Investor's Eye
[September 20, 2013] | | |
| Summary of Contents
PULSE TRACK Mid-quarter policy review: repo rate upped by 25 basis points, MSF rates reduced by 75 basis points Newly appointed governor of Reserve Bank of India (RBI), Raghuram Rajan, delivered a surprise package in its mid-quarter policy review by raising the repo rate by 25 basis points and easing the short-term interest rates through reduction of 75 basis points in the marginal standing facility (MSF)/bank rate. Taking advantage of the improving global situation, the RBI has done a partial unwinding of the exceptional measures announced in July. It is taking efforts on reinstatement of repo rate as operational interest rate, which lost its relevance due to the tight liquidity and curbs on liquidity adjustment facility (LAF) borrowings. The reduction in MSF rate and the daily cash reserve ratio (CRR) requirements (95% from 99%) is likely to give some breathing space to the banks. However, the focus on retail inflation (not wholesale) and the hike in the repo/policy rate does indicate the continued hawkish stance. Moreover, the commentary also indicates the possibility of further rate hikes to narrow the gap between the repo/policy rate and MSF rate. Inflation concerns back on fore
Since the inflation (Wholesale Price Index [WPI]) is again on an uptrend, the RBI expects upward risks to the inflation estimate of 5% for FY2014. According to the RBI, a persistent high Consumer Price Index (CPI) inflation, suppressed fuel inflation and volatility in exchange rates remain key concerns to the inflation outlook. Though the external environment threatens the current account deficit, the RBI suggested the government should focus on internal dynamics, such as fiscal deficit and inflation. Going ahead, we expect greater emphasis on inflation with respect to policy rates. Therefore, the interest rates are likely to remain firm, which could result in a downward revision in the gross domestic product (GDP) growth estimate. Emphasis on resuming repo rate as operational interest rate
The RBI in the monetary policy statement expressed its intention to bring normalcy in monetary operations, which has been distorted on expectation of tapering by the US Federal Reserve (US Fed). The RBI wants the repo rate to resume its role as the operational policy rate, which has been occupied by MSF due to the tight liquidity and curbs on LAF borrowings. However, the deferment of tapering by the US Fed has raised uncertainties with regard to withdrawal of exceptional measures announced earlier. Banking sector: NIMs pressure likely to continue for banks
The banks may slightly benefit at the operating level by the reduction in the MSF rate and easing of the CRR requirement (95% from 99% earlier) since the borrowings from the MSF window has increased and have been higher than the LAF (due to curbs on the LAF borrowings). However, an increase in the repo rate has pushed up the bond yields and raised the uncertainty with respect to interest rates. This could impact the investment cycle and credit offtake from banks. Also, as the busy season kicks in, the liquidity tightness will add pressure to the short-term and deposit rates, which in turn will impact the net interest margins of the banks. Going ahead, the banks may shore up the base rates (due to a rise in the cost of funds) to mitigate the margin pressure.
SECTOR UPDATE Construction Improvement in order inflows Key points -
Order inflows show signs of revival: Infrastructure companies across different segments witnessed a marquee increase in the new order wins during Q2FY2014. As per the companies' announcements, we noticed that on an aggregate basis, the new order wins rose by 31% quarter on quarter (QoQ) and 43% year on year (YoY) to Rs44,241 crore for Q2FY2014. The water and irrigation segment has increased by over 47% QoQ and by 27% YoY for the quarter. -
Power and building segments maintain momentum, road segment yet to take off: Over the past one year, we have noticed that the power and building segments have been incrementally getting a higher share of the new orders. However, the road segment has shown a declining trend due to inherent issues like an economic slowdown, banks reluctance to fund projects, difficulties in land acquisition and delays in environmental clearances. We have also noticed an uptick in orders from the railways over the past two quarters.
