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Monday, January 01, 2007

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2007: Year of the unknown!

Let’s begin by talking some of the things that will or will not certainly happen in 2007. First for the things that are certain. It will not be a leap year. It has been designated as the International Polar Year. Most of the 2007 will overlap with the ‘Year of the Pig’ in the Chinese calendar. Dates from the 1st of January 2007 until the 17th of February 2007 will be in the ‘Year of the Dog’ in the Chinese calendar.

Well, that’s for China. What about India? For us, 2007 will be a year of taking stock. For the economy, the government and policymakers, it marks the end of the 10th five-year plan, thus raising the need to reassess the targets set in 2002 versus actual performance at the end of the plan period. For the stock markets, unlike the Chinese pigs and dogs, 2007 will most likely mark an intense tug of war between the bulls and the bears. These things are certain!

Now, for things uncertain! Considering the current tight balance, there is less surety on the way the Indian economy will fare in 2007. As for the stock markets, will they be able to repeat their performance of the past two years in 2007 as well? Our answer, “Maybe! Maybe not!” That’s the uncertainty!

2006: The year that was…

After a 44% YoY rise in 2005, the BSE Sensex repeated the performance to the tee in 2006 as well (another 44% YoY rise). This strong performance from the benchmark index has been broad based considering that only 2 of the 30 index stocks closed the year with a decline in their market capitalisation. The Sensex surge was despite rising global imbalances and vibes of a domestic overheating. The year 2006 also saw crude prices rising to record high levels and interest rates in key developed and developing economies hardening.

As far as financial performance of Quantum Universe (350 companies) goes, while net sales in the first half of the fiscal 2006-07 grew by 29% YoY (22% YoY in 1HFY06), net profit grew at a stronger rate of 34% YoY (15% YoY in 1HFY06). More importantly, the net profitability of this sample improved from 9.6% in 1HFY06 to 10.1% in 1HFY07, indicating better pricing scenario and lower input cost pressure.

FII activity:

As far as FII activity was concerned, the year saw US$ 8.3 bn of net inflows into Indian equities (US$ 10.7 bn in 2005). While the quantum of investments was low when compared to the previous year, it still played a significant part in the Sensex rally. Another indication of FIIs considering India as an investment destination, apart from the FII investments, is the ever-increasing number of FII registrations with the stock market regulator, SEBI. The same have increased from about 500 in early 2003 to 993 as of today.

The solid economic performance of the Indian economy in general and India Inc. in particular has played their part in the country getting more mind-share among foreign investors. Apart from this, lack of enough growth opportunities elsewhere and a weakening US dollar (owing to the superpower’s burgeoniong current account deficit) has also been prompting foreign investors to invest in non-dollar assets, which is partially responsible for FII money flowing into emerging markets. However, any signs of reversal in any of these fronts would be viewed negatively and investors must remain alert, as this reversal would force FIIs (especially the momentum guys) to reallocate to better opportunities.

What we said at the start of 2006?

Interest rates and the stock market: Our belief that hardening of interest rates in the developed world (the largest suppliers of capital) will have an impact on emerging markets like India (in terms of money flow), was vindicated in 2006. At the beginning of 2006, we had warned investors of this risk, which reared its head during the year.

We clearly saw valuations of stocks/sectors getting upgraded just because there was a demand for Indian equities. And if the crash of May 2006 were any indication to go by, speculators/punters/tippers would have learnt their lessons the hard way. As far as long-term investors are concerned, we had indicated that the crash presented them with an opportunity to allocate (more) money towards equities, while sticking to their respective risk-return profiles.

If investors are to remember, the pressure on Indian equities (and those of other emerging markets) in May 2006 was a knee-jerk reaction to the US Fed’s hawkish stance on interest rates, led by its own excesses and indicated by inflationary pressure on the world’s largest economy. While it was difficult to predict when the Fed will stop hiking interest rates (it finally did it in June 2006), we remained firm believers of the fact that any further rate hike would have an adverse impact on FII inflows into India. Our reasoning was that a further rise in Fed funds rates could have reduced the risk premium between the US and emerging market equities, thus leading to a U-turn in the movement of capital to safer US T-Bills and bonds.

