Dishman Pharmaceuticals and Chemicals Limited
Dishman Pharmaceuticals and Chemicals Limited’s (Dishman) Q3 FY07 results were in line with expectations. Sales recorded a growth of 181% to Rs1.7bn driven by CRAMS which includes the full impact of Carbogen Amcis (CA-sales Rs820mn) for the first time. Sales for EM (Eposartan Mesylate) to Solvay are back on track after a sluggish H1 FY07 and on target to record Rs1bn for FY07. Operating profit margin (OPM) declined by 110bps to 28.2% as CA has lower margins as compared to other business segments of Dishman. Consolidation of CA which has led to higher depreciation and interest outgo restricted PAT growth to 25% to Rs244mn, translating into an annualized EPS of Rs12 on a fully diluted basis.
Post result conference call with the management has further reaffirmed our view that Dishman would be one of the best bets in the growing outsourcing space. Starting with Solvay as its only client in 2003, Dishman has made significant progress in this space, emerging as a preferred supplier for big pharma companies (GSK, Merck, Krka, AZN, Sanofi Aventis). CA business is gaining increasing momentum surpassing its own estimates for CY06. With capacity at Amcis nearing saturation, a few customers have expressed an in principle approval to shift operations to Dishman India. This we believe is a very positive sign for both Dishman and the industry at large as it shows confidence in Dishman’s IPR adherence.
Apart from CRAMS, Dishman has also made significant progress in the Electrolyte QUATs business and has signed a couple of long term contracts with global majors. One contract with Ferro Corporation worth US$6mn annually is progressing smoothly. In addition, Dishman has broadened its top management by appointing a COO and a CFO, which indicates robust growth in the years to come.
We are very positive on Dishman’s CRAMS strategy and believe Dishman will be able to leverage strongly on the relations developed with big pharma companies in CRAMS. At Rs236, the stock is trading at 22.7x FY07E EPS of Rs11 and 14.9x FY08E EPS of Rs16.8. We maintain BUY with a target price of Rs286 based on 17x FY08 earnings.
Kesoram Industries Ltd. (KIL) Q3FY07
Result Update
Kesoram Industries Ltd.'s (KIL) cement despatch for Q3FY07 increased by 10.6% to 0.84mn ton and tyre volumes increased by 19.9% to 20331 ton. Cement capacity utilization for Q3FY07 increased to 116% compared to 105% in Q3FY06 and Q2FY07. We estimate FY07 despatches to be at 3.35mn ton with new capacity expected to commence commercial production in March 2007. We expect cement volumes to be at 4.2mn ton for FY08 with staggered production for the new capacity.
KIL’s gross cement realization went up by 45.7% to Rs3285 yoy for Q3FY07 but was down sequentially by 2.7%. Cement prices are looking up in the recent months. We expect realisations for KIL to improve 3.6% in FY08 over FY07. The recent customs duty removal for cement is expected to have marginal impact on pricing front and prices are expected to rule firm till major capacities are coming in FY09.
Tyre margin for Q3FY07 has come down to 4.1% from 4.6% on yoy basis and on sequential basis the same has come down from 6.1%. Prices of key inputs like Carbon Black, NTCF and Synthetic Rubber has firmed up in the quarter and reduction in average natural rubber price to the tune of 6% has not had a major impact. Tyre producers reduced the prices of tyres also by nearly 4% in September 2006 which has reduced the EBIT margins for tyre segment. We expect natural rubber prices to continue at the present levels and possibility of increase in tyre prices by the producers if the prices exceed Rs10000 per quintal. Recent reduction in Carbon Black is a positive for the sector.
Rayon and Transparent Paper (TP) division has turned around and posted profits at EBIT level in Q3FY07. Definitive anti-dumping duty was imposed for VFY in Q2FY07 and provisional duty was imposed on TP in Q4FY06. This has improved the prospects of these segments and prices have started moving up. From negative EBIT margin in Q3FY06 and Q2FY07 the segment has recorded 4.3% EBIT margin in Q3FY07.
KIL’s share is discounting its FY07 and FY08 estimated earnings by 10.1x and 8.4x. We expect cement and tyre business margins to improve going forward with price increases. With increased cement capacity and ongoing expansion on tyre capacity, we expect KIL to be well positioned to exploit the up-cycle in these sectors. KIL is expanding its cement capacity by 1.5mn ton which is expected to come online in Q4FY09 and planning to increase its tyre capacity by putting Greenfield tyre capacity at Jharkhand. It has purchased land for new tyre capacity at Rs600mn recently. With major capacity expansions, KIL is expected to become a mid-sized player in Cement and Tyres and command better valuations going forward. We revise our target from Rs641 to Rs668 based on estimated FY08 earnings upgrade. Our target discounts FY08 by 10x. We maintain our BUY rating on the stock.
Chennai Petroleum Corporation Ltd. (CPCL) Q3FY07
Result Update
Chennai Petroleum Corporation Ltd. (CPCL) announced Q3 FY07 results, which were below expectations primarily on account of a shutdown in the month of December 2006. Net sales rose by 7.9% yoy to Rs59bn on account of higher realizations and also on back of refund of Rs1.2bn offered to oil marketing companies as discount on LPG and SKO for the period of April 2006 to September 2006. The profit growth was stunted, as GRMs for the company remained flat at US$2.7/bbl, which was on backdrop of weakness in refining margins across the globe and also on account of Rs1bn inventory loss.
Going ahead the company is the process of expanding its capacities from the current levels of 10.5mn tons to around 12.3mn tons. The expansion is through de-bottlenecking of the existing facilities. We have a positive outlook for the trend in gross refining margins going ahead as demand is likely to remain strong for petroleum products especially from developing countries such as India and China. The emission standards are getting stringent in most of the developing and developed economies leading to increased demand for low sulphur fuels. Existing refineries are spending on upgrading their facilities to process heavier varieties of crude oil and hence there are no major capacity additions coming on stream during the next couple of years. Apart from these factors, a complex refinery can also leverage upon the increasing differential between prices of heavy and light crude. CPCL's Manali refinery, which has a nelson complexity index of over 9, should be able to clock higher GRMs in Q4 and also in the couple of years going ahead.
On the above premise that the GRMs will strengthen and also for the fact that CPCL is increasing its capacity by 1.8mn tons per annum, we believe that the company can witness a CAGR of 15.2% between FY06 and FY09 in earnings. The stock at CMP of Rs204, trades at 5.1x and 4.6x FY08 and FY09 estimated EPS of Rs43.9 and Rs49.4 respectively. With high complexity index of the refinery and rising demand for lower emission products, we feel that CPCL should trade at 4.5 times FY09 EBIDTA, which yields a target of Rs282 giving an upside of 25.3%. We recommend a BUY.
CRR Hike Impact
In a surprising move RBI last evening hiked the Cash Reserve Ratio (CRR) currently at 5.5% by 50bps effective in two stages from 17th February and 3rd March 2007. This is likely to suck out Rs140bn liquidity from the market. The move seems to emanate from RBI’s concern on rising inflation and sustained high credit growth.
We expect the banking and real estate sector to be the biggest losers of this move. Hike in CRR in all likelihood will prompt for another round of PLR hikes, which would pull down consumer loan growth and especially mortgage loans. The ripple effect of this would be felt by the real estate sector, where this could form the much awaited trigger for drop in real estate prices, which have held on despite rising interest rates (small correction in some parts).