| Summary of Contents STOCK UPDATE Mahindra & Mahindra
Recommendation: Buy
Price target: Rs1,046
Current market price: Rs883 Q3FY2013 results-First cut analysis Result highlights Q3FY2013 sees a weaker operating performance
Mahindra & Mahindra (M&M) delivered a weak operating performance in Q3FY2013 mainly due to a margin pressure in the automotive segment. The margin in the automotive segment at 8.5% was 70 basis points lower than our estimate. The company maintained its margin in the tractor segment despite the challenging environment. The company reported a profit before tax (PBT) of Rs1,059 crore, which was 7% below estimate. However, the company reported lower tax expenses, which resulted in a profit after tax (PAT) of Rs836 crore, which was broadly inline with our estimate of Rs844 crore. Tractor demand to remain sluggish in near term
With the rabi rain lower than expected, the industry witnessed a negative growth during Q3FY2013 as against the expectation of a flattish growth. We expect the tractor sales to remain under pressure in the near term. Automotive demand to remain strong
The company's automotive segment is witnessing a strong double-digit demand on back of a strong growth for the utility vehicles and light commercial vehicles. With new launches in the automotive segment (a sub-four metre Verito and an electric car) and continued outperformance of the utility vehicles, the automotive demand is expected to remain strong. Valuation
We are keeping our Buy recommendation and the price target unchanged as of now. We would review our estimate in the subsequent note. Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Rs775
Current market price: Rs744 Q3FY2013 results-First cut analysis Result highlights -
Q3FY2013 results in line with expectation: Sun Pharmaceuticals (Sun Pharma) reported a 33% year-on-year (Y-o-Y) rise in net sales to Rs2,852 crore, which was line with our expectation of Rs2,850 crore. The operating profit margin (OPM) improved marginally by 28 basis points year on year (YoY) to 45.2% (better than our estimate of 41.5%). The adjusted net profit jumped by 36.1% YoY to Rs910 crore (vs our estimate of Rs896 crore). However, the reported net profit jumped by 31.9% YoY to Rs881 crore after providing for Rs28.30 crore as exceptional expenditure related to one-time payment to employees of the newly acquired Dusa Pharmaceuticals (Dusa Pharma) as severance cost. -
US business and API drive growth: The net sales during the quarter have been mainly driven by the US business, which grew by 43.7% YoY to Rs1,495 crore (or $276 million, 32% YoY at constant currency). The US business was strongly supported by supplies of Lipidox and performance of Taro Pharmaceuticals (Taro), which reported a 25.4% Y-o-Y rise in revenues to $185.7million. Besides, Sun Pharma did financial closures for the two newly acquired US-based entities, namely Dusa Pharma and the generic business of URL Pharma (through US-based subsidiary Caraco Pharmaceuticals). We believe these entities also partially contributed to the company's growth during the quarter. Besides, the revenues from the active pharmaceutical ingredient (API) business jumped by 36% YoY to Rs209 crore, which helped the growth. -
Indian revenues fall short of expectation: The revenues from the branded formulation business in India reported a 13.3% Y-o-Y rise to Rs788 crore (vs our estimate of Rs826 crore). The slower growth in the Indian business as explained by the management was due to a change in treatment of expected sales return and in treatment of discounts. On a like-to-like basis, the growth in the Indian formulation business should have been nearly 19% YoY for the quarter. The company launched seven products during the quarter in the Indian market, taking the total to 22 products for the first nine months. -
RoW markets post impressive 31% growth YoY: The revenues from the Rest of the World (RoW) jumped by 31% YoY to $73million during the quarter. Excluding contribution from Taro in the RoW markets, the underlying sales growth in the dollar terms for Sun Pharma's business was 58% for the third quarter, which is impressive. -
Higher tax and minority interest restrict growth at bottom line: The effective tax rate during the quarter increased to 18.2% (although on expected lines) as compared with 7.4% in Q3FY2012. Moreover, the strong profit contribution from Taro (where minority holds 33.7% stake) resulted in the minority stake increasing by 19.4% YoY to Rs152.1 crore. Consequently, the net profit after tax (adjusted for EO items) witnessed a restricted growth of 36.1% YoY to Rs910 crore, which was 1.6% lower than our estimate. -
Product pipeline: In the third quarter, the company filed eight new the abbreviated new drug applications (ANDAs), taking the tally of total ANDAs filed to 403 products (including Taro and newly acquired generic business of URL Pharma). It got approvals for two products during the quarter, taking the tally of total ANDAs approved to 261 (including 107 products from newly acquired generic business of URL Pharma) including 17 tentative approvals. Recently, Sun Pharma got approvals for generic Doxil, which is a significant achievement and recognition of its technological capabilities. -
Valuation: The stock currently trades at 22x FY2014E earnings. We have Buy rating on the stock with a price target of Rs775 (23x FY2014E earnings).
