Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs731
Acquisition marginally earnings accretive
Key points
- As mentioned in our earlier note dated March 9, 2007, M&M had won the bid to acquire a 43.5% stake in Punjab Tractors at Rs360 a share in an all-cash deal. Private equity fund Actis and the Burman family are selling their respective stakes of 29% and 14.5% in Punjab Tractors.
- M&M's management expects a number of strategic benefits and synergies from the acquisition. Several benefits are expected to come from the brand Swaraj, a well-respected brand that enjoys a good brand loyalty, particularly in the northern states like Punjab, Haryana, Uttar Pradesh and Bihar. M&M is particularly strong in the central, western and southern regions. The acquisition of Punjab Tractors would further increase its presence in the north Indian market.
- The acquisition would make M&M an undisputed leader in the tractor segment, with an overall market share of about 40%. It would help it consolidate its presence in the 31-40 horsepower (hp) category and help it to acquire a dominant status in the >51hp category. This would be a huge positive as a strong growth is expected in the higher-end tractor segment.
- We believe that the acquisition would have a marginal impact on M&M's earnings for FY2008. The management has indicated that it will use a mix of internal resources and debt to fund the acquisition. At present the management has surplus funds of up to Rs800 crore, and its debt equity ratio currently stands at 0.43:1. We expect that about 40-50% of the acquisition cost would be financed through debt. Considering this, our calculations suggest that the deal would be marginally earnings accretive for M&M for FY2008. However, we believe that the deal is a good strategic move by M&M, which would yield substantial long-term benefits for M&M.
- At the current levels, M&M trades at 11x its FY2008E consolidated earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,050.
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,341
Current market price: Rs1,012
R&D pipeline adds sheen
Key points
- Sun Pharma Industries has de-merged its innovative research division into a separate company called Sun Pharma Advanced Research Company (SPARC) Ltd.
- As anticipated Sun Pharma has unfolded the innovative research pipeline for SPARC Ltd, which comprises of 4 new chemical entities (NCE) and 4 novel drug delivery systems (NDDS). The lead molecule—SUN 1334H—that targets anti-allergic disorders is undergoing Phase-II clinical studies in the USA and is likely to enter Phase-III trials in 2008.
- On the NDDS technology front, Sun is working on four platforms including controlled release system (which covers gastro retentive innovative device and WRAP matrix system), dry powder inhalers (DPI), targeted delivery by Nanoemulsion and biodegradable injections/implants.
- Sun Pharma's NCE research is analogue-based which means that the research is for creating newer drugs by modifying the existing ones. Hence, the risks of uncertainty about the molecules are minimal.
- The de-merger would positively affect Sun Pharma Industries, as Sun Pharma currently spends 35-40% of its research and development (R&D) expenses for innovative research, which will be saved on the de-merger. On the other hand, the NDDS technologies developed by SPARC would help Sun Pharma to launch new NDDS products in various markets where it has a presence.
- For lack of information, we are maintaining our earlier estimate for SPARC at Rs54 per share. And as per our earlier estimate, the base business is valued at Rs1,287 per share. Hence, our target value for Sun Pharma remains at Rs1,341 per share.
SECTOR UPDATE
Pharmaceuticals
Strong competition to limit gains from Zolpidem
Ranbaxy Laboratories has received a tentative approval from the US Food and Drug Administration (US FDA) to manufacture and market Zolpidem Tartrate tablets, of 5mg and 10mg strength.
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