Investor's Eye: Update - Glenmark Pharmaceuticals, Power; Mutual Gains - Sharekhan's top equity mutual fund picks, Sharekhan's top SIP fund picks

 

Investor's Eye [December 10, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Glenmark Pharmaceuticals Recommendation: Hold Price target: Rs600 Current market price: Rs538 FTFs to sweeten prospects Key points  Hydrocortisone Butyrate exclusivity to give 3-4% revenue upside in the USA: Glenmark Pharmaceuticals (Glenmark) has announced a plan to launch Hydrocortisone Butyrate cream in the USA under 180-day exclusivity. Hydrocortisone Butyrate cream is a generic version of Locoid Lipocream, which is indicated for a particular type of dermatitis. The annual sales of Hydrocortisone Butyrate cream is pegged at $36.8 million. We believe there would be two to three potential players (including innovater) for this product during the exclusivity period and that will allow Glenmark to gain 40% to 50% market share (potential revenues of $8-10 million during exclusivity), which shall represent 1-2% of the base US business estimated for FY2014.  Strong US pipeline instills confidence: Currently, Glenmark is authorised to sell 90 products in the USA apart from 56 abbreviated new drug applications (ANDAs) pending approval. This includes a high proportion of Para IV filings (23 ANDAs under Para-IV filings, which represent 44% of the ANDAs pending approval) as well as differentiated and complex products like hormones and dermatology. Among Glenmark's visible pipeline where the company has sole first-to-file (FTF) opportunity, Zetia is the biggest (current market size of $1.3 billion) and would be launched during December 2016. In H1FY2014, the company reported a 22% rise in revenues to Rs1,005 crore from the US business.  Outlook remains strong; we maintain price target of Rs600: The key growth catalysts for the company include: (1) the FTF opportunities and focus on niche segments in the USA; (2) stronger traction in Europe on launch of new products including in-licenced products; (3) improvement in the domestic business due to focus on niche segments; and (4) out-licencing opportunities emanating from its research and development (R&D) pipeline which is progressing well under various stages of development. On the flip side, the company is facing challenges in some geographies like Brazil, which is witnessing stiff competition and pricing pressure, and these challenges will continue to haunt its growth prospects in these regions. The stock is currently trading at 16.5x earnings per share (EPS) for FY2015. We maintain our price target of Rs600, which includes Rs508 for its core business (implies 15.5x FY2015E EPS) and Rs92 for its R&D pipeline. We maintain our Hold rating on the stock.    SECTOR UPDATE Power CERC norms to hurt power companies CERC proposes tighter norms for regulated players in its draft regulation 2014-19 Central Electricity Regulatory Commission (CERC) has released its draft regulation for the tariff period 2014-19. The base return on equity (RoE) has been retained at 15.5%, however the regulator has proposed changes in the incentive norms and the tax re-imbursements that would adversely impact earnings (reduced tax gross up, lower incentives) and return ratios (lower incentives, working capital norms and reduced gains from operational efficiency) of power generation companies, especially for a regulated player like National Thermal Power Corporation (NTPC) due to following reasons:  The regulator has tightened the incentive norms by linking incentives to the power load factor (PLF; fixed at 85%) as against the power availability factor (PAF) previously. This puts the risk of non-off take of power from the State Electricity board on power generation companies.  In the drafted regulations for FY2014-19, the tax re-imbursements on the RoE has changed to actual rather than grossing up on the marginal tax rate or minimum alternate tax (MAT) in the earlier regulation, resulting in a dent on earnings. The regulator has also tightened normative working capital days (by reducing inventory days) for calculating the tariff. Moreover, the interest rate for calculating tariff was linked to the State Bank of India rate (13-14%), but the drafted regulation proposes it as the bank rate (at about 9% currently).  The draft regulator has also tightened norms in the case of operational efficiency parameters by lowering the normative station heat rate and lowering the norms for auxiliary consumption of power, which would hamper earnings. However, the norms on depreciation remain unchanged. This would reduce the opportunity for power generating companies to gain from fuel savings; eventually hurting earnings.  The operation and maintenance expense is proposed to be escalated at 6.35% per year as against 5.72% in the previous tariff plan. However, this is lower than the expectations in the street, given the cost inflation.  View-draft regulation negative; power companies to strongly oppose some recommendations Clearly, the proposed draft regulations would impact earnings and return ratios of all regulated power generation companies, like NTPC, National Hydroelectrical Power Corporation (NHPC), Satluj Jal Vidyut Nigam (SJVN) and also other private players who have a regulated model. The Power Grid would be impacted on the incentive front on most of the criteria, except the availability factor as it is operating at 99% availability. However, we expect the power companies to strongly oppose some of the recommendation in the public hearing which is scheduled on January 15, 2014. In the past, the regulator has adjusted the norms in line with the feedback received from the stake holders. In the interim period, we expect the power stocks to suffer due to the uncertainty created by the draft regulation 2014-19.     MUTUAL GAINS Sharekhan's top equity mutual fund picks Large-cap funds Mid-cap funds Multi-cap funds ICICI Prudential Focused Bluechip Equity Fund - Ret SBI Emerg Buss Fund SBI Magnum Global Fund Birla Sun Life Top 100 Fund Mirae Asset Emerging Bluechip Fund ICICI Prudential Discovery Fund SBI Magnum Bluechip Fund SBI Magnum Mid-cap Fund Axis Equity Fund Tata Pure Equity Fund - Plan A Franklin India Prima Fund Quantum Long-Term Equity Fund Kotak 50 IDFC Sterling Equity Fund  - Reg Tata Equity Opportunities Fund - Plan A 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 BNP Paribas Tax Advantage Plan Birla Sun Life India GenNext Fund Tata Balanced Fund - Plan A Tata Tax Saving Fund - Plan A Reliance Media & Entertainment Fund Canara Robeco Balance SBI Magnum Tax Gain Scheme 93 UTI India Lifestyle Fund SBI Magnum Balanced Fund DWS Tax Saving Fund Canara Robeco FORCE Fund - Reg FT India Balanced Fund Indices Indices Indices CNX500 S&P Nifty (CNX Nifty) Crisil Balanced Fund Index Fund focus SBI Magnum Global Fund - Growth   Sharekhan's top SIP fund picks Large-cap funds Multi-cap funds ICICI Prudential Focused Bluechip Equity Fund - Ret SBI Magnum Global Fund SBI Magnum Bluechip Fund ICICI Prudential Discovery Fund Tata Pure Equity Fund - Plan A Quantum Long-Term Equity Fund Franklin India Bluechip SBI Magnum Multiplier Plus 93 Kotak 50 Tata Equity Opportunities Fund - Plan A BSE Sensex BSE 500 Mid-cap funds Tax saving funds SBI Magnum Mid-cap Fund BNP Paribas Tax Advantage Plan Franklin India Prima Fund SBI Magnum Tax Gain Scheme 93 HDFC Mid-cap Opportunities Fund Tata Tax Saving Fund - Plan A SBI Emerg Buss Fund DWS Tax Saving Fund IDFC Sterling Equity Fund  - Reg HDFC Tax Saver BSE Mid-cap CNX Nifty Fund focus Franklin India Bluechip Fund - Growth 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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