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Friday, February 08, 2008

Bank of Baroda, Ahemednagar Forgings, Ranbaxy,Deepak Fertilizers


Bank of Baroda
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs393

Treasury gains drive strong PAT

Result highlights

  • For Q3FY2008, Bank of Baroda (BoB) reported a profit after tax (PAT) of Rs501 crore, beating our estimate of Rs402.6 crore and the consensus estimate of Rs378.3 crore. The PAT indicates a growth of 52.3% year on year (yoy) and 53.1% quarter on quarter (qoq) primarily driven by a strong growth in the non-interest income.
  • The net interest income (NII) growth was moderate at 9.8% yoy to Rs997.5 crore. The NII growth was largely due to the continued pressure on the net interest margin (NIM) and a relatively slower credit growth of 23% compared with that of 27.1% during H1FY2008.
  • During the quarter, the deposits grew by 22% yoy to Rs136,900 crore, while the advances rose by 23% yoy to Rs 95,518 crore. With the advances growth outpacing the deposit growth, the credit-deposit (CD) ratio improved to 69.8% for the quarter from 68.7% for the previous quarter and 69.2% for the year-ago period.
  • The non-interest income spiked up 85.2% yoy to Rs618 crore on the back of strong treasury gains, thereby supporting the bottom line. The treasury gains for the quarter came in around Rs194.4 crore, about five times the gain in the year ago period.
  • The operating expenses growth was contained at 7.1% yoy to Rs683 crore, while on quarter-on-quarter (q-o-q) basis it declined by 14.4%. This was largely due to a 8.5% year-on-year (y-o-y) decline in the staff expenses, partially offset by 40% y-o-y jump in the other operating expenses.
  • The asset quality remained healthy with the gross non-performing assets (GNPA) declining by 14.6% yoy to Rs2,040.3 crore, while the net non-performing assets (NNPA) were largely flat yoy at Rs517.2 crore. However, the provisioning coverage declined to 75% for the quarter from 77% for the previous quarter and 78% for the year ago period.
  • The bank remains well capitalised with a capital adequacy ratio (CAR) of 13.5% at the end of December 2007 compared with 12.9% at the end of September 2007 and 12.2% at the end of December 2006.
  • In short term, the proposed initial public offering (IPO) of the UTI Mutual Fund should act as a trigger for BoB, as the bank holds 25% stake in the fund. Recent media reports suggest a valuation of about Rs6,500 crore for the UTI Mutual Fund compared with our valuation of Rs4,000 crore.
  • At the current market price of Rs393 the stock is quoting at 8.2x its FY2009E earnings per share (EPS), 4.3x its pre-provision profit (PPP) and 1.3x FY2009E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs500.

Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs169
Current market price: Rs132

JV with Yara International

Key points

  • Deepak Fertilisers & Petrochemical Corporation Ltd (DFPCL) has agreed to form a joint venture (JV) company with Yara International ASA (Yara International) to produce and market ammonium nitrate and specialty fertilisers in India.
  • DFPCL will own 51% stake in the JV, while the Norway-based Yara International will own the balance 49% stake. The current heads of agreement will be converted into final agreement after due diligence and necessary company and regulatory approvals.
  • The JV will provide DFPCL stability and flexibility in its operations in ammonium nitrate and specialty fertilisers segments through Yara International's leadership in the ammonia value chain and a large-scale ammonia/urea production base in the low-cost natural gas regions. The JV will also invest in the company's Paradip project of setting up a 300,000 million tonne per annum (MTPA) ammonium nitrate plant.
  • Indian technical ammonium nitrate (TAN) consumption is growing at about 5-6% per annum on the back of high coal demand for power generation. DFPCL is the only major domestic producer of TAN, with the balance being met through imports.
  • DFPCL has already increased its ammonia capacity to 130,000 tonne per annum (TPA) from 90,000TPA during the second quarter. This along with increased natural gas availability and additional ammonia storage tank would benefit the company in reducing the raw material cost and enhancing its nitric acid production.
  • For FY2009, we expect the company to post a revenue growth of 18.8%.
  • At the current market price of Rs132, the stock is trading at 8.5x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Buy recommendation on the stock with a price target of Rs169.

