Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs352
Price target revised to Rs500
Key points
- Pfizer Inc has lost the initial bid for a new patent on Lipitor, the world's best-selling drug that could extend the company's monopoly on the medicine until June 2011.
- The rejection of Pfizer Inc's plea to reissue the invalidated '893 patent by the US Patent & Trademark Office brightens Ranbaxy Laboratories' (Ranbaxy) chances of entering the $8.5-billion Lipitor market in March 2010, 15 months ahead of the expiry of the invalidated '893 patent.
- Lipitor is the world's largest selling drug with annual sales of $8.5 billion in 2006. Using the discounted cash flow (DCF) method, we have valued the Lipitor exclusivity opportunity for Ranbaxy at Rs48 per share.
- Ranbaxy has created a rich pipeline of one-time opportunities for itself, the current ones being for Pravastatin 80mg, Valtrex and Isoptin SR (an authorised generic). Further, the company has a First-to-File (FTF) status on approximately 20 Para IV abbreviated new drug application (ANDA) filings, representing a market size of about $26 billion. The management is confident of monetising one such opportunity every year during CY2008-10.
- Ranbaxy has underperformed the market by over 30% over the last one year, largely due to the overhang of the regulatory issues with the company's Paonta Sahib plant and the raid by the US Food and Drug Administration (USFDA) on its US offices. However, we believe that all the negatives relating to the company have been priced in, with limited downside potential from the current levels.
- To account for the lower dollar/rupee exchange rate for CY2007, we have adjusted our CY2007 revenues and earnings estimates by 5.7% and 10.9% respectively. Our revised earnings estimate for CY2007 now stands at Rs18.5 per share. We are also introducing our CY2008 estimates for Ranbaxy in this report. We estimate a 14% growth in its revenues to Rs7,456.2 crore and a 4.7% decline in its profits to Rs706.0 crore in CY2008, yielding earnings of Rs17.7 per share in CY2008.
- At the current market price of Rs352, Ranbaxy is trading at 19.0x its estimated CY2007 and 19.9x its estimated CY2008 earnings. We maintain our Buy recommendation on the stock, with a revised price target of Rs500.
Tourism Finance Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs30
Current market price: Rs25
Operating performance to improve going forward
Result highlights
- For Q1FY2008 Tourism Finance Corporation of India (TFCI) has reported an 86% year-on-year (y-o-y) growth in its profit after tax (PAT) to Rs1.6 crore. The profit growth was aided by improved operating performance and lower provisions. The quarter-on-quarter (q-o-q) comparison has not been presented as we feel it is not relevant for TFCI since most of its earnings are back-ended with the fourth quarter accounting for over 65% of its FY2007 PAT.
- In the first quarter, the net interest income (NII) grew by 40.7% year on year (yoy) to Rs4.7 crore, mainly driven by a y-o-y decline of 10.3% in the interest expense to Rs8.2 crore. Going forward, we expect the interest expense to remain subdued due to the limited borrowing requirements of TFCI for FY2008. The existing funds coupled with the recoveries and planned capital raising should be sufficient for TFCI's business plans.
- TFCI's operating expenses jumped by 47.8% mainly due to a significant increase in the lease rentals for its office space. The increase had come into effect from October 2006—hence the full impact of the same would keep the operating expenses elevated in FY2008. The operating profit was up by 35.4% to Rs3.8 crore.
- Provisions and contingencies declined by 33.3% to Rs1 crore, reflecting the lower provisioning requirement as the net non-performing asset (NPA) was almost nil and incremental defaults were contained during the first quarter.
- The tax outflow jumped up significantly during the quarter due a higher income and also a higher effective tax rate of 38% for Q1FY2008 compared with 23% in Q1FY2007 and 18% in FY2007. Going forward, the management expects the effective tax rate to decline but the overall tax outflow to remain higher due to a higher income.
- We expect TFCI's earnings to grow at a 32% compounded annual growth rate over the period FY2006-09. The business prospects for the company have improved significantly on the back of the capacity expansion planned in the hotel and tourism sectors for the next three to four years. At the current market price of Rs25 the stock is quoting at 6.1x its FY2009E earnings and 0.7x FY2009E book value. We maintain our Buy recommendation on the stock with the price target of Rs30.
VIEWPOINT
Kanoria Chemicals & Industries
Capex of Rs150 crore for expansion
We attended the analyst meet of Kanoria Chemicals & Industries Ltd (KCIL) to discuss the future prospects and expansion plans of the company. We present the key takeaways from the meet.