Investor's Eye: Update - Lupin, Capital First, PTC India; MF - Sharekhan's top equity mutual fund picks, Sharekhan's top SIP fund picks

 

Investor's Eye [September 13, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Lupin Recommendation: Hold Price target: Rs907 Current market price: Rs861 Downgraded to Hold Key points Steady progress in US market, strong product pipeline help retain confidence: Lupin has received abbreviated new drug application (ANDA) approvals for two molecules, namely Topiramate and Zolpidem tartrate, from the US Food and Drug Administration (USFDA). Both these molecules are already in generic space with multiple players in fray. In the current fiscal so far, the company received nine ANDA approvals, a few of them being plain generics facing stiff competition in the market. Though the pace of the product approvals is in line with the management's expectation of launching 15-20 products in FY2014, but none of these approvals is really a big trigger for the company (except the approval for Ranexa where Lupin hopes to have 180-day market exclusivity). We also do not see any remarkable progress in the oral contraceptive business (where only five products have been launched so far out of the 11 approved and the planned pipeline of nearly 30 products). The management indicated the oral contraceptive business would generate $100 million of revenues in FY2014 vs $70 million in FY2013. However, the company has a strong pipeline of 90 ANDAs pending approval and that includes some of the big products, eg Niaspen ($900 million), Acephex ($1 billion) and Cymbalta ($2.9 billion), which are yet to come in during the current fiscal.  India, Japan unlikely to see a stronger uptick in FY2014: Having posted a weaker performance in the Indian and Japanese markets in Q1FY2014, Lupin is expected to report a moderate performance in the subsequent quarters. However, as the impact of the new drug pricing policy in India has yet to normalise, we do not expect a stronger bounce in the company's performance. The Japanese market is also not likely to see a strong come-back, as Irom Pharmaceutical Company (Irom; a Japanese step-down subsidiary) has shown a weaker performance in the contract manufacturing space.  Outlook remains strong; we downgrade Lupin to Hold owing to limited upside: Lupin has a strong growth trajectory and multiple upside triggers which shall drive its earnings growth. However, most of these elements seem to be factored in the current price of the stock. The stock price has moved up by 38% from the start of the current fiscal and by 8% since our last update on the company on August 8, 2013, materially limiting the upside. Therefore, we downgrade our recommendation on the stock from Buy to Hold but maintain our earnings estimates and price target of Rs907 (20x FY2015E earnings per share [EPS]). However, if some of the key products that are currently under litigation receive the USFDA approval earlier than expected it would provide an upside to our estimates. Capital First Recommendation: Hold Price target: Rs170 Current market price: Rs162 Price target revised to Rs170 We recently interacted with the management of Capital First to understand the company's growth plans in light of the slowing economic growth and tight liquidity. According to the company's management, the loan growth is expected to remain strong (28% compounded annual growth rate [CAGR] over FY2013-15) largely contributed by the small and medium enterprises (SME)/mortgage and retail (two-wheelers, consumer durables etc) segments. The funding scenario remains comfortable given a well-matched book and a small proportion of commercial papers (CPs; accounting for 5% of total borrowings), though an increase in the base rates of banks could slightly affect the net interest margin (NIM). However, on the flip side, the reported earnings growth would remain weak in FY2014 due to a change in the accounting policy (since Q2FY2013) and investment in building new lines of businesses (consumer durables, two-wheelers, SME etc). The return ratios will show a material improvement only in FY2015 (return on asset [RoA] is likely to improve to 1% in FY2015 from 0.7% in FY2014). Thus, the re-rating of the price-book multiple is a few quarters away. In the meantime, we revise our price target to Rs170 (1.1x FY2015E book value) and downgrade the recommendation from Buy to Hold (due to the limited upside from the current level and the absence of any re-rating trigger in the near term).  