RANBAXY LABORATORIES
RESEARCH: CLSA
RATING: OUTPERFORM
CMP: Rs 470
CLSA reiterates ‘outperform’ rating on Ranbaxy Labs based on strong earnings momentum heading into CY09 with upside triggeRs from R&D pipeline disclosure. The highlight of Ranbaxy’s annual report is encouraging improvement in working capital ratios led by reduction in debtor days (from 95 to 82 in CY07).
This has contributed to the swing in cash flows from last year. The company’s balance sheet remains stretched with a debtto-equity ratio of 1.33 and a net debt position of $1 billion, which limits the company’s ability to grow inorganically.
EBITDA margins declined from 12.6% to 8.7% in CY07 due to pressures from currency appreciation, high base (Simvastatin exclusivity in CY06) and higher promotional spend. Revenue growth remained weak at 9.4% YoY because of the rupee’s appreciation and sluggish growth in the US.
While the company’s global filings have declined, the US filings continue to be steady. Ranbaxy’s valuations are reasonable, given its strong earnings momentum, going forward. The stock is likely to remain firm with strong earnings visibility heading into CY09 and exclusivities on Imitrex, Flomax, Valtrex, Lipitor and Nexium.
UNION BANK OF INDIA
RESEARCH: MORGAN STANLEY
RATING: OVERWEIGHT
CMP:Rs 167
Morgan Stanley maintains ‘overweight’ rating on Union Bank of India (UBI), given its attractive valuations (6x FY09E earnings) and much safer balance sheet compared to other PSU banks. The bank’s Tier-1 ratio declined marginally on account of the Rs 390-crore adjustment pertaining to AS-15 liabilities provided through the reserves.
UBI reported strong Q4 FY08 earnings at Rs 520 crore, up 128% YoY and 43% sequentially, against expectation of 28% YoY growth. But this was driven by lower employee expenses, higher recoveries and low taxes. The bank wrote back some pension provisions
MOSER BAER
RESEARCH: JP MORGAN
RATING: UNDERWEIGHT
CMP: Rs 191
JP Morgan cut its December ’08 price target for Moser Baer by 15% to Rs 170 and maintains negative view on the stock. While strong growth in the company’s new businesses can partly offset the weakness in its core business, JP Morgan expects capital raising and execution risk on the photo voltaic (PV) business to weigh on the stock.
Moser Bear reported muted Q4 FY08 results with 8% QoQ decline in revenue (below expectations) and 1.5% drop in EBITDA margins. While optical media volumes were flat QoQ, average selling price declined 9% QoQ with continued pricing pressure. Overall, the company reported a net loss of Rs 71.7 crore. Moser Baer has indicated a challenging environment for the next few quarteRs.
JP Morgan expects pricing to remain weak due to Philips litigation issues. More importantly, Moser Baer is planning a significant reduction in capital expenditure for the business to harvest cash flow for investment in the entertainment and solar business.
The company recorded revenues of $10 million in this division with net margin break even. It expects FY09 revenues of $80-100 million in this vertical. During Q4 FY08, the PV business generated $20 million in revenues with 10+% EBITDA margins. Moser Bear plans to spend $400 million to increase overall capacity to 240 megawatts (mw).
HINDALCO INDUSTRIES
RESEARCH: MERRILL LYNCH
RATING: SELL
CMP: Rs 180
Hindalco’s Q4 recurring profit declined 26% to Rs 540 crore, which was 21% lower than expectations due to a hike in aluminium costs. There is strong likelihood of near-term correction in aluminium due to the strengthening US dollar, continuing YoY profit decline in Q1 FY09 and earnings per share (EPS) downgrade, which is 20% below consensus. Hindalco sources 80% of its coal from Coal India, where the price increase is only 8%, but for the balance 20%, rising global prices may have a significant impact.
Despite higher ally prices, margin gains look difficult in FY09. Merrill Lynch estimates EBITDA of $600 million in FY09E. This poses a significant risk, given concerns of a slowdown in the US and Europe, which account for 75% of Novelis’ volumes. Hindalco trades at a price-earnings (P/E) multiple of 12x FY09E, compared to 10.5x for its closest peer Chalco. Given poorer ally leverage and low visibility on Novelis (with break-even unlikely before FY10), this premium is not justified.
MARUTI SUZUKI INDIA
RESEARCH: CITIGROUP
RATING: HOLD
CMP: Rs 770
Maruti Suzuki India’s (MSIL) recent analyst meet addressed concerns related to cost pressures, capital expenditure (capex) plans, revision in the depreciation policy, export plans and the strategic focus on MSIL within the Suzuki group. The management appeared cautious on the company’s near term outlook due to cost pressures. It appeared fairly confident about MSIL’s long-term strategy on exports and the domestic market.
Rising steel costs and escalating royalty costs are near-term pressure points. Cost reduction initiatives are commencing with Tier-2 vendors (an initiative that will yield structural benefits over the long term). Pricing action (which should be implemented shortly) will mitigate cost pressures, though the management indicated that it did not want to adversely affect demand.
The Rs 6,500-crore capex outlay remains unchanged at present, with 52% of the capex incurred over FY07-08. Additional capex will be incurred to boost the distribution and logistics backbone, as also R&D. The capex assumptions for FY09-10E partially reflect this. The A-Star will be launched in the European market in Q4 FY09. Citigroup believes the A-Star can face competition from other models in this segment (Toyota Aygo, VW Fox and Hyundai i-10).
RELIANCE COMMUNICATIONS
RESEARCH: IL&FS INVESTSMART
RATING: BUY
CMP: Rs 543
Considering the growth opportunities in the sector, as well as Reliance Communications’ (RCom) aggressive growth plans and strong operating capabilities, IL&FS Investsmart continues to maintain a ‘buy’ rating on the stock. A 64% YoY increase in overall subscriber base to 46 million and 33% growth in minutes of usage to 56.5 billion enabled RCom to post a 36% YoY growth in topline during Q4 FY08.
In line with this growth, the company’s topline increased from Rs 3,873.6 crore in Q4 FY07 to Rs 5,250 crore in Q4 FY08. The increase in subscriber base strengthened the company’s market share from 17.4% in Q4 FY07 to 17.9% in Q4 FY08. RCom plans to incur an overall capex of $6 billion in FY09 for the following: (a) rollout of GSM/IPTV/DTH services; (b) setting up towers; and (c) expansion in global and broadband services.
The company had secured spectrum for 14 GSM circles on January 12, ’08; it plans to roll out services in these circles in Q3 FY09. Within a short span, it will also foray into DTH and IPTV services. In the tower business, it plans to scale up the number of towers from about 35,000 currently to 60,000 by March ’09 and 70,000 by March ’10.
