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Sunday, January 20, 2008

Weekly Technicals, Track - Jan 21 2008

Weekly Technicals, Track - Jan 21 2008

ULIP v MF - what to choose ?

What to choose - ULIP or MF ?

Weekly Technicals - Jan 21 2008


We had a very bearish move for the Nifty on Friday, as the markets lost 208 points in a day. Hence, for the rest of this week we made some bearish moves for our markets, including the bearish moves on Tuesday and Wednesday. The markets, thus closed at 5705 levels, (-7.98 %) below its previous week''s close. Hence, we have now consecutively closed negative for the past two weeks. The market breadth was also slightly negative throughout the week. We had the BSE REALTY, BSE OIL & GAS and BSE BANKEX Indices making bearish moves for the last week.


We can observe for the Nifty on the daily charts, that the markets have broken below its strong support at 5750 levels. We can also notice that the markets have continuously fallen from the highs at 6357 levels to the lows of 5677 levels last week and a small bounce back can be expected next week. The markets also have a strong support at 5600 levels ,which should hold in the short term, as we have bounced back from these levels on past two occasions. Therefore, we can expect our markets to trade in a broad range between 5600-5900 levels in the short term.


BSE REALTY (12021)

The BSE REALTY Sector has closed at 12021 levels last week, which is (-10.84%) below its previous week''s close. We can also notice on the daily charts that we have a strong support at 11500 levels, which is likely to be tested in the short term. Hence, we expect this sector to move slightly lower to 11400 levels in the short term. We recommend a sell in Omaxe Ltd. and Ansal Infra in this sector.

BSE OIL & GAS (12594)

The BSE OIL & GAS index has closed at 12594 levels last week, which is (-8.95%) below its previous weeks close. We can also notice on the daily charts that we have a strong support at 12000 levels, which seems likely to be tested in the short term. Hence, we can now expect this index to move slightly lower to 11800 levels in the short term. We recommend a sell in Aban Lloyd and GAIL in this sector.

Reliance Power - big investors pump in money

The mega Rs 11,563 crore IPO saw big names including George Soros’s Quantum, Indian insurance behemoth Life Insurance Corporation of India, Merrill Lynch and JP Morgan submitting bids worth $1.6 billion each.

There was participation from nearly 500 domestic and international qualified institutional bidders.

Market may have more downside

The markets went into a tailspin last week mainly on account of heavy selling in heavyweights such as Reliance, Bharti Airtel, ONGC, Infosys, ICICI Bank, NTPC and DLF.

The Sensex, which began the week on a positive note at 20,918, managed to touch a high of 20,986. A downward bias, thereafter, saw the index tumble to a low of 18,930 - an intra-week loss of 2055 points. The Sensex ended the week with a hefty loss of 8.7 per cent (1,814 points) at 19,014.

The intensity of the fall was so severe that the index broke quite a few support levels last week. The index dropped below its monthly S3 (support 3) level of 19,290 and also broke the quarterly S1 level of 19,005 in intra-day deals.

The markets are likely to see more downside in the coming week. The Sensex could move in a broad range of 18,300 (which is the quarterly S3 level) and 20,300 this week. On its way up, the index is likely to encounter some resistance around the 19,700 level.

The Nifty swung in a wide range of 583 points - from a high of 6,260, the index slumped to a low of 5,677, and finally ended with a loss of 8 per cent (495 points) at 5,705.

Some indicators point to a pull back in the short-term. The 9-day RSI (relative strength index) is in slightly oversold zone at 22 per cent (an RSI of less than 30 per cent is said to be oversold).

Meanwhile, the 14-day slow stochastic has also dropped to a low of 21 per cent.

The Nifty is below its short-term (20-days) moving average, which is at 6,096 and the 50-day moving average, which is at 5,927. The index may move in a broad range of 5,500-6,050 this week.

Via BS

ICICI Securities IPO Coming soon

ICICI Bank announced that the board of directors of ICICI Securities, a wholly-owned subsidiary of the bank, at its meeting held on Jan. 19, 2008 approved an initial public offering (IPO) of equity shares, as well as private placement of equity shares to one or more institutional investors.

The board of directors of the bank also approved the proposed capital raising. The maximum dilution of the bank`s holding in ICICI Securities through the proposed public offering and private placement would be up to 15% of the post-issue capital base of ICICI Securities.

The primary operation of ICICI Securities would mainly involve retail broking, institutional broking, distribution of retail financial products, wealth management and equity capital markets, including advisory services. The above equity offering would be subject to necessary regulatory, statutory and other approvals and procedures.

ICICI securities is considering an initial public offering (IPO) of equity shares, which may also include an offer for sale by the promoter. The draft red herring prospectus will be filed with Securities and Exchange Board of India (SEBI) in due course. However, this is subjected to the market conditions and regulatory approvals.