Past performers may be laggards: Our concerns with respect to prime valuations of capital goods stocks did not reflect in their stock market performance as these maintained their outperformer status during 2006 as well (reasons mentioned below). On the other side of the spectrum, pharma maintained its underperformer status in 2006, as it had in 2005 (reasons mentioned below). However, FMCG, Auto and IT indices, which had outperformed the Sensex during 2005, turned out to be relative underperformers in 2006.

Sector leader: Capital Goods

While the scale of outperformance was significantly lower, the performance was a repetition of what we had witnessed in 2005. During 2006, the BSE Capital Goods index returned 9% more than the benchmark Sensex. And why not! The sector has been a witness to tremendous growth over the past few quarters, owing to large scale infrastructure spending that has directly flowed into companies' order books and topline. And the financial performance has been rewarded by the stock markets. The major beneficiaries have been those who are focused on the power (generation, transmission and distribution) sector.

As far as the other segments of capital goods are concerned - infrastructure construction, hydrocarbons and process industries - growth will be a factor of greater capacity addition and increased private-public participation.

Outlook for capital goods:

World-class infrastructure has emerged as one of the most important necessities for unleashing high and sustained growth and alleviation of poverty in any economy. And with poor infrastructure to support other growth initiatives, the Indian economy continues to be a laggard when compared to its developing peers. From a policy perspective, however, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in. Considering these factors, we expect the sector to grow strongly into the future. However, scale and execution capabilities will be the key mantras for success for the engineering companies.

Sector laggard(s)

I. Pharmaceuticals: While adverse ruling in cases of some generic drugs and price decline in the US market had led to the underperformance of the healthcare sector in 2005, in 2006, the pressure was on the back of some serious price erosion in the US generics market (due to rise in the level of competition and lesser number of drugs going off-patent) and slow growth in product launches from MNC companies in the domestic market.

Outlook for pharmaceuticals: While the fundamentals driving the generics market continue to remain strong, the brutal pricing environment is a cause for concern. It must be noted that the competition has tremendously increased, escalating the extent of price erosion. Having said that, while the competition most probably will show no signs of abating, a considerable rise in the patent expiries of blockbuster drugs in the coming years is likely to provide a breather to generic companies and boost revenues. The ability to manufacture drugs at the cheapest cost and leverage one's marketing and distributing network to increase reach will be the key to survival.

We also believe that partnerships are likely to play a crucial role in driving growth. This could be in generics (contract manufacturing, authorised generics) or research (R&D collaboration, contract research, out-licensing of molecules) or custom manufacturing for innovator companies. In the domestic market, with the introduction of the patent law and subsequent slowdown of product launches, albeit at a gradual pace, companies entering into in-licensing agreements with innovator companies will have the upper hand. This will ensure a steady flow of product launches in this market. For MNC companies, while new product introductions from their parent's folio will be the key to success going forward, in our view, it is unlikely to be a cakewalk for them. This is because prices of these patented products will most likely be subject to 'price negotiation'.

II. FMCG: After a year of outperformance in 2005, the BSE FMCG Index grossly underperformed the benchmark Sensex during 2006. For every Rs 100 invested in the FMCG index at the start of 2006, yielded Rs 116 (16% returns) at the end of the year (against Sensex returns of 44%). The problem for FMCG companies was not in terms of growth. In fact, 2006 saw strong volume growth numbers from most of the sector companies, largely on the back of robust economic performance and consequently higher consumption spending. Even the rural demand kicked in during the year. The issue that plagued the sector pertained to declining brand strength due to intensifying competition across categories, and added pressure on profitability owing to rising input costs. Even in cases where companies resorted to price hikes to take care of rising raw material costs, the instances were few, indicating a fear of loss of market share. This led to increased volatility in performance of the companies from the sector, and the consequence was seen in their stock prices.

