Investor's Eye
[February 20, 2013] | | |
| Summary of Contents
SHAREKHAN SPECIAL Q3FY2013 Pharma earnings review
Strong boost from the US business Key points -
In line performance for universe: Most of the players in Sharekhan's pharmaceutical (pharma) universe reported performance in line with our expectation during Q3FY2013 both in terms of revenues and profit. However, on aggregated basis, the universe reported a 25.7% Y-o-Y rise in its net sales as compared with our estimate of 23.6% during the quarter, mainly led by a strong performance in the USA and emerging markets. The revenue growth was mainly led by Lupin Pharmaceuticals (Lupin; up 38% year on year [YoY]), Glenmark Pharmaceuticals (Glenmark Pharma; up 37% YoY) and Sun Pharmaceuticals (Sun Pharma; up 33% YoY) on back of a strong performance in the USA. The operating profit margin (OPM) of the pharma universe got expanded marginally by 73 basis points YoY to 26.3% (vs our estimate of 25.3%) during the quarter. However, the adjusted net profit of the universe witnessed a restricted growth of 17.8% YoY, mainly due to the higher fixed cost (ie interest cost, which went up by 24.6% YoY) and effective tax rate (at 22.6%; up 968 basis points YoY). The adjusted net profit of the pharma universe was in line with our estimate for the universe. -
Strong performance in USA and emerging markets augurs well: During the quarter, our pharma universe reported a 45.9% Y-o-Y rise in the US business, mainly driven by the business of Lupin (up 68% YoY) followed by Aurobindo Pharma (up 57% YoY), Sun Pharma (44% YoY) and Glenmark Pharma (up 37% YoY). During the quarter, the key products like Singulair (market size $3.5 billion, launched by Aurobindo Pharma, Glenmark Pharma and Torrent Pharmaceuticals [Torrent Pharma]), Maxalt (launched by Sun Pharma and Glenmark Pharma) and a few contraceptives by Lupin and Glenmark Pharma were launched that helped these players post a strong performance. Sun Pharma's performance was boosted by a strong show by its US subsidiary, Taro Pharmaceutical (Taro). The emerging markets (excluding India) posted a 34% Y-o-Y rise in revenues for the pharma universe during Q3FY2013, mainly driven by Torrent Pharma (up 62% YoY), Glenmark Pharma (up 49% YoY) and Lupin (up 44% YoY). -
Mixed performance from CRAMS business; negative surprise from Cadila Health: Players engaged in contract research and manufacturing services (CRAMS) business reported a mixed performance during the quarter. Though Divi's Laboratories (Divi's Lab; up 10.6% YoY) and Cadila Healthcare (Cadila Health; revenues from joint ventures; up 4.2% YoY) reported a weaker than expected revenues from the CRAMS business, players like Dishman Pharmaceuticals (Dishman Pharma; up 23.8% YoY on strong performance of Carbogen Amics) and Torrent Pharma (up 25.2% YoY from low base) reported revenues in line with expectation. -
Growth guidance by management and our estimate remain intact in most cases: Except players like Cadila Health and Torrent Pharma, most of the players performed in line with our expectation during M9FY2013. The managements of most of the players have kept their revenue guidance intact (except Opto Circuits, which refrained from giving any guidance in the midst of poor performance). Therefore, except a little fine-tuning, we have kept our earnings estimate intact in most of the cases. -
Our top pick: Sun Pharma, Dishman Pharma and Aurobindo Pharma are our top picks. Q3FY2013 Capital Goods & Engineering earnings review
Slowdown evident; hopes pinned on policy actions Key points -
Mixed revenue growth trend: Our coverage universe of capital goods and engineering companies showed a subdued sales growth of 4% year on year (YoY) in Q3FY2013. There was clear distinction between the companies that recorded a healthy sales growth and the companies whose sales declined during the quarter. PTC India (PTC), V-Guard Industries (V-Guard) and Larsen and Toubro (L&T) showed a robust top line growth of 41%, 36% and 10% respectively. On the other hand, Thermax, Crompton Greaves (CG) and Bharat Heavy Electricals Ltd (BHEL) recorded a decline in their sales growth during Q3FY2013. -
Margin pressure continued, operating profit declined by 14%: During Q3FY2013, most of our coverage companies witnessed margin pressure, except PTC and Thermax both of which managed to sustain their margins at the previous year's level. Nevertheless, broadly companies found it difficult to maintain margin on account of a tough macro-economic environment which led to intense competition and a higher fixed cost. The operating profit reported by our universe showed a decline of 14% YoY (on a sales growth of 4%), which was also 18% below our expectation. A large part of the underperformance of our universe could be attributed to BHEL and CG. BHEL's performance was largely affected by slow order execution whereas restructuring expenses dented CG's operating profit to a large extent. -
Sticky working capital trend pushed up interest cost; PAT declined by 10%: The interest cost remains a major concern for our universe, as the issue of sticky working capital (which forced these companies to raise debt) persists. The interest cost for the universe grew by 37% YoY and 10% quarter on quarter (QoQ), largely contributed by the heavyweights BHEL and L&T. All companies except PTC recorded a higher interest cost YoY while their operating profit declined in Q3FY2013 compared with Q3FY2012. However, an incremental other income helped to some extent and largely negated the higher interest cost of the universe, again thanks to the heavyweights BHEL and L&T. Effectively, the profit after tax (PAT) of our coverage universe declined by 10% YoY in Q3FY2013 vs a 14% decline in the operating profit. If we look at the PAT ex CG, then the fall is of around 5% only (on a decline of 10% in the operating profit). -
Order inflow revival gives hope, though order backlog yet to reflect that: The order inflow was seen healthy during the quarter despite a lacklustre domestic environment--a ray of hope, in our view. The order inflow of our universe grew by 19% YoY as capital goods behemoth L&T received an order inflow of Rs19,545 crore in Q3FY2013, showing a growth of 14% YoY. Also, Thermax supported with close to Rs700 crore of incremental order inflow with a growth of 118% YoY (achieved on a low base). On the contrary, the order inflow for BHEL was poor at around Rs2,000 crore, which is the lowest in many quarters. We believe the order inflow outlook for BHEL remains weak owning to several headwinds affecting the power sector. CG's consolidated order inflow also declined by a third YoY.