During the quarter, Larsen & Toubro (L&T) received orders worth Rs25,297 crore comprising 57% of the new orders announced. The top four companies accumulated 79% share of the total orders announced while 14 companies shared the balance. Most of the companies have witnessed a rise in new order wins on a sequential basis barring the likes of Era Infrastructure, Punj Lloyd, Valecha Engineering etc. Policy initiatives -
Increase in repo rate by 25 basis points to put pressure on industry: The RBI on September 20, 2013 surprised the industry by hiking the repo rate by 25 basis points to 7.5% to keep the inflation under check, a move that may increase the equated monthly installments (EMIs) for home in the medium term. The increase in repo rate is likely to put further burden on the industry, which is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation. -
Real Estate (regulation and development) Bill, 2013: The government has recently introduced the Real Estate (regulation and development) Bill, 2013 in the Parliament. Once voted into law, the bill will set up a strong regulatory architecture for the residential real estate sector with strong provisions for consumer protection. The transparency and accountability in the real estate sector is likely to enable easier access of capital and reducing delays for its long-term growth.
VIEWPOINT Ranbaxy Laboratories Ranbaxy's US problems worsen Key points -
USFDA issues adverse observations on US facility: As per the media report, Ranbaxy Laboratories (Ranbaxy)'s US facility (Ohm Laboratories) has been served a Form 483 under the Federal Food, Drug, and Cosmetic Act (Form 483 contains inspectional observations and is generally served to notify deviations from the standard manufacturing process but that is not a conclusion by the regulator regarding the non-compliance of the standard norms). The report says, Ohm Laboratories underwent an inspection by the United States of Food and Drug Administration (USFDA) during the end of FY2012, which led to issuance of Form 483, and the company is believed to have not yet responded to the queries raised by the USFDA through Form 483. Ohm Laboratories is the only facility left with Ranbaxy that currently supplies drugs to the US market after having received an import alert on the remaining three facilities based in India at Dewas, Paonta Sahib and Mohali. -
Series of blows to US business to also impact international stature: Last week, Ranbaxy received an import alert on its Mohali facility after the USFDA inspectors found serous deviations from the standard manufacturing practices (like presence of hair-like substance embedded in tablets, presence of oil spot in tablets and poor sanitation in production areas etc) and the management had failed to give satisfactory explanations to the inspectors within the set timeline. Earlier, Ranbaxy's manufacturing facilities at Dewas and Paonta Sahib were also given an import alert in 2008 and these plants which are still under remedial process as per the consent decree filed with the USFDA and under the court's direction. After getting all its India-based plants blocked by the USFDA, Ranbaxy solely depends on the US-based Ohm Laboratories to supply products in the US market. Ranbaxy supplies products to over 140 countries and is one of the prominent generic players. A series of negative observations by the USFDA on almost all its manufacturing facilities meant to supply products in the USA are set to jolt its international stature as well. -
Threat of generic entry for Absorica is another concern: Ranbaxy's US problems have deepened further as its key in-licenced product, Absorica, is facing threat of generic entry. Actavis (Watson Laboratories Inc) has challenged the patent on Absorica through Paragraph IV Certification (a company files for a Paragraph IV Certification when it contest that the patent on the original drug is either invalid or unenforceable or that the generic version that they intend to manufacture will not infringe on the listed patents). The company sells Absorica (isotretinoin capsules), which has been in-licence from innovator Cipher Pharmaceuticals for the US market. Absorica was approved by the USFDA in May 2012 and granted a three-year market exclusivity period, which expires in May 2015. For Ranbaxy, Absorica is important as it is gaining market share and generating a healthy margin for the company. -
Earnings may get eroded by 45% in absence of US business: Supposing the Ranbaxy's US business gets completely hampered due to the USFDA actions (the worst case scenario being a ban on Ohm Laboratories), Ranbaxy should be ideally be left with 73% of the current business with a base margin of 10-12%. While the domestic market would be the largest contributor and main growth driver for Ranbaxy, it would like to enhance its focus on the emerging markets and Eastern Europe, where growth is fairly good and regulations are less stringent.
The non-US business if annualised on the basis of H1CY2013 results should give annual revenues of Rs7,400 crore with an EBIDTA (assuming 12% margin) and net profit of Rs890 and Rs510 crore respectively. This gives an earnings per share (EPS) of Rs12 as compared with the estimated EPS of Rs22 when the US business is included. This implies nearly 45% erosion in the earnings of the company when the US business is excluded.
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Regards,
The Sharekhan Research Team | |
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