Outlook for FMCG: In 2007, the environment will no doubt be competitive for FMCG players. However, growth will remain a factor of ‘volumes’. Product differentiation and innovation along with technology and processes will be the critical aspects for growth. Also, the leading domestic FMCG players, who have started to spread their wings in the overseas market, will see a greater global shift during 2007. The bottomline from investors’ perspective is to have a balanced portfolio in the FMCG sector (large and niche players) to reap benefits of the consumption story going forward. More importantly, investors need to understand that FMCG is not a high-return sector and to that extent, expectations have to be realistic.

What to expect in 2007?

Volatility, uncertainty, and more of the same! We believe that the Indian and global economy, interest rates, and stock markets are more tightly balanced as we near the end of 2006 than these were anytime in the near past. Let us see where these are headed in 2007

Indian economy: We believe that the three key macro factors of demographics, globalisation and economic reforms, which have led India's strong economic performance during the past three years, shall continue to pump up the economic activity in the country going forward as well. However, there is a caveat to this assumption. While we believe that these factors will aid the economy's strong performance in the coming years, the fact that a part of growth in the past has been a result of the sharp rise in capital flows (in response to an increase in the global risk appetite), which has allowed the government and the RBI to pursue relatively loose fiscal and monetary policies, puts the economic growth to a test of risk. In our view, the government needs to implement measures to stimulate the supply-side by investing in infrastructure, implementing labor reforms, improving the management of its finances and strengthening the institutional and administrative framework.

As reported in the Economist, “The shining dreams evoked by the world’s recent recognition of India as a great emerging power have always seemed at odds with the messy reality of the country itself. In 2007, dream and reality will collide in each of India’s three claims to greatness: as a country of more than 1 billion people that remains a vibrant democracy; as a power accepted at the global high table and at peace with its neighbours; and as an economy enjoying almost Chinese rates of growth. All three claims will survive the collision, emerging not so much tarnished as strengthened by a new sense of realism.”

Interest rates: We believe that the days of cheap money are near to over. And if the vibes from the RBI are an indication, we shall see more action on the Mint Road. The first week of 2007 will see the cash reserve ratio (CRR, or an indicative rate for broader interest rate scenario in the economy) being raised by a further 25 basis points to 5.5% (already announced; effective January 2007). Considering the globalisation of the international financial system, formulating an independent monetary policy is expected to become more complex in 2007. The RBI will have to take into account, among other issues, developments in the global economic situation, the international inflationary situation, interest rate scenario, exchange rate movements and capital flows while formulating its monetary policy for 2007-08.

Stockmarkets and valuations: At the current juncture, Indian equities, on a broader basis, are trading at almost 19 times one-year forward earnings. While this looks expensive on a peer comparison basis (relative to other emerging markets in Asia and South America), considering our bottom-up approach to stock selection, we still find value in stocks from a long-term perspective. As for our view on the Sensex is concerned, we never had one in the past, and do not intend to have one in the future as well. How does that matter when one is following a stock-specific approach?

We, in fact, hope that the BSE Sensex loses some of its relevance in 2007. There have been innumerable instances in the past when gullible investors have drowned in the sea of stock market uncertainty just because they jumped on their experts’ advise that the ‘Sensex will touch XYZ,000 in 1 or 2 months time!’ It is for this reason we hope for 2007 to witness an increasing irrelevance of the Sensex. And this is what we are asking readers of this article to do. Block the noise! Stop listening to the paranoid experts! Sleep easy!

We believe that one of the biggest downside risks to the performance of Indian equities in 2007 will be a reversal of global capital flows from emerging and developing economies in the case of realignment of global interest rates. Also, slow investment growth on account of higher domestic interest rates with the tightening of monetary policy stance by the RBI will only add to the pressure.

These factor, however, do not alter our view on equities as an asset class from a 3-5 years perspective. While it might not be a one-way ride for stocks in 2007 and beyond, what is more important to note is that equities will provide attractive inflation adjusted returns in the long term. You just have to be rational in your choices and not follow the herd, and you need to value stocks not beyond any accurate or rational reflection of their actual worth. This is not to say that your (equity) investments cannot legitimately enjoy a huge leap in value, but this leap should be justified by the prospects of the underlying companies, and not just by a mass of investors following each other.