Borrowing profile comfortable though NIM may decline slightly: The company maintains a well-matched book and has sufficient liquidity in the balance sheet. Hence it is not too worried about liquidity tightening. A bulk of its borrowings is from banks (as much as 70% of its total borrowings) while non-convertible debentures (NCDs) and CPs constitute 13% and 5% of the borrowings respectively. The borrowings are mostly from the public sector banks that have largely kept their base rate unchanged. Therefore, the company doesn't foresee any significant impact on the cost of funds. However, on a conservative basis we have factored a 15-20-basis-point contraction in its NIM in FY2014.  SME, retail loans the key driver of the loan book: The SME and mortgage segment continues to be a focus area (up 52% FY2013) while other retail products (two-wheelers, consumer durables) have also shown a strong growth. The proportion of SME and retail loans constitutes 76% of the assets under management (AUM). While the company is cautiously growing its gold loans, the other retail segments like two-wheelers and consumer durables have witnessed a strong offtake. Recently, the company launched a product called business installment loans for the SMEs which is showing healthy offtake. We expect the loans to expand at a CAGR of 28% over FY2013-15. Fee, securitisation incomes to pick up gradually: Since Q2FY2013, the company has adopted a more conservative accounting policy whereby the fee and securitisation incomes are being booked over the tenure of the loans. Hence, the growth in fees would be slightly back-ended. In addition, the change in the securitisation guidelines (mandatory holding period of 12 months) has affected the growth in the securitisation income but the income should improve going ahead as a higher proportion of loan book gets seasoned.  Investment in newer businesses and changes in accounting policy to constrain earnings growth in FY2014: The change in accounting policy and investments in newer businesses has affected the profits (reported) in FY2013 which could see a material improvement from mid FY2015 onwards. The cost-to-income ratio remains high at 78% as the company has invested in setting up processes, technology and infrastructure to develop and scale up the retail financing products. While we expect the earnings growth to remain strong (at 24% CAGR), the return ratios are likely to remain lower than that of its peers. We value Capital First at 1.1x FY2015 book value and revise the rating on the stock from Buy to Hold.   PTC India Recommendation: Buy Price target: Rs58 Current market price: Rs47 PFS business on track; adding value to PTC We recently met the director (Finance) and chief financial officer of PTC India Financial Services (PFS), a subsidiary of PTC India (which holds a 60% stake) to discuss the key growth triggers for the company and the challenges faced by it. We found the management to be very positive about the company's growth prospects with a robust loan asset growth trajectory and nil non-performing assets (NPAs). The key takeaways from the meeting are presented below.  Key takeaways from the meet Loan book to double in FY2014, backed by healthy sanction pipeline: Currently, PFS has a pipeline of Rs10,500 crore of sanctioned loans and Rs2,700 crore of loan assets. Based on this, the management expects the loan book to double (over the last year) in FY2014 and grow at a significant rate in FY2015 (on a year-on-year basis) too, due to a low base. We learned from the management that the loan book could experience significant growth traction, thanks to the renewable energy projects. The company has enhanced its focus on renewable energy recently in view of the uncertainty around thermal projects. Moreover, renewable energy projects carry relatively lower execution risk and have a significantly lower gestation period. Out of the total loan assets around 40% is in the renewable energy space (mainly in the wind energy segment, which accounts for about 90% of the renewable loan book). The company believes that in the next two years, the loan book is likely to grow mainly because of sanctioning of more loans for renewable energy projects.  