We will revisit our estimates after interactions with the management (a teleconference call with the management is scheduled at 7.00pm today). Aurobindo Pharma
Recommendation: Buy
Price target: Rs247
Current market price: Rs184 Q3FY2013 results-First cut analysis Result highlights -
Q3FY2013 results better than expected: Aurobindo Pharma reported a 22.2% year-on-year (Y-o-Y) rise in net sales to Rs1,570.1 crore (vs our estimate of Rs1,564 crore), mainly driven by the US formulation business (up 58% year on year [YoY] to Rs513 crore) and the dossier income of Rs38.6 crore (up 69.3% YoY). The operating profit margin (OPM) improved by 162 basis points YoY to 16.5% (vs our estimate of 16%) on the back of a better product mix (lower contribution of low-margin antiretroviral [ARV] business). The effective tax rate declined by 110 basis points to 6.6% during the quarter (vs our estimate of 12%) and that helped the adjusted net profit grow by 42.5% YoY to Rs165.2 crore (vs our estimate of Rs142.4 crore). However, due to a foreign exchange (forex) loss of Rs73.4 crore (related to translation of long-term foreign borrowings) compared with a forex loss of Rs144.5 crore provided in Q3FY2012, the reported net profit turned around to Rs91.8 crore during the quarter (vs loss of Rs28.6 crore). -
Lower proportion of ARV business helps margin in Q3: During the quarter, the contribution from the ARV formulation business, which is considered a low-margin business, dropped to 10.9% from 15.9% in Q3FY2012. Similarly, the contribution of the active pharmaceutical ingredient (API) business related to ARV drugs dropped to 12.5% of sales from 15% in Q3FY2012. We expect this change in business mix to continue in the subsequent quarters and that should help the company to achieve a 15% margin in FY2013 (vs 13.2% in FY2012). -
Aggressive launches in US market augur well; expect ramp-up to continue: During the quarter, the company launched nine generic products in the USA and also got tentative approvals for three products. These launches helped the company to clock sales of Rs514.4 crore (57.8% YoY) during the quarter. The company filed 11 new abbreviated new drug applications (ANDAs) during the quarter, which takes the tally to 262 filings by end of this quarter, and the total approvals from the US Food and Drug Administration (USFDA) goes to 171 including 26 tentative approvals. We believe the healthy pipeline will continue to expand further with aggressive filings from the newly approved facility at Unit-4 (general liquid injectable manufacturing) and Unit-12 (semi-synthetic penicillin oral and injectable). -
Valuation: The stock currently trades at 10.6x FY2014E. We have Buy rating on the stock with a price target of Rs247 (12x average earnings for FY2014E and FY2015E).
We will come out with detailed note after interaction with the management (teleconference call scheduled at 4:00 pm today). Tata Chemicals
Recommendation: Buy
Price target: Rs430
Current market price: Rs355 Price target revised Rs430 Result highlights -
Consolidated revenues grew marginally; subsidiaries' profitability remains a concern: During the third quarter of FY2013 Tata Chemicals Ltd (TCL)'s consolidated revenues grew by 10.2% to Rs4,196.8 crore, which was largely in line with our expectations. However, the consolidated earnings growth was dented by the weak performance of the subsidiaries, namely IMACID (pricing pressure on phosphoric acid), Tata Chemicals Europe (equipment cost failure and shrinkage in demand due to a slowdown) and Tata Chemicals Magadi (lower production due to rain and water backlogs). Consequently, the reported profit after tax (PAT; after the minority interest and income from associates) remained flat at Rs224.0 crore, which included an extraordinary income of Rs130.4 crore from the sales of the long-term investments, a foreign exchange loss of Rs50.1 crore and the restructuring cost (the UK loan was restructured) of Rs31.2 core. Adjusting for this the PAT stood at Rs175.8 crore, which was lower than our estimate. -
North American and domestic markets clocked better revenue growth: The stand-alone performance of TCL for Q3FY2013 was better than expected. The revenues for the quarter grew on the back of a higher production volume of non-urea fertilisers and a good volume growth in soda ash and branded salt. The volume in soda ash grew by 4% year on year (YoY). The total revenues of the stand-alone business grew by 8.8% to Rs2,546.0 crore and the EBIDTA margin stood at 11%, which was marginally lower than our expectation. However, the margin of the stand-alone business was under pressure during the quarter due to input cost pressure. The North American business' revenues also grew handsomely by 24.3% YoY to Rs690 crore and profit grew by 3% YoY to Rs68 crore. A lower growth in the profitability of the North American business was mainly due to a higher input cost and change in the product mix. -
Outlook: margins to remain under pressure: The margin in the non-urea fertilisers is expected to remain under pressure mainly due higher prices of inputs and an increase in the sales of traded fertilisers. On the chemical front, margin pressure in the European and Kenyan businesses may remain because of an economic slowdown and intense competition. However, the company believes that the demand for soda ash and salt will remain firm in India and North America despite the declining demand from China. -
