Opto Circuits (India) Limited
Opto Circuits (India) Ltd (OCIL), an established player in a niche segment of medical electronic devices and medical monitoring products is expected to witness revenue CAGR of 63% to Rs3.7bn over FY06-08. While the core business is expected to record 30% plus revenue CAGR to Rs2bn over FY06-08 driven by continuous demand for its products, EuroCor (OCIL’s 100% subsidiary) is on track to expand its geographical coverage of stents to 36 countries by end 2006 and contribute at least 30% to profitability by FY08. However, net margins for EuroCor may be subdued in the short term on account of heavy advertising and promotional expenditure. OCIL’s products have started gaining preference with cardiologists who have attended various seminars, conferences and live workshops conducted by the company. Appointment of Dr. O’Neill on board is likely to expedite the process for USFDA approval, but it is still 18-24 months away.
OCIL’s proposed acquisition of a European company is likely to be a good strategic fit for the company. OCIL is likely to acquire this company which is into design and manufacturing of a wide range of balloon catheter assemblies and related products for coronary, renal and other applications for a consideration of Rs0.72bn. The target company is likely to generate revenue of Rs0.8-1bn for 2007. While we await further details about the acquisition, which is likely to be closed over the next 4-6 weeks, the acquisition enables EuroCor to achieve backward integration, which would cut costs. These savings can then be passed on to the customer, which would increase penetration. In addition, OCIL is also looking at conducting certain low-end manufacturing operations for EuroCor in India, which will not only cut costs but boost net margins as OCIL is under 100% EOU till 2009-10.
We are confident that the company is on track to witness earnings CAGR of 61.1% to Rs1bn over FY06-08 excluding the potential from the proposed acquisition. At Rs305, the stock is trading at 28.8x FY07E EPS of Rs10.4 and 18.4x FY08E EPS of Rs16.3. We maintain BUY with a target price of Rs326. Closure of the proposed acquisition and disclosure of financial details by the management may lend further upsides to the stock.
Unitech Ltd.
CMP: Rs465.40 Not Rated
Unitech is India’s largest listed real estate company with a market cap of Rs284bn. The company has a land bank of 10,332 acres (400mn sq ft) spread across north, south and east India. The company is one of the leader in developing residential complexes and commercial/IT parks in India. Unitech has also ventured into SEZ development and is expected to develop a large SEZ of 20,000 acres in Kundli (Haryana) and another 38,000 acres development in Kolkota. Apart from the real estate development, the company is involved in executing industrial projects on a turnkey basis both in India and overseas. It also has a tie up with Carlson Hospitality to manage Radisson hotels and with Marriot International to manage 3 hotels.
As a management philosophy, Unitech does not believe in trying to get a foothold in established areas. The management is clear that it prefers to enter into a city into the city suburbs, and develop integrated townships, thereby developing the area. This is seen in Unitech’s policy in Gurgaon, where the company along with few other large players have capitalized on the early mover advantage in creating integrated townships.
The company is clear that it would rather prefer to accumulate land though open market purchases and agricultural land, than bid for high cost properties at public tender process. While this process is cumbersome, it benefits the company through lower land prices.
In line with industry trend, majority of Unitech’s completed projects have been in the residential segment. Incrementally, 77% of the total planned development space is expected to come from residential segment. This also helps the company’s cash flows as residential segment is a very low working capital intensive business.
Indo Tech Transformers Ltd
CMP: Rs249 BUY
Indo Tech Transformers Ltd is in the process of more than doubling its existing capacity from 2,450MVA to 7,450MVA, including both planned and unplanned expansions. It is venturing into higher rating power transformers segment by setting up a new unit at Kancheepuram. This facility will have the capability to manufacture 400kv class transformers. It is also setting up a new dry type transformer unit in collaboration with Dupont. In order to expand its reach the company is appointing marketing executives pan India, which will help it have pan India focus. We expect the company to benefit from the ongoing investments in the power generation and transmission and distribution space by public and private sector. This should translate into stronger demand for transformers which will help the company’s bottomline grow at 39.1% CAGR over FY06-08E. The stock is currently trading at 16.7x and 12.3x FY07E and FY08E earnings of Rs14.9 and Rs20.1 respectively. We maintain a BUY on the stock with a long term perspective.
Cement Update –
December 2006
Average cement prices in the country have gone up by Rs2 in the beginning of December 2006 as the situation improved in Southern States post monsoon. Cement prices in other regions are stable and ruling at November 2006 levels. Cement prices in Southern States were depressed in the first half of November due to monsoon. Construction activities picked up smartly due to the real estate boom in Southern States.
We expect cement prices to rise in Southern States in January again as they are slightly low compared to pre monsoon levels and the demand is strong. With the onset of peak construction period we expect cement prices to go up in the coming months in other regions also. The dispatch growth is better by 100 basis points compared to the April-November period in FY06.
Outlook
The economy is growing strongly and the October 2006 IIP slowdown is considered to be just a blip due to festivals. Demand for cement is picking up and with the onset of peak construction period, this is expected to grow at a faster pace in future. We feel the initial estimates of 10% growth for FY07 may get surpassed as construction activities pick up. The demand from Housing, Retail and SEZ is expected to keep the growth at higher levels.
The supply growth is not matching with the demand growth at present. With the supply growth lagging behind we see possibilities of further upside in price in the coming months, but we the yoy growth may come down going forward.
The margin for cement companies operating in Tamil Nadu is expected to rise slightly as the state is implementing VAT from January 2007. The sales tax incidence will come down from 14% to 12.5% post VAT.
Our top pick continues to be Kesoram Industries (KIL), which is expected to start its additional capacity in December 2006. We expect tyre margins for the company to improve as the average rubber prices are trading at lower levels compared to last quarter. KIL is ramping up its tyre capacity also. There is possibility for upward revision in our estimates for KIL if rubber and tyre prices continue at the present levels. The tyre industry is expected to do well for the next few years and we find the valuations of KIL not justifying the growth opportunities in the tyre industry. We retain our HOLD rating for ACC and BUY rating on Shree Cement and downgrade Ultratech Cement to HOLD from BUY as we feel the share price of the company reflect possible upside in cement prices and gains from fuel price reductions.
Marico - another acquisition in Egypt
Marico Ltd. has acquired a hair creams and hair gels brand – HairCode from Egypt’s Pyramids Group for an undisclosed consideration. The Pyramids group has agreed for a non-compete agreement in certain segments with Marico. Marico has funded this acquisition through a short-term debt. The brand enjoys 23% market share of the pre and post wash hair care market in Egypt. In September 2006, Marico had acquired a hair care brand called Fiancee, owned by the Ready Group of Egypt. With both these acquisitions, Marico has now achieved a dominant market share of 50% in the Rs1.7bn pre and post wash hair care market in Egypt.
The management expects, Fiancee and HairCode brands to contribute Rs950mn plus to its consolidated turnover during FY08.
Marico has raised Rs1.5bn through a QIP issue of 2.9mn fresh equity shares at Rs522 per share. Post this placement, the issued capital of the company has increased by 5% Rs609mn from Rs580mn. Marico has used the money to retire some of the short-term debt on the company’s books and has brought down the debt: equity ratio from 1:1 as on September 30, 2006 to about 0.4:1. The current debt on the books is at Rs1.8bn.