyland Ltd (ALL) and Volvo-Eicher Commercial Vehicles (VECV), gained ground on the relatively better regional performance and new product introduction. We have Neutral view on Tata Motors and a Hold Recommendation on ALL. Utility vehicles: We expect M&M to deliver a strong growth in the medium term as Quanto and Rexton would make it the most entrenched player in the utility vehicles (UV) space. We have a Buy on the stock with a target of Rs849/share.   MUTUAL GAINS Sharekhan's top equity mutual fund picks Large-cap funds Mid-cap funds Multi-cap funds Principal Large Cap Fund SBI Magnum Sector Funds Umbrella - Emerg Buss Fund Reliance Equity Opportunities Fund Tata Pure Equity Fund HDFC Mid-Cap Opportunities Fund  Tata Dividend Yield Fund  UTI Wealth Builder Fund - Series II IDFC Sterling Equity Fund  Mirae Asset India Opportunities Fund - Reg Franklin India Bluechip Franklin India Prima Fund UTI Opportunities Fund ICICI Prudential Focused Bluechip Equity Fund - Ret Reliance Long Term Equity Fund  BNP Paribas Equity Fund Indices Indices Indices BSE Sensex BSE MID CAP BSE 500 Tax saving funds Thematic funds Balanced funds Reliance Equity Linked Saving Fund - Series I Birla Sun Life India GenNext Fund - Growth HDFC Balanced Fund Reliance Tax Saver (ELSS) Fund UTI India Lifestyle Fund - Growth HDFC Prudence Fund  Franklin India Taxshield Canara Robeco FORCE Fund - Ret - Growth Tata Balanced Fund Canara Robeco Equity Taxsaver Fidelity India Special Situations Fund - Growth ICICI Prudential Balanced  BNP Paribas Tax Advantage Plan Reliance Media & Entet Fund - Growth Canara Robeco Balance Indices Indices Indices CNX500 S&P Nifty Crisil Balanced Fund Index Fund focus IDFC Sterling Equity Fund Sharekhan's top SIP fund picks Large-cap funds Multi-cap funds  Birla Sun Life Top 100 Fund  Reliance Equity Opportunities Fund Tata Pure Equity Fund UTI Opportunities Fund SBI Magnum Bluechip Fund Tata Dividend Yield Fund  Franklin India Bluechip BNP Paribas Equity Fund Birla Sun Life Frontline Equity Fund - Plan A  Tata Ethical Fund  BSE Sensex BSE 500 Mid-cap funds  Tax saving funds  SBI Magnum Sector Funds Umbrella - Emerg Buss Fund BNP Paribas Tax Advantage Plan HDFC Mid-Cap Opportunities Fund Reliance Tax Saver (ELSS) Fund  Franklin India Prima Fund Franklin India Taxshield DSP BlackRock Small and Midcap Fund ICICI Prudential Taxplan Reliance Long Term Equity Fund Religare Tax Plan BSE Midcap S&P Nifty Fund focus Birla Top 100 Fund Click here to read report: Investor's Eye Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

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