The unreasonable belief in the possibility of getting 'rich' quickly is the primary reason people burn their fingers in market crashes. One tends to neglect the fact that there is a direct correlation between high risk and high returns. While the history of market crashes does not in any way foretell anything dire for the future, the best thing that you, as an investor, can do in 2007 is keep yourself educated, well informed and well practiced in doing your homework.

“Trust no future, however pleasant! Let the dead past bury its dead! Act, act in the living present! Heart within and God overhead.” - Henry Wadsworth Longfellow, Psalm of Life

Wishing you all a very happy new year!

Listless trade likely to mark New Year beginning

The year 2006 was a good one for the Indian investors as the benchmarks - the BSE Sensex and the NSE's S&P CNX Nifty - generated returns of 47 per cent and 41 per cent respectively. Even the performance of broader indices - BSE-500 with 39 per cent, the BSE Midcap (31 per cent) and the BSE Smallcap (16 per cent) - should be satisfying to the general investment class. This is the fifth straight year of gains for the Indian markets.

Emerging markets

One of the major reasons for the Indian bourses to show robust performance was the strong inflow from foreign investors. In fact, it was a record inflow in 2006 for emerging markets (including India). According to EPFR, an emerging market fund activity tracking firm, about $22.4 billion entered the emerging markets in 2006 with China attracting half of the amount. Inflows are around nine per cent higher than the record inflow of $20.3 billion during the whole of 2005.

India losing sheen?

Despite emerging markets attracting strong inflows, India seemed to be out of favour with the global investors, at least for now, as overall foreign institutional investments slipped in 2006. According to SEBI data, FIIs were net investors to the tune of Rs 36,539 crore in 2006 - much below 2005 level of Rs 47,181.20 crore - a drop of 22.5 per cent, as they indulged in profit booking at higher levels. In dollar terms, FIIs were net investors of $7.993 billion against $10.701 billion in 2005, a decline of 25 per cent.

However, the total number of FIIs operating in India crossed the 1,000-mark for the first time and has gone up to 1,035.

Consolidation seen

So what is in store for 2007? General view among investment circles is that 2007 may not be as fabulous as 2005 or 2006. A majority of them say that the market has entered consolidation phase. Despite recent slowing down in FII flows, India's macro picture is still intact. Strong economic growth remains the key trigger, with India's GDP for the first half of the current fiscal ended September hitting 9.1 per cent. The RBI has forecast full-year growth of 8 per cent. Corporate earnings have been growing at 20-23 per cent for the last two years. Most analysts are hopeful that the trend may continue for the Indian Inc in 2007 too.

The stock market was expected to remain stable despite concerns that the RBI would raise interest rates early next year with inflation rate nearing 5.5-mark against the Government's targeted level of below five per cent.

This week, the Indian bourses may not be an action-packed one. With overseas funds in no hurry to commit fresh investments and are in profit-booking mood, listless trade may mark the beginning of the New Year.

Corporates are scheduled to announce their Q3 performance soon; Infosys and HDFC Bank would report their earnings on January 11. Market may see fresh commitments from big funds only after seeing the initial trend (Q3 numbers) and more importantly the outlook they are going to present for the next quarter as well as next fiscal.

Will the Sensex touch 20000?

Domestic equity markets have witnessed a steady rise in the last four years. The BSE Sensex gained 44% in 2006 alone. Returns from the Indian markets in the last two years have been substantially higher than most other world markets. Admittedly, this is the result of a never-seen-before degree of buoyancy in the economy and robust corporate profit growth.

India's economic growth remains buoyant, with real GDP growth at 9.1% YoY for first half FY07. India continues to be the second fastest growing economy in the world after China. Favourable demographics and rising levels of disposable income would co-ntinue to spur consumption growth. Hence, urban consumption, investment growth led by corporate capex and infrastructure and growth in services will help India move towards higher levels of sustainable growth.

