| MARKET OUTLOOK Actions speak louder than words
In 2015, the government's ability to deliver on its key promises would drive equity rally 2014, reversal of fortunes: Calendar year 2014 turned out to be a landmark year for India. After three decades, a single political party gained absolute majority in the general election in this year. The new government, though criticised for moving slow on many of its electoral promises, has made significant progress on two fronts: (1) It has taken steps to revitalise the bureaucracy to end policy logjam; and (2) India's foreign policy has turned pro-active under the Narendra Modi regime and put India back on the global centre stage. God has also been kind. The sharp correction in the prices of commodities especially crude oil has dramatically improved the macro situation and eased pressure on India's fiscal health. The country can today look forward to a credit rating upgrade instead of the real threat of a potential rating downgrade to the "Junk" status it faced about 15 months back. 2015, time to deliver on economic recovery and reforms: No doubt, it is not an easy task for the government to undo the legacy of a slumping economy with low business confidence and to get the economy back on track. However, the time has come to take aggressive and bold policy decisions rather than just looking at improving the situation by focusing on execution and smooth implementation of the existing policies. With little progress in the winter session of the Parliament, the forthcoming Union Budget would be an important event for the domestic businesses and foreign investors. A lot of attention would also be paid to the timing of the Reserve Bank of India (RBI)'s commencement of the interest rate cut cycle in 2015. Globally, situation might not be as benign anymore: In 2015, the risk will emerge from the expected changes in the economic order globally. Unlike the status quo of the past few years, the US economy is recovering and the Federal Reserve (Fed) is scheduled to commence interest rate hikes in 2015. On the other hand, the rest of the world including Europe, Japan and China is still slowing down and would maintain close to zero interest rates and could provide additional doses of monetary stimulus to support growth. In such an environment, the US dollar could strengthen and bond yields in the USA could also firm up resulting in an outflow of some money from the emerging equity markets (and the other risky assets like commodities and bullions) back to the US government debt in 2015. This could cause uncertainty and volatility in the global financial markets. Valuation supportive; equities to sustain uptrend: Though 2015 could see a higher level of volatility (bouts of risk aversion globally), we expect the overall uptrend in the Indian equity market to remain intact. The benchmark indices are trading at ~12x FY2017E earnings which is way below the average valuation multiple of 15x (and closer to the bottoming out level of 10x) and leaves enough scope for an upside in response to the improving trajectory of growth in the corporate earnings driven by a supportive domestic macro environment. The Nifty and the Sensex, the benchmark indices, have not corrected by even 10% on any single occasion since the last 15 months and the trend is likely to continue in spite of the expectations of higher volatility in 2015. Thus, we retain our positive stance on equities and continue to see corrections driven by global risk aversion as accumulation opportunities.
We are positive on rate-sensitive sectors like bank & financial services and auto & auto ancillaries in addition to our favourable view on the urban consumer discretionary spending-driven businesses and quality cyclical stocks. Long-term view of multi-year rally: We retain our view that the Indian equity market is in a multi-year rally and the Sensex is set to appreciate to 70,000 to 90,000 levels over the next three to four years.
STOCK UPDATE UltraTech Cement
Recommendation: Buy
Price target: Rs2,935
Current market price: Rs2,626 Cementing strong growth ahead Key points - UltraTech buys JP Associates' 4.9 million tonne cement capacity and 180-MW power plants in Madhya Pradesh: UltraTech Cement (UltraTech) is acquiring Jaiprakash Associates (JP Associates)' two cement plants in Madhya Pradesh both located in Satna cement cluster (it is the key cluster in the central region), with a total installed clinker capacity of 5.1 million tonne, grinding capacity of 4.9 million tonne and a combined power plant capacity of 180MW. The first plant is located at Bela with an installed clinker capacity of 2.1 million tonne and cement grinding capacity of 2.6MT along with a captive power plant of 25MW. The second plant is located at Sidhi having an installed clinker capacity of 3.1MT, cement grinding capacity of 2.3MT and a 155-MW power plant.
- Deal value: EV/tonne of around $140/tonne (at Rs63/USD) considering Rs5.5 crore per mega watt paid towards power plant: UltraTech is acquiring JP Associates' Madhya Pradesh cement plant having a cement capacity of 4.9mtpa at Rs5,400 crore which turns out to be EV/tonne of around $140 (at an exchange rate of Rs63/USD), which is marginally lower than the replacement cost. Especially, since the cement plants are strategically located in Satna cluster of Madhya Pradesh (the targeted market will be Uttar Pradesh and Madhya Pradesh). Moreover, UltraTech will have excess clinker capacity from which the company can manufacture around 2 million tonne of cement by installing a grinding capacity. The company may add another 2 million tonne of grinding capacity cost for the acquisition, as the current capacity (4.9mt) is around $165/tonne (at Rs63/USD) EV/tonne.
- Short term it may marginally dilute earnings; retain preference for UltraTech: Like other acquisitions in near term, the company may see a marginal dilution in their earnings, however in the long run the company will able to realise the full benefit of higher demand by a way of improved volume and higher realisation in central India. Among the large-cap cement companies, we prefer UltraTech due to its scale of operations and a strong balance sheet. Further, the deal to buy stake in Madhya Pradesh cement plants of JP Associates would improve UltraTech's volume growth outlook. Hence, we maintain our Buy recommendation on the stock with a price target of Rs2,935.
Ipca Laboratories
Recommendation: Hold
Price target: Rs785
Current market price: Rs719 Latest USFDA observations may complicate the remedial process; maintain Hold Key points - The event: Ipca Laboratories (Ipca) has been served Form-483 by USFDA for its Silvassa formulation facility, highlighting six observations, which do not conform to the good manufacturing practices (GMP) norms. The latest observations follow the similar adverse observations on another formulation facility at Pithampur (Indore SEZ) and API facility at Ratlam. Although, the latest observations on Silvassa are not critical in nature, the complicity is likely to increase for the company, who is working hard to get an early resolution to the issues. In a separate action, Health Canada has issued an import alert due to the USFDA actions on its Indore SEZ facility.
- Consequences: The latest observations, at worst, can see USFDA issuing an import alert and thus jeopardising the near-term resolution. Therefore, the prospects of the company will depend on the gravity of the USFDA actions in aftermath of the latest observations. In case of an import alert, the company would see consequences of: (a) resolution being delayed by 12-18 months, (b) an incremental remedial cost (assume $5-10 million), and (c) a market share loss (full restoration of the US business will take 24 to 30 months). Assuming an import alert, our current earnings estimates would see a 15% downside from the current level.
- Worst case scenario is factored in stock price; early resolution to give an upside; maintain Hold: The stock has corrected by nearly 18% since the news about USFDA's action on its Ratlam facility emerged in July 2014. Before Ipca voluntarily stopped supplies from its affected facility, the US business was contributing a small portion (close to 9%) of the total sales. Assuming a worst case scenario (15% downside in earnings from the current level), the stock would trade at 16x FY2016E earnings, which is still comfortable under the historical range of 12-23x. On the other hand, an early resolution of the USFDA issues will give a decent upside. We maintain our Hold rating on the stock without changing our earnings estimates (assuming a six months delay in resolution) with a price target of Rs785 (implies 15x FY2016E EPS).
|
No comments:
Post a Comment