Healthy interest spread but could witness margin pressure: During Q1FY2014, the blended yield on the loan assets was at about 13% while the cost of fund was 8.5%. Hence, the company had a very healthy interest spread of 4.6% during Q1FY2014. However, this was lower on both Y-o-Y and quarter-on-quarter (Q-o-Q) bases as a function of both a lower yield and rising cost of funds. The yield on the loan assets came down from 14.3% in Q1FY2013 and 13.9% in Q4FY2013 to 13.07% in Q1FY2014, as the share of the short-term loans (which generate higher yields compared with the long-term loans) in the total loan asset book came down from 30-35% in FY2012 to 20-25% in FY2013. Currently, the blended cost of fund is around 8.5% for PFS. The majority (65%) of the total funds is from the domestic banks and the remaining from external commercial borrowings (ECBs), bonds and debentures.  We believe the yields could come down marginally going forward, given the changing composition of the short-term and long-term loans. We also expect the cost of fund to go up from the current level due to a revision in the base rates and higher hedging cost, given the volatility in exchange rates in recent times. We learned that the incremental cost of borrowing is about 10.5%. Hence, we opine that overall there could be some compression in the spreads in FY2014 compared with FY2013.  As the company is having some foreign loans (ECBs) on its books, we believe there could be a foreign exchange loss of around Rs3-4 crore in the coming quarter, given the dollar's movement.  View: remains a significant contributor to PTC India group: PFS is not under our active coverage. However, our coverage company PTC India holds a 60% stake in PFS. During FY2013, PFS contributed around 33% to the bottom line of the consolidated company, PTC India, and the contribution is likely to inch up in the coming two years, given the significant ramp-up in the PFS's loan book which should translate into earnings. Hence, we believe PFS could be one of the major drivers of PTC India's earnings growth. Based on the sum-of-the-parts (SOTP) valuation methodology, PFS contributes around 25% of our price target for PTC India. PTC India is trading attractively at 0.5x its FY2014 and FY2015 book value estimates. Hence, we retain our Buy rating on the stock with a price target of Rs58 (SOTP based).  MUTUAL GAINS Sharekhan's top equity mutual fund picks Large-cap funds Mid-cap funds Multi-cap funds Canara Robeco Large Cap+ Fund  SBI Emerg Buss Fund UTI Opportunities Fund ICICI Prudential Focused Bluechip Equity Fund - Ret  Mirae Asset Emerging Bluechip Fund  ICICI Prudential Top 100 Fund UTI Wealth Builder Fund - Series II HDFC Mid-Cap Opportunities Fund Tata Ethical Fund - Plan A  Birla Sun Life Top 100 Fund  IDFC Premier Equity Fund - Reg  IDFC Equity Fund - Reg UTI Top 100 Fund  Franklin India Prima Fund Templeton India Equity Income Fund Indices Indices Indices BSE Sensex BSE MID CAP BSE 500 Tax saving funds Thematic funds Balanced funds Axis Long Term Equity Fund ICICI Prudential Exports and Other Services Fund ICICI Prudential Balanced - Growth Franklin India Taxshield  Birla Sun Life India GenNext Fund  HDFC Balanced Fund - Growth Tata Tax Saving Fund - Plan A UTI India Lifestyle Fund FT India Balanced Fund - Growth IDFC Tax Advantage (ELSS) Fund - Reg L&T India Special Situations Fund Birla Sun Life 95 - Growth Canara Robeco Equity Taxsaver Reliance Media & Entet Fund UTI Balanced Fund - Growth Indices Indices Indices CNX500 S&P Nifty (CNX Nifty) Crisil Balanced Fund Index Fund focus ICICI Prudential Balanced Fund Sharekhan's top SIP fund picks Large-cap funds Multi-cap funds  ICICI Prudential Focused Bluechip Equity Fund - Ret Tata Ethical Fund - Plan A Birla Sun Life Frontline Equity Fund - Plan A ICICI Prudential Top 100 Fund Birla Sun Life Top 100 Fund  Canara Robeco Equity Diversified UTI Leadership Equity Fund  Templeton India Equity Income Fund UTI Top 100 Fund  Quantum Long-Term Equity Fund BSE Sensex BSE 500 Mid-cap funds  Tax saving funds  IDFC Premier Equity Fund - Reg Tata Tax Saving Fund - Plan A IDFC Sterling Equity Fund  - Reg Franklin India Taxshield - Growth HDFC Mid-Cap Opportunities Fund ICICI Prudential Taxplan - Growth UTI Mid Cap Fund Birla Sun Life Tax Plan - Growth Reliance Long Term Equity Fund  L&T Tax Advantage Fund - Growth BSE Midcap CNX Nifty Fund focus UTI Leadership Equity Fund. 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.

Regards, The Sharekhan Research Team

 

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