Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs875
Current market price: Rs660
Vertical integration to change fortunes
Key points
- Domestic formulation business to outpace industry growth: Driven by steady new launches, a strong therapy-focused field force and good brand building abilities, Ipca Laboratories' (Ipca) domestic formulation business has been growing at above industry growth rates. With an enhanced focus towards chronic therapies and aggressive new launches, Ipca's domestic formulation business would continue to grow at 16-18% during FY2007-09.
- Strong thrust on exports: With steady performance on the domestic front, Ipca is increasingly focusing on its export business, which generates 30% of its total revenues. Driven by aggressive brand promotion in the emerging economies, a revival in the European business and a scale-up in the US business, the formulation exports are projected to grow at a CAGR of 14.5% over FY2007-09.
- API business to benefit from outsourcing contracts: A leader in several API products, Ipca's API business constitutes 33% of its total revenues. With its low-cost advantage, Ipca is set to capture a substantial chunk of the outsourcing business of global pharmaceutical companies. We believe Ipca's API business will grow at a 13.5% CAGR over FY2007-09, driven by a 9% CAGR in the domestic API business and a 15% CAGR in API exports.
- Earnings to gallop at a 23% CAGR: We estimate Ipca's earnings to grow at a CAGR of 23% over FY2007-09E on the back of a 20% CAGR in revenues. The revenues will be driven by a 15.3% CAGR in the domestic business and a 24.4% CAGR in exports. We estimate earnings of Rs59.9 per share in FY2008 and of Rs73.0 per share in FY2009.
- Compelling valuations: At the current market price of Rs660, Ipca is trading at attractive valuations of 11.0x FY2008E earnings and 9.0x FY2009E earnings. It has traditionally been getting PE multiple in low teens. But with the enhanced visibility of growth from the US and European markets, the sustained growth in the domestic business and the healthy return ratios, we believe that the stock should command higher valuations. We therefore recommend a Buy on Ipca with a one-year price target of Rs875, ie an upside of 33% from the current levels.
STOCK UPDATE
Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs542
Current market price: Rs471
Price target revised to Rs542
Result highlights
- Corporation Bank's (CORP) Q2FY2008 profit after tax (PAT) grew by 27% year on year (yoy) to Rs161.3 crore. The growth was primarily driven by a higher non-interest income component. However, the net interest income (NII) growth was better than that of most peers. A surge in the operating expenses due to higher provisioning on account of AS-15 related staff expenses restricted the overall profit growth.
- We have revised our FY2008 and FY2009 earnings estimates upwards by 5% and 3.5% to Rs669.2 crore and Rs773 crore respectively. The upward revision in the earnings is to factor in the higher non-interest income growth and higher AS-15 related expenses likely to be reported by the bank going forward compared with what was envisaged at the beginning of the year.
- CORP's total assets grew by 18% yoy and 5% quarter on quarter (qoq) while the reported NII grew by 17.5% yoy and 7.3% qoq. The NII (adjusted for amortisation) grew by 15.3% yoy and 7% qoq. Its adjusted net interest margin (NIM) showed a sequential improvement unlike many of its peers as it was the only bank that aggressively reduced deposit rates after its dismal NII performance in Q1FY2008 (when NII had seen a growth of 7.8% yoy).
- The non-interest income grew by 62% yoy and by 32.3% qoq to Rs183.2 crore, driven by higher treasury and foreign exchange (forex) incomes. The higher non-interest income growth was the trend for all public sector banks during Q2FY2008.
- CORP's operating expenses jumped up by 25.3% yoy to Rs243.2 crore mainly due to a 39.2% jump yoy in the staff expenses brought about by a Rs47-crore AS-15 related expense charged during the quarter. Despite such a sharp jump in the operating expenses, the operating profit growth was robust at 33.4% yoy brought about by a higher non-interest income growth. However, the core operating profit growth was moderate at 8.7% yoy.
- Provisions and contingencies increased by 128% yoy mainly due to lower investment depreciation write-back and higher standard assets provisioning during the quarter compared with that in the corresponding quarter in the previous year.
