Marksans Pharma
Cluster: Emerging Star
Recommendation: Book Out
Current market price: Rs98
Book out
Key points
- Marksans Pharma's (Marksans) performance in FY2007 has been extremely disappointing. The company's revenues declined by 17% whereas its profits plunged by a massive 56% to Rs9.9 crore. The company has reported poor revenues in all segments of its business. Sales of bulk drugs have decreased by 35.8% year on year (yoy), led by the decline in bulk drug sales in domestic and export markets, whereas the sales of formulations remained flat at Rs136 crore in FY2007.
- Ciprofloxacin and Ranitidine form the mainstay of Marksans' bulk business. With increasing commoditisation and competition from Chinese players, the prices for Ciprofloxacin bulk and Ranitidine bulk have fallen by approximately 28% each in the last one year, leading to a decline in the realisations. Due to this, the company's bulk business has plunged by almost 36% in FY2007 and 42% in Q1FY2008. The uncertainty over the future prices of these bulk drugs is a cause for concern and makes Marksans' bulk business unpredictable.
- Against Rs100 crore worth of orders for the CRAMS business for FY2007, Marksans has only executed Rs52 crore. This was primarily due to a delay in obtaining regulatory approvals for its filings and site variation applications. Marksans has made four certificate of suitability (COS) filings so far for Ciprofloxacin, Ranitidine, Metformin and Losartan. Our growth assumptions for the export business were based on the company receiving these COS approvals and launching these products in FY2007. However, the company has not yet received any of the COS approvals and there seems to be no clarity on the timeline of these approvals. We do not expect a major ramp-up in the company's CRAMS business until the regulatory approvals come through.
- Marksans had raised $50 million in November 2005 through a foreign currency convertible bond (FCCB) issue, primarily to fund acquisitions. Even though the redemption date for the FCCBs is distant--in November 2010--yet the conversion price of each bond into an equity share stands at Rs336.92, which is almost three times the current market price of Rs98 per share. Further, if the bonds are not converted into equity shares by November 2010, Marksans will have to redeem the bonds at 145.2% of their principal amount. We believe the risk of non-conversion and the resultant burden of the redemption premium are causing Marksans to retain the FCCB money as cash instead of deploying it for acquisitions.
- Despite giving repeated promises and timelines, the management has not been able to deliver on several counts, ranging from growth in the domestic market, to execution of the CRAMS orders and approval of regulatory filings. The company seems to be in an investment phase, planning for its future growth in the domestic market and its foray into newer markets such as South Africa, Europe and the USA. At the current price of Rs98.0, the stock is trading at 52x its FY2007 consolidated earnings. In view of the disappointing performance in FY2007 and the uncertain outlook on the future prospects of the company, we advise investors to book out of the stock.
India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs285
Annual report review
On implementation of the revised capex plan the company will emerge as one of largest cement players in the south with a capacity of 15MMT. Consequently, it will have higher pricing power in the wake of the downturn in the cement cycle. The higher prices in the south coupled with the savings from blending will drive the profitability of the company going ahead. Also, the company's strategy of putting up additional capacities through the brownfield route rather than the greenfield route will save its capital costs and thus enhance its RoCE.
We expect the company's earnings to grow at a compounded annual growth rate of 27% over FY2007-09 on an enhanced equity capital of Rs260 crore. The stock has appreciated by 22% in the last one month. At the current market price of Rs285, the stock is currently trading at 9.9x its FY2009 EPS and an enterprise value/EBITDA of 5.8x. We maintain our price target of Rs300 per share.
SECTOR UPDATE
Media
TRAI's notification on interconnection issues in DTH
To facilitate the smooth expansion of direct to home (DTH) services in India, the Telecommunications Regulatory Authority of India (TRAI) has been addressing the key issues that have emerged in the initial stages of the DTH takeoff in the country. TRAI has recently issued regulations mandating the broadcasters to issue Reference Interconnect Offer (RIO) to DTH service providers.
Marksans, Media, India Cements