In addition, the growing trade linkages and reducing irritants for trade, are helping foster a positive environment for overall GDP growth. Further, this is helped by a tax system, which is, slowly coming close to adopting global best practices. India remains resilient and decoupled fr-om a global economic slowdown. This is because the main growth driver for our economy is private consumption expenditure, which constitutes 61% of the GDP, and not exports.

It's a fact that the valuations of the market are above the past average, with the P/E multiple for the BSE Sensex (on a one year forward basis) at 17.9 times, which is 42% higher than the average P/E of 12.6 times in the last nine years. However, there is a strong case for these premium valuations. The quarterly earnings from corporate India and the overall economic gro-wth has been strong. The strong fundamentals together with the importance of corporate governance and transparency make India attractive from an investment point of view.

Therefore, the overall long term trend remains positive. Many believe that the future growth of India for next two decades will have no parallels in the annals of economic history, except the last two decades in China. With this newfound enthusiasm about the long-term prospect of Indian economy, it's conceivable that Sensex will continue its northward journey in '07 and beyond. It could touch 20000 in 18 to 24 months.

An ID to confuse the MF investor

There is a sour acronym soup brewing in the financial markets. After Sebi’s investor identification number — MAFIN, Amfi has put its broth to boil with MIN, a number that investors will have to quote while making mutual fund investments of more than Rs 50,000.

At this rate, the next may be the insurance industry coming up with another identification scheme ending with ‘-IN’. Forget the prevention of proliferation of nuclear weapons, somebody should check the proliferation of identification numbers.

All the financial audit trail can be accomplished by using the permanent account number (PAN). Then, what is the point of having multiple identification numbers that could turn out to be a nightmare in terms of data extraction or issues related to data security?

“In mature systems, it is advisable to have a single identification number or code for an individual to help maintain integrity and availability of data to reduce overheads. For improved information security, it is important to have one piece of information compared to discrete pieces,” says Raghu Raman, CEO, Mahindra Special Services Group.

Ideally, mutual funds do not even need to have the PAN as they never take investments in cash. Mutual fund investments can be made by cheques. The fact that an investor has a cheque means that the investor has a bank account. This means that due diligence has been taken while making an individual a customer of the bank.

In case a bank customer is a front for someone and is investing it into a mutual fund, the extra-ordinary cash transaction can always be spotted by the bank and reported to the tax guys. The bank also makes sure that the identity of the customer is genuine. It takes into consideration his PAN and other identification details that include an address proof in the form a passport or an electricity or telephone bill. In many cases a passport is insisted as it is not so easy to forge a passport. Individuals do not mind citing the PAN on any required document as it is considered like a social security number.

The mutual fund industry was against the introduction of the MIN as it will only make the investors process of investing more complicated. The asset management companies will now be paying for the allocation of MIN, and thus fund houses are not happy about taking this unnecessary additional expense on their balance sheet. Mutual funds always insist on the PAN when investors invest more than Rs 50,000 in one particular scheme and they feel that there was no need to have a separate number as the PAN number is supposed to be universal.

In the interest of customer privacy and data security, it is better to have one identification number than many. It is even better when that number is in custody with a trusted authority like the income tax department.

Vodafone's hiked bid values HEL over $20 bn

The bidding war for the country’s fourth largest mobile phone company Hutch-Essar (HEL) has gained momentum with leading contender Vodafone slated to make a fresh bid this week. According to sources, the UK telecom major has assigned a value of over $20 billion for the entire company. At this valuation, Hong-Kong based Hutchison Whampoa’s 67% stake in HEL is pegged at about $14 billion. In addition, Vodafone is also expected to incur an extra cost of about $2 billion for control of the company.

Vodafone, the world’s largest cellphone firm, is believed to have earlier valued the Hutch at $17-18 billion. Sources confirmed that Vodafone was likely to table its fresh bid for the 67% stake this week through its advisor. When contacted, the Vodafone spokesperson Bobby Leach told ET: “I’m afraid this is all speculation and we have no comment to make.”