- The bank's business growth moderated with advances up by 17% yoy from a 25% growth yoy reported during March 2007. The deposit growth also moderated from 28.8% to 20% for the same period. Its total assets grew by 18% yoy compared with a growth of 30% yoy reported in March 2007. The cut in the deposit rates and a moderation in the balance sheet expansion are welcome as the same would help in maintaining the margins, a task that many public sector banks are finding difficult at a time when credit growth is moderating and deposit costs are escalating.
- The bank's asset quality continues to remain one of the best in the industry with the gross non-performing asset (NPA) down by 21 basis points to 1.9% and the net NPA lower by 11 basis points to 0.35% sequentially.
- CORP has been the first bank to cut deposit rates and show some sequential improvement in its NIM in Q2FY2008. The non-interest income growth is expected to be much better in future. It will be driven by higher treasury gains that would help in improving the bank's return on equity (RoE) by 230 basis points to 17.3% in FY2009 from 15% reported in FY2007. The bank's earnings are expected to grow at a compounded annual growth rate (CAGR) of 20.1% between FY2007 and FY2009, which is much better than its past performance. At the current market price of Rs471 the stock is quoting at 8.7x its FY2009E earnings per share (EPS), 4.5x pre-provisioning profit (PPP) and 1.4x FY2009E book value (BV). We maintain our Buy recommendation on the stock with a revised twelve-month price target of Rs542.
SECTOR UPDATE
Cement
Cement dispatches pick up post-monsoon
The top three cement majors have announced their October dispatches. Volumes for ACC grew by 6.7% year on year (yoy) to 1.76 million metric tonne (MMT), whereas Ambuja Cement's volumes grew by 3.6% yoy to 1.48MMT. Volumes for AV Birla group remained flat at 2.55MMT.
VIEWPOINT
DLF
Strong Q2FY2008 performance
Result highlights
- DLF sales grew by 5.7% quarter on quarter (qoq) to Rs3,249.9 crore in Q2FY2008 despite a reduced revenue contribution from DLF assets Limited (DAL-the promoter owned company involved in the management of real estate properties). The revenues from the sales to DAL declined by 16.0% qoq to Rs1,387 crore and contributed 42.7% to the total revenues in Q2FY2008 (down from 53.8% in Q1FY2008). The non-DAL sales grew by 33.7% qoq to Rs1,963 crore.
- The operating profit margin (OPM) declined by 205 basis points qoq to 69.7% in Q2FY2008. The OPM decline can be attributed to a fall in the margins of non-DAL business, which went down to 69.5% in Q2FY2008 from 77.9% in Q1FY2008 due to unfavourable sales mix (lower margin in retail segment and absence of super luxury sales in residential segment). Consequently, the company's operating profit grew by 2.7% qoq to Rs2,263.7 crore.
- DLF's bottom line grew by 33.2% qoq to Rs2,018.6 crore during the quarter, primarily due to lower tax rate and interest expenses. The company's effective tax rate in Q2FY2008 stood at 14.1% compared with 28.4% in Q1FY2008, mainly due to a favourable sales mix. Moreover, the company invested in wind power assets, which led to the reduction in tax expenses. Additionally, the company also utilised some initial public offer (IPO) funds for the repayment of long term debt. This led to a significant reduction in the interest expenses to Rs3.6 crore in Q2FY2008 from Rs107.7 crore in Q1FY2008.
- During the quarter, the company also issued a 100% interim dividend of Rs2 per share.
- At the current market price of Rs915, the stock trades at 25.1x and 16.6x of consensus FY2008E and FY2009E price-to-earning multiples respectively. In terms of net asset value (NAV), the consensus estimates range from Rs800-820 per share. The stock trades at around 10-15% premium to the NAV estimates. Given its leadership position, superior quality land bank (concentrated in tier I cities and National Capital Region [NCR]), and proven execution skills, DLF has emerged as a preferred investment option in the real estate sector.