Investor's Eye: Pulse - RBI's mid-quarter policy review; Update - Tata Consultancy Services, Sun Pharmaceutical Industries

 

Investor's Eye [December 18, 2012]  Sharekhan www.sharekhan.com

Summary of Contents     PULSE TRACK RBI's mid-quarter policy review In the mid-quarter policy review, the Reserve Bank of India (RBI) surprised the markets by holding the repo and the cash reserve ratio (CRR) rates as the markets were expecting a 25-basis-point CRR cut. According to the RBI, the recent policy initiatives taken by the government have improved sentiments in the market but the pitfalls in the global economy remain, especially the US fiscal cliff and contagion risks to other economies. While the liquidity has tightened due to rising government balances, the RBI expects to manage it via the open market operations (OMOs). Further, the RBI expects the inflation to moderate in Q4FY2013. The RBI has also reiterated its guidance of easing monetary policy by the beginning of Q4FY2013 in order to address the growth concerns.     STOCK UPDATE Tata Consultancy Services Recommendation: Hold Price target: Rs1,364 Current market price: Rs1,211 Expect soft Q3FY2013 but management remains confident We attended the pre-result analyst meet of Tata Consultancy Services (TCS). The management has indicated at a soft volume performance in the seasonally weak December quarter impacted due to furloughs in the USA and Europe and also due to the Hurricane Sandy in the USA. The company's margin would also be soft due to lower volume and addition of fresher recruits. However, the management has reiterated its margin aspiration at 27% for the full year. Overall, for FY2013, the management commentary on the demand environment remains intact, with the company confident of comfortably posting industry-leading growth. The commentary exhibits more confidence than some of its peers. For CY2013, the management expects stable information technology (IT) budgets with more clarity emerging in January next year. We maintain our preference of TCS over Infosys. In the large-cap space, we maintain our preference of TCS and HCL Technologies while in the mid-cap space, we prefer Persistent Systems and CMC. We maintain our Hold rating on the stock with a price target of Rs1,364. Volume growth to remain soft sequentially owing to furloughs in December  The management indicated at a soft volume growth for Q3FY2013 as compared with Q2FY2013 (4.9% volume growth) on account of the furloughs in December. Seasonally telecom, manufacturing and hi-tech sectors have furloughs in December, which impacts the volume growth. However, this time around, banking and financial services (BFS) have also seen the furlough and that will have a further impact on the sequential volume growth. Impact of Hurricane Sandy would also lead to softer volume expectation by the company for the quarter.  The pricing environment remains stable with material irrational behaviours from the clients. No delay has been observed in the client's decision making during the quarter. Margin to fall QoQ owing to absence of currency benefits and lower volume growth.... The management indicated at a decline in the margin on a sequential basis in Q3FY2013 on account of absence of currency benefits, higher sub-contracting costs and addition of fresher recruits in the quarter. In Q2FY2013, the average exchange rate was Rs54.8 to the US dollar, whereas, for the December quarter, it is expected to be around Rs54.4. Further, the company's lower volume growth would also impact the margin for the quarter.  The management maintained its margin aspiration at 27% for FY2013 and for the coming years. View: The commentary from the management of TCS for the seasonally weak Q3FY2013 in terms of volume and margin is in line with the expectation. Overall, for FY2013, the management commentary on the demand environment remains intact, with the company confident of comfortably posting industry-leading growth. The commentary exhibits more confidence than some of its peers. For CY2013, the management expects stable IT budgets with more clarity emerging in January next year. We maintain our preference of TCS over Infosys. In the large-cap space, we maintain our preference of TCS and HCL Technologies while in the mid-cap space, we prefer Persistent Systems and CMC. We maintain our Hold rating on the stock with a price target of Rs1,364.     Sun Pharmaceutical Industries Recommendation: Buy Price target: Rs775 Current market price: Rs736 Price target revised to Rs775 Key points Sun Pharma to acquire URL Pharma, annual revenue potential of $180-190 million: Sun Pharmaceutical (Sun Pharma)'s US arm Caraco Pharmaceutical (Caraco) has entered into a definitive agreement with Takeda Pharmaceuticals (Takeda) to buy the non-Colcrys business (which is mainly a generic business) of URL Pharma, Inc (URL Pharma; a wholly owned subsidiary of Takeda) for an undisclosed consideration. URL Pharma's non-Colcryl business has 288 abbreviated new drug application (ANDA) approvals from the US Food and Drug Administration (USFDA). It has the potential to generate $180-190 million in FY2013 with an annual growth rate of 8-10%. This is set to give Sun Pharma incremental revenues and strengthen its products pipeline.  Acquisitions to fast track growth: This is second strategic acquisition by Sun Pharma within a span of two months in the US market, where it does business through its two major subsidiaries, namely Taro Pharmaceutical (Taro) and Caraco. The company acquired the US-based DUSA Pharmaceuticals, Inc (DUSA Pharma) in November 2012 for $230 million to strengthen its product portfolio in the dermatology segment. Both these acquisitions are set to give Sun Pharma additional revenues of $220-230 million, which will fast track its growth. Although, considering the weaker margin in generic business of URL Pharma due to the additional costs to increase the sales and distribution, the overall operating margin would tend to erode marginally, we expect the net profit to record an incremental growth of 5-6% in FY2014.  We revise estimate and price target: We have revised our earnings estimate up by 4% for FY2014, to factor the impact Sun Pharma had due to the acquisition of URL Pharma. Consequently, our price target stands revised up by 4% to Rs775 (23x FY2014E). We maintain Buy rating the stock. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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