Hutchison Whampoa, owned by Hong-Kong tycoon Li Ka-shing, holds 67% stake in HEL, with the Ruias of the Essar group holding the remaining 33%. As reported by ET, the Ruias, last week had offered to buy Hutchison Group’s 67% stake for $11 billion, at an estimated enterprise value of about $17-18 billion for the company. The offer was made through the group’s advisors Morgan Stanley and Bear Stearns.

However, Vodafone’s proposed bid raises the enterprise valuation of the company to over $20 billion. Vodafone’s new bid will also be in line with the Hong Kong conglomerate’s stance that it will sell its 67% stake only for $14 billion plus, and would not ‘consider any offer below this figure’.

Even as some shareholders have objected to the high valuations being assigned to HEL, Vodafone’s top management appears to be going ahead full steam with the bid. Also, its principal share holder Standard Life, which in the past has openly criticised the company’s acquisition moves has endorsed the move to bid for HEL. (Standard is among the company’s three major stakeholders.)

Last week, Reliance Communications (RCOM) chairman Anil Ambani moved the battle to the next level by officially confirming his RCOM’s interest in acquiring HEL.

At the moment Vodafone, RCOM and the Ruias are the front runners to buy out the Hutchison Group’s stake in HEL.
Meanwhile, fresh speculation is doing the rounds that the Ruias were having different views on their strategy, with chairman Shashi Ruia, wanting to sell-out and exit the telecom business, while Ravi Ruia wanted to continue by acquiring the remaining 67%.

However, when contacted, Essar sources rubbished these rumours as ‘utterly baseless’.
If Vodafone acquires Hutch, India will account for its third largest customer base. The UK-based company operates in 27 markets, globally. Germany is the largest market for Vodafone with 29 million subscribers while the US (where it has 44.4% stake in Verizon) is the second largest. If the deal goes through, India would become the country with most potential for expansion for Vodafone, with only 11% teledensity. Most countries where Vodafone operates currently are reaching the saturation point. Switzerland has a teledensity 96% followed by Germany (80%), US (76%), France (78%), Turkey (67%) and Romania (70%).

Vodafone’s strategy clearly is to concentrate its resources on emerging markets. In a statement issued earlier this month, the company states that its focus will now be markets of EMAPA — Eastern Europe, Middle East, Africa, Asia Pacific and affiliates.

Vodafone’s move to join the war for Hutch Essar, and in the process sellout its 10% stake in Bharti Airtel, is in line with its global exit strategy. Vodaone’s recent history reveals that the telecom behemoth has exit markets, where it did not command a leadership position. And, it has been shedding stake in operators, where all doors to pick up controlling stake remained closed.

Stocks you can pick up this week

Indraprastha Gas
Research: India Infoline
Ratings: Buy
CMP: Rs 116 (Face Value Rs 10)
12-Month Price Target: Rs 162

Mandatory sources such as DTC buses, taxis and auto rickshaws, generate approximately 92% of the revenues for the CNG segment of Indraprastha Gas (IGL). The client profile is now broadening with private cars realising the advantages of CNG over petrol or diesel.

The increased awareness along with widespread infrastructure set up by IGL will translate into increased conversions of private vehicles. Recent statistics indicate that 2,000-2,500 conversions are happening every month. The company is likely to witness a CAGR of 12.8% in revenues from sale of CNG between FY06-FY09.

As only around 8% of CNG volumes arise from discretionary sources, the business risk with IGL is very low. Further, there is a strong visibility for revenue and profitability growth over the next few years as the mandatory sources cannot shift back to other fuels and the cost dynamics will continue to attract private cars towards conversion to CNG.

With features of pressurised natural gas (PNG) also making it an attractive fuel in comparison to LPG, the growth in PNG customers is sustainable. India Infoline feels that the stock can continue to trade at 12 times one year forward earnings or 6 times EV/EBIDTA. Assigning a P/E multiple of 12x to FY09 EPS of Rs13.6 our target price works out to Rs162.7 providing an upside of 42.6%.