Though the order inflow trend was better in Q3FY2013, but the cumulative order backlog remained tepid (a 5% decline YoY) till M9FY2013, as the order backlog contracted by 22% in BHEL. This is reflected in the declining book/bill ratio of the company. The order backlog position of our universe stood at Rs290,456 crore during the quarter under review. -
Positive triggers for the sector: The order awarding activity could pick up triggered by: (1) a cut in the interest rates; (2) an uptick in the demand environment followed by positive policy actions; (3) a pick-up in the execution of infrastructure projects with the streamlining of the process (approvals) -
Negative triggers for the sector: The capital goods and engineering stocks continue to face risk from the continuous competitive pricing pressure amid a slow demand environment due to policy inaction, the deadlock in the power sector, and the continuing sluggishness in the execution of the infrastructure projects. -
Outlook: Though we see an improvement in the order inflow (which spawns hope), but it is difficult to tell if the sector has bottomed out. Nevertheless, improved sentiment combined with more concrete policy actions from the government would boost this sector's performance. The management commentary of some of the companies reflected that these companies are pinning their hopes on the recent policy announcements which would eventually translate into better order inflow and environment for the sector. A declining interest rate scenario would also be a positive indicator which could act as a catalyst for the investment cycle. We believe PTC (on which we have a Buy recommendation) has a better visibility with higher tolling volume and long-term volume as well as sustained purchase of merchant power by the state electricity boards (SEBs) during the pre-election period. V-Guard is also poised to deliver growth driven by consumption momentum along with the expansion of its product line and geographies. However, currently we believe the positives are in the price. Hence, we retain our price target and Hold recommendation on V-Guard. Q3FY2013 Cement earnings review
Margin pressure dents earnings In Q3FY2013 the earnings of most of the domestic cement companies declined year on year (YoY) on the back of a surge in the freight cost (the fuller impact of the increase in the diesel price and railway freight was felt in the quarter) and a muted growth in the volume. Overall, the earnings of the Sharekhan cement universe declined by 11.7% YoY (largely on account of margin contraction). Going ahead, with a likely improvement in the demand environment and the recent correction in the price of imported coal, we believe the operating performance of the cement companies will improve in the next couple of quarters. Our top pick in the sector is UltraTech Cement (UltraTech) among the large cement companies on account of its strong balance sheet and attractive valuation compared with the other pan-India players like ACC and Ambuja Cement. Among the mid-sized cement companies we continue to prefer Orient Paper & Industries (Orient Paper) due to its attractive valuation and the unlocking of value through the de-merger of its cement business. -
Aggregate revenues grew by 10% YoY: During the quarter under review, the aggregate revenues of the cement companies in Sharekhan's universe grew by 10% YoY to Rs18,949.7 crore. The revenue growth was supported by a 3.2% uptick in the average blended realisation and a volume growth of 3.3% whereas the other businesses like power (in Shree Cement), viscose staple fibre (VSF; in Grasim Industries [Grasim]) and electrical appliances (in Orient Paper) accounted for the rest of the growth in the revenues. -
Mixed volume growth performance, India Cements and Madras Cements take the lead: India Cements and Madras Cements reported a volume growth of 10.7% and 10.5% YoY respectively due to a low base effect and the stabilisation of their new capacities. On the other hand, Shree Cement posted a volume growth of 5.2% whereas Orient Paper posted a decline of 1.5% in its volume YoY. The pan-India large players like Ambuja Cement also disappointed with a volume decline of 2.8%. The volume of ACC remained largely flat YoY. -
Cumulative realisation increased by 3.2% YoY but corrected sequentially: The cumulative realisation of the cement makers under our coverage increased by 3.2% YoY in the quarter. However, on a sequential basis the cement prices corrected across the country by Rs5-8 per bag on an average. However, the cement prices have recovered during January and February 2013. Hence, the current cement price is marginally higher compared with the average cement realisation of Q3FY2013. -
Cost pressure offsets benefit of better realisation; margin contracted sharply: On the operating profit margin (OPM) front, the cumulative OPM of the cement companies under our coverage contracted by 247 basis points to 20.5% during the quarter under review. The margin contracted on account of a surge in the freight cost due to the fuller impact of an increase in the diesel price and railway freight. Hence, the positive impact on the margin arising from the better realisation got offset by the cost pressure and resulted in an overall contraction in the OPM. In the Sharekhan cement universe, companies like Orient Paper, JP Associates and Madras Cements posted margin contraction in the range of 450-900 basis points YoY whereas Shree Cement witnessed relatively less pressure on the margin. The overall OPM of UltraTech marginally expanded by 14 basis points. -
Earnings declined by 11.7% YoY: The cumulative earnings of the Sharekhan cement universe declined by 11.7% YoY largely on account of a sharp contraction in the margin. Among the companies under coverage, Orient Paper, JP Associates and India Cements displayed earnings decline of 53-65% YoY while companies like UltraTech witnessed relatively less pressure on their earnings. On the other hand, companies like Shree Cement and Madras Cements posted an impressive earnings growth. However, the robust earnings growth of Shree Cement was largely supported by a low base effect.
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