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs374

Generic Nexium—a potential exclusivity opportunity

Key points

  • Ranbaxy Laboratories (Ranbaxy) has received tentative approval from the US Food and Drug Administration (US FDA) for generic Esomeprazole Magnesium Delayed-Release Capsules, 20 mg (base) and 40 mg (base), the generic version of Astra Zeneca's blockbuster drug Nexium. Annual sales of Nexium is around $5.5 billion (IMS - MAT: December 2007).
  • Ranbaxy was the first to file a Para IV abbreviated new drug application (ANDA) with the US FDA, seeking approval to market Nexium in the USA. It will thus gain from being awarded a 180-day period to exclusively market the product in the USA upon final approval from the USFDA. We expect the final approval for Ranbaxy's version of generic Nexium to come by April 2008, when the 30-month stay expires, thus allowing Ranbaxy to launch the product 'at-risk' in the USA with 180-day exclusivity.
  • Based on our calculations, we believe the Nexium opportunity could yield $550 million in revenues and $220 million in profits for Ranbaxy during the 180-day exclusivity. This will translate into incremental earnings of Rs21 per share for Ranbaxy. However, we do not believe Ranbaxy would launch the product 'at-risk' in the USA before the outcome of the litigation. In such a case, Ranbaxy could attempt to enter into an out-of-court settlement with Astra Zeneca for the launch of generic Nexium.
  • Ranbaxy has already announced four exclusivity opportunities until 2010, collectively valued at Rs68 per share. Further, Ranbaxy has in its kitty, 18 more Para IV filings with potential first to file (FTF) status, representing a market size of about $27 billion. The company expects to monetise at least one FTF opportunity every year. We expect the news flow on Para IV challenges and associated exclusivity opportunities to continue.
  • We expect the announcements on de-merger of the new drug discovery research (NDDR) division, clarity on the Lipitor launch in Canada and other countries across the world and news flow on potential FTF opportunities to act as positive triggers for the stock. At the current market price of Rs374, Ranbaxy is trading at 17.5x its estimated CY2008E and 15.3x its estimated CY2009E earnings. We maintain our Buy recommendation on the stock with a sum-of-the-parts price target of Rs558 (20x CY2009E earnings of base business plus Rs68 for exclusivity opportunities).

Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Book Out
Current market price: Rs203

Book out

Result highlights

  • The Q2FY2008 results of Ahmednagar Forgings Ltd (AFL) are below our estimates.
  • The company's sales for the quarter grew by only 8.8% to Rs165.8 crore. The domestic sales remained flat at Rs111 crore and the export sales grew by 30% to Rs54 crore. The export revenues were flat on a quarter-on-quarter (q-o-q) basis.
  • The operating profit margin (OPM) has been maintained at 20.6%. As a result, the operating profit grew by 8.5% to Rs34.2 crore. Higher interest and depreciation costs led the profit after tax (PAT) to remain flat at Rs17.7 crore.
  • The ramp up in exports is not happening, as expected. There has been a delay in product approvals for exports. The domestic revenues are also not growing due to a slowdown in the domestic market.
  • AFL is making preferential allotment of 17 lakh shares and 38 lakh warrants to its promoters at a price of Rs240, thereby raising Rs132 crore. The funds will be used in buying assets such as forging lines. The preferential allotment would lead to an equity dilution of 16%. The resolution to raise money through debt of Rs2,000 crore has also been cleared.
  • Slow ramp up in exports, slow down in domestic market and 16% equity dilution would be a dampener on AFL's performance. We downgrade our earning estimates for FY2008 and FY2009 by 25% to Rs16.3 and Rs20.6 respectively. At the current market price of Rs203, the stock is trading at 9.9x its FY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.0x. We advise investors to Book out of the stock.