Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,550
Current market price: Rs2,321
Upgraded to a Buy
Key points
- Bajaj Auto Ltd (BAL) reported a 7% year-on-year (y-o-y) drop in the motorcycle sales for August 2007. The overall sales declined by 6% year on year (yoy) and grew by 5% month on month (mom) at 195,707 vehicles.
- BAL is launching its new bike Exceed on September 9, 2007 and has already begun its production at the Waluj plant. The company targets to sell 20,000 vehicles in September and about 50,000 vehicles by November 2007. The new vehicle should further fuel the growth in sales numbers in the festive season, beginning next month.
- The company plans to shut down its Akurdi plant from September 2007 and shift the production to its Waluj plant. The company manufactured only its scooter Krystal from this plant. With the production of the same being shifted to Waluj, the company hopes to save through sales tax benefits and other tax incentives.The Akrudi plant is spread over ~200 acres, and we estimate that it could add Rs95 per share to the value of the company, in case the management decides to sell it off.
- The sales numbers for the company as well as the industry should improve going forward. Further, the improved product mix is likely to increase the operating margins for the company going forward. At the current market price of Rs2,321, the stock trades at 19.3x its FY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.4x. We are slightly raising our FY2008E earnings for BAL by 2.7% to Rs109.7. We have valued BAL on-sum-of-the- parts basis and are raising our price target for the company to Rs2,550. We are also upgrading our recommendation on the stock to a Buy.
Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs326
Current market price: Rs288
Demerger of discovery R&D to unlock value
Key points
- Nicholas Piramal India Ltd (NPIL) has announced the demerger of its new chemical entity (NCE) research into a separate company called Nicholas Piramal Research Company (NPRC). The proposed demerger would be effective from April 1, 2007 and the new company will be listed on the bourses by June 2008.
- With a focus on the therapeutic segments of oncology, diabetes, inflammation and infectious diseases, NPIL has a pipeline of 13 molecules, including one molecule in-licensed from Eli Lilly for clinical development. Of the 13 molecules, nine molecules (including the one in-licensed from Eli Lilly) are in pre-clinical development stage, whereas the remaining four molecules are in Phase II clinical trials. Further, four more molecules are scheduled to enter the clinics by the end of FY2008, which would make NPIL one of the largest clinical development pipelines among the Indian players.
- As a part of the demerger plan, NPIL will initially invest Rs4.55 crore as equity capital in the new company (NPRC). It will also transfer Rs90 crore worth of fixed assets (as per book value) and Rs95 crore of cash to the new company. In consideration, NPIL will issue one new share of face value Rs10 each in the new company to all its shareholders for every ten shares of face value Rs2 each held in NPIL (ie in the ratio of 1:10).
- With the proposed demerger, the managament has revised its guidance for FY2008. Even though the top line growth guidance has been maintained at 25%, the operating profit margin (OPM) is expected to expand to 17.7% (as against the earlier guidance of 15.5%) on the back of a Rs70 crore savings in the research and development (R&D) expenses. The capital expenditure (capex) is also expected to come down to Rs150 crore versus the earlier guidance of Rs210 crore. As a result, the earnings per share (EPS) is expected to improve by Rs3 to Rs17.0 (as compared with the earlier guidance of Rs14).
- We have attempted to value NPRC in line with Sun Pharma Advanced Research Company (SPARC, which is the demerged innovative R&D unit of Sun Pharmaceuticals). SPARC is currently trading at an estimated 5.7x its planned R&D spend of around $70 million (Rs287 crore) over the next three years. On assigning a similar multiple to NPRC's projected discovery R&D spend of Rs310 crore, we arrive at a value of Rs1,755.2 crore for NPRC. This translates into a per share value of Rs688.3 (2.545 crore shares of face value Rs10 each). However, for NPIL, whose shares have a face value of Rs2 each, this would imply a per share value of Rs137.6.
- With the demerger of the R&D division, the earnings of the company are expected to improve by Rs3 per share (as per management guidance), implying a price appreciation of Rs54 (if we assign a multiple of 18x to the incremental EPS). We will be revising our estimates for NPIL in order to incorporate the impact of the proposed demerger at a later date. At the current market price of Rs288, the stock is trading at 21.5x its estimated FY2008E earnings and at 17.7x its estimated FY2009E earnings. We maintain our Buy recommendation on the stock with a price target of Rs326.
SECTOR UPDATE
Automobiles
Maruti, Hero Honda lead the show
After lacklustre sales in the past two months, we saw a slight revival in the sales of two-wheelers and four- wheelers in August. The major gainers during the month, however, were the industry leaders Hero Honda and Maruti Suzuki. Both posted a much higher growth than their peers.
VIEWPOINT
Gujarat NRE Coke
Merger of subsidiaries and growing investment value
India NRE Minerals Ltd (INR) proposes to acquire Gujarat NRE resources NL (GUJ) by way of an off market take over bid with the merged operations creating a major Australian coal company with coking coal reserves of ~456 million tonne.
Great Offshore
Fleet expansion boosts FY2007 revenues
We attended the Annual General Meeting (AGM) of Great Offshore (GOL) and the key takeaways from the same are mentioned.