Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs262
Niche Generics to have marginal impact
Key points
- Unichem Laboratories Ltd has acquired the balance 40% stake in its subsidiary, incorporated in the United Kingdom, Niche Generics Ltd, from a group of managers of Niche Generics.
- Prior to this acquisition, Unichem held a 60% majority stake in the said Niche Generics.
- Niche Generics, UK, is engaged in the business of product development, dossier filing and manufacturing pharmaceutical formulations for the European markets.
- Niche recorded revenues of GBP12.3 million (approximately Rs108.2 crore) in FY2006, with profits of GBP0.1 million (approximately Rs0.9 crore). The performance of the company has been poor largely due to the severe pricing pressures being witnessed in the UK generics market.
- We do not expect the acquisition to impact the profitability of Unichem significantly. However, strategically the company may exploit the strengths like product development, dossier filing and manufacturing of the wholly-owned subsidiary and may accelerate its fillings in the European region, leading to an expansion of its footprint across Europe.
- At the current market price of Rs262, the stock is trading at 9.2x its estimated FY2008E earnings. We maintain our Buy recommendation on the company with a price target of Rs360.
SECTOR UPDATE
Cement
Concrete road ahead
Key points
- Continuing with the growth momentum of the past few months, the cement dispatches for November grew by a strong 13% year on year (yoy) to 12.4 million tonne against a marginal growth of 5% in the same month last year. The cement prices followed suit, surging by 25-30% yoy to the levels of Rs205-210 per 50-kilogram bag for the month.
- The southern region witnessed the highest year-on-year (y-o-y) growth in dispatches in the month at 18%.
- With all the three demand drivers, ie the housing, industry and infrastructure sectors, showing strong signs of growth, the consumption of cement is expected to grow at a compounded annual growth rate (CAGR) of 10-10.5% for the next three years.
- In such a scenario, we expect the cement prices to sustain at the current levels for as long as beyond FY2009. That the industry shares our expectations is evident from Sanghi Industries' recently-announced plan to scale up its cement capacity by 5.7 million tonne over the next two to three years. Even the cash-rich companies including Shree Cement (which is already raising its capacity from 4.5 million metric tonne [MMT] to 10MMT) are looking to expand further and this only reinforces our view that cement prices will remain buoyant for the next two to three years.
- Tamil Nadu will implement the value-added tax (VAT) with effect from January 1, 2007, migrating to a sales tax rate of 12.5% from 14.5% currently. This will spell good news for the south-based cement companies, namely India Cements and Madras Cement.
- Recently, Holcim upped its stake in Gujarat Ambuja Cement Ltd (GACL) by 3.7% to 18.67% for a price of Rs690 crore. This translates into a mammoth enterprise value (EV) of USD270 per tonne. We believe the stake hike would provide a fresh trigger for the cement stocks that have under-performed the Sensex in the last three months.
- We maintain our positive view on the cement sector and believe that the companies that have taken a lead in announcing capacity expansions, such as Grasim Industries, Shree Cement, Jaiprakash Associates, UltraTech Cement and Madras Cement, will benefit the most in a scenario of buoyant prices. We rate Grasim Industries, UltraTech Cement and India Cements as our top large-cap picks in the sector. Among the mid-caps we like Shree Cement and Madras Cement. We also like Orient Paper and Industries and JK Cement on account of their compelling valuations, which are much less than the sector average