Reliance Natural Resources Fund

Reliance Natural Resources Fund

Reliance Power for all retail investors ? How ?

It may have been a chance remark. Said at the spur of the moment without contemplation. On the other hand, it may not have been so on-the-spot. Just hours after pulling off the largest ever IPO subscription in global capital market history, Anil Ambani, chairman of ADAG, was at a press conference tackling the ticklish question of whether he is likely to overtake elder brother Mukesh Ambani in the richest Indian sweepstakes.

“The media seems to be more interested in this than anybody else. In any case, if you look at Indian history, the elder brother always stays ahead in the race,” Mr Ambani quipped.

A short look at numbers will tell why Mr Ambani can afford to be in a jocular mood. Two years after being formed, the Reliance ADA group is likely to emerge as the country’s second-biggest business group with a market cap of $100 bln (which includes Reliance Power listing at the IPO price of Rs 450 per share).

His own personal wealth has also been trending skywards and is set to rocket further after the Reliance Power listing. Reliance Power’s market cap alone is set to be more $25 bln, making it one of India’s biggest companies.

A day after creating history by attracting bids for shares worth over Rs 7.5 lakh crore for its IPO, Anil Ambani’s Reliance Power is now working on allotment of shares to maximum number of retail investors.

“Our endeavour is to allot shares to each and every retail shareholders who have applied for the IPO. On listing, Reliance Power will be amongst the top 10 listed companies in India and will have the largest shareholders across the world,” he told on Saturday.

This will be the second bonanza for the 50 lakh retail investors who have applied for a slice of the $3 billion IPO, largest maiden issue in the Asia Pacific power sector. The first one was a Rs 20 discount on the sale price. The issue price is fixed at Rs 450 a share and it is expected to be listed in early-February on the stock exchanges.

Mr Ambani’s penchant for retail investors is well-known. On the day of kick-starting the road show for the IPO, he had said he would have sold the entire issue to retail investors, had it been allowed. Even in that case, the issue would have subscribed four times.

In addition to the record participation by retail investors, the issue created a whole lot of new milestones. For instance, it got subscription worth over $100 billion from foreign investors, which is nearly 40% of India’s current forex reserves. The entire foreign institutional investors’ (FIIs) contribution to the Indian market was $20 billion last year. As many as 500 domestic and international QIBs (qualified institutional bidders) applied with a combined $125 billion, another new high in India.

“Record subscription achieved in the midst of global and domestic meltdown in stock markets during the week. The Dow Jones index has fallen 4.2%. London index fell down 4.1%. Hang Seng witnessed a 4.8% fall. During this period Sensex has fallen 8.3%. We appreciate the confidence of the investors in Reliance Power,” said Mr Ambani.

At Rs 450 a share, the market cap of the company works out to be $25.88 billion, taking the total M-Cap of the group to $100 billion. This will make it the second largest group in terms of M-Cap, overtaking the Tata Group.

Interestingly, the group’s M-Cap was just $4 billion when it was born out of a de-merger of the Reliance group in June, 2005.

Via Economic Times

Allahabad Bank

Allahabad Bank

Geometric Software, TCS, HCL Technologies

Geometric Software, TCS, HCL Technologies

Derivatives - Jan 21 2008

Derivatives - Jan 21 2008

Cords Cable Industries IPO review

Cords Cable Industries, promoted by mechanical engineers Naveen Sawhney, D K Parashar and Rakesh Malhotra in 1991, caters to the growing requirement for high quality customised cables. Over the years, the company has been expanding its product range and has added a variety of specialty cables to its product range. The aim was to address specific requirement of industries involving modern process technologies, instrumentation and communication demanding the highest standards of precision and reliability and household users with assured quality and safety standards.

Recently, Cords Cable Industries increased its capacities for existing products (including low-tension cables) at Rs 13.20 crore. Production from the expanded facility started in January 2008. The product portfolio includes low-tension (LT) control and power cables (up to 1.1 KV); instrumentation, signal and data cables; thermocouple extension/compensating cables; panel wires/household wires/flexible cables and specialty cables (tailored for each application as per specifications of customers).

In view of the increasing demand for cables and the need for diversifying and expanding its existing range of products, Cords Cable Industries plans to add high-tension (HT) cables and rubber cables to its existing product range at an outlay of Rs 57.40 crore (Rs 5.19 crore has already deployed in this project). The commercial production from this expanded facility is expected to start from April 2009. For funding such expansion and for working capital and general corporate purpose, the company has lined up an IPO to raise Rs 38.56 crore to Rs 41.65 crore comprising fresh issue of 30.85 lakh shares in the price band of Rs 125 to Rs 135 per share. It will take on Rs 12.20-crore debt for the proposed expansion.


  • The