Cadila Healthcare
Research: Angel Broking
Ratings: Buy
CMP: Rs 351 (Face Value Rs 5)
12-Month Price Target: Rs 430

Over the past three years the company has taken initiatives to enhance presence in the regulated markets. New product launches in Europe (France) and US, will aid the robust export growth.

During its first year of operations (FY2006), company grossed sales of Rs 50 crore, which is a good performance given that the company has been a late entrant in this region, in comparison to its peers.

Going forward, with a robust product pipeline (till date company has filed 41 ANDAs, with 24 pending approval, it is expected that the company would clock robust 53.3% CAGR during FY2007-09.

The company’s JV with Altana Pharmaceutical for contract manufacturing is currently the most profitable one in the Indian space. While earlier confined to one client, the company is diversifying its client risk.

During FY2006, the company entered into two 50% JVs, namely Mayne (Now Hospira for manufacturing of eight anti-cancer drugs) and Bharat Serums & Vaccines (for developing and manufacturing an NDDS anti-cancer drug). These JVs are likely to start contributing from FY2009. Currently, we have not factored in any upsides from the same.

Apart from these two JVs, till date the company has added 17 clients, having peak sales potential of $ 25.5 million. At current market price, the stock trades at 15.2 times FY2008E and 12 times FY2009E earnings, at a discount to its peers.

Poly Medicure
Research: Edelweiss
Ratings: Buy
CMP: Rs 153 (Face Value Rs 10)
12-Month Price Target: NA

The Indian medical disposables market is valued at ~Rs 2,000 crore and is growing at a CAGR of 18-20%, compared to the $40 billion global medical disposables industry, which has been growing at a CAGR of ~10%.

Hike in healthcare expenditure, opening up of new hospitals, and preference for private medical care has led to increase in demand for quality healthcare products. Poly Medicure (Poly) is augmenting its capacity by 47% to 190 million pieces by FY08.

The capacity expansion is being done through automation at the Faridabad plant and a new plant at Haridwar. This will not only boost revenues by 29% CAGR from FY06-09E, but also expand its product portfolio by addition of five-six new products. In an attempt to reduce costs, Poly Medicure is integrating backwards for production of needles, which are used in IV cannula and blood bags.

The needle capacity will be 100 million pieces p.a. This backward integration will not only lead to lower costs, but will also enable control over product quality. Edelweiss estimates Poly Medicure’s revenues and profits to grow at 29% CAGR respectively, between FY06 and FY09E.

At the current market price, the stock trades at 8.7 times FY07E EPS of Rs 15.6 and at 6.2 times FY08E EPS of Rs 22.1. With capacity expansion, entry in the US market, decent valuations and healthy return ratios, Edelweiss initiates a ‘BUY’ recommendation on the stock.

Subhash Project
Research: Prabhudas Lilladher
Ratings: Buy
CMP: Rs 252 (Face Value Rs 2)
12-Month Price Target: NA

Subhash Projects, started in 1981, is a pioneer in executing water-related projects in India. Even today it gets over 50% of its revenues from water projects (largely end-to-end turnkey). It is also a significant player in the power sector, which contributes about 40% of revenues. It gets its remaining 10% revenues from roads, environment etc.

Subhash Projects has an unexecuted order book of about Rs 2,600 crore and L1 status in Rs 800 crore worth of projects. Its order book to sales ratio of 4.4x (based on H1 annualised revenues).

The momentum of order flows remains quite strong with the company likely to bid for Rs 2,000 crore worth of projects in the coming weeks. The management expects the order book to stand at about Rs 4,000-4,500 crore by December next year. Prabhudas expect Subhash Projects to grow its revenues by 104%, 73% and 46% in FY07, ‘08 and ‘09 respectively.

The company also expects margins to improve leading to higher profit growth. PAT is likely to grow by 114%, 78% and 54% in FY07, ’08 and ‘09 respectively. Assuming a dilution of 8 million shares, Subhash is quoting at 11.6 times FY08 and 7.5 times FY09 earnings.


Deadpresidents wishes you all a VERY HAPPY and PROPEROUS NEW YEAR! & Newsletter

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