Valuation: We have broadly maintained our earnings estimates for the company and rolled over our target multiple to the FY2015 estimate. Consequently, we have increased our price target to Rs430 and maintained our "Buy" rating on the stock. At the current market price the stock trades at 10.1x its FY2014E earnings per share (EPS) of Rs35.3 and 9.2x its FY2014E EPS of Rs38.5. On the valuation front, we value TCL at 10x FY2015E EPS and investment value of Rs45 per share, and arrive at a fair price of Rs430. Orient Paper and Industries
Recommendation: Hold
Price target: Rs79
Current market price: Rs73 Price target revised to Rs79 Result highlights -
Revenues in line with estimate, margin pressure dents earnings: In Q3FY2013, Orient Paper & Industries (Orient Paper) posted net sales of Rs593.6 crore (up 3.1% year on year [YoY]), which was largely in line with our estimate. Further, the profitability of its cement division though contracted sharply at the earnings before interest and tax (EBIT) level, but came much in line with our estimate. However, its paper division disappointed with a higher than expected loss at the EBIT level, which stood at Rs23.6 crore. Hence, the loss in the paper division and a severe margin pressure in the cement division resulted in the net profit declining by 65.4% YoY to Rs14.7 crore, which was lower than our estimate. -
Electrical division supports revenue growth: The company's overall revenue growth of 3.1% was largely supported by the electrical division, which delivered a revenue growth of 19.5% YoY to Rs160.6 crore. On the other hand, the revenues from the cement division largely remained unchanged on a year-on-year (Y-o-Y) basis as a 1.4% growth in the average realisation got offset by a decline in the volumes. Further, the paper division continued to disappoint with the revenues declining by 8.5% YoY to Rs86.2 crore on account of lower production. -
Margin pressure witnessed across all business divisions: The overall operating profit margin (OPM) of the company contracted by 896 basis points YoY to 6.5%. The contraction in profitability was on account of a sharp decrease in the EBIT margin of the cement division by 976 basis points and a loss to the tune of Rs23.6 crore in the paper division as compared with a loss of Rs15.3 crore in the corresponding quarter of the previous year. The margin in the electrical division stood at 3.4% as compared with its historical average of 7-8% on account of advertising spends in the home appliance products. The sharp contraction in the margin of the cement division was largely on account of a cost inflation in terms of power and fuel due to the purchase of imported coal at a higher price on account of a shortage of coal in the domestic market and a surge in the freight charges due to a fuller impact of an increase in the diesel prices and railway freight. Consequently, the operating profit decreased by 56.5% YoY to Rs38.8 crore (as compared with 3.1% growth witnessed on the revenue front). -
Commissioned captive power plant of 55MW: During the quarter, the company commissioned a captive power plant (CPP) of 55MW at its paper facility in Amlai. The CPP is expected to stabilise in the coming quarter and the saving in the cost of production of paper is expected in FY2014. Hence, we believe the move could limit the loss in the paper division and improve profitability in FY2014. -
Demerger of its cement business: The cement business of Orient Paper will be transferred to its newly formed subsidiary company, Orient Cement. The demerger of its cement division will come into effect from April 2012. According to the management, the company is expected to get the order from the High Court for the proposed demerger of the cement division in two to three months. We believe the development is positive for the company as it will unlock the value for the shareholders through direct exposure to a pure cement player. However, as per our interaction with the management of the company, the procedure will take some more time to get Orient Cement listed on bourses. -
Huge outstanding water tax, company applied for waiver as per agreement: As per the auditor's report, no provision against the water tax amounting to Rs263.4 crore has been made by the company since its application for waiver thereof is under consideration by the state government of Madhya Pradesh. -
Downgrading earnings estimates for FY2013 and FY2014; introducing FY2015 estimate: We are downgrading our earnings estimates for FY2013 and FY2014 mainly to factor higher than expected cost inflation in the cement division and higher than expected loss in the paper division. Consequently, our revised earnings per share (EPS) estimates now stand at Rs8 and Rs9.3 for FY2013 and FY2014 respectively. We are also introducing our earnings estimate for FY2015 with the EPS estimate standing at Rs10.9. -
Maintained Hold with revised price target of Rs79: Given the severe margin pressure in the cement division, rising losses in the paper division and a limited upside from the current level, we have maintained Hold recommendation on the stock with a revised price target of Rs79 (based on the sum-of-the-parts [SOTP] valuation methodology). At the current market price (CMP), the stock trades at price/earnings ratio (PER) of 8x and enterprise value (EV)/ EBIDTA of 5x discounting its FY2014 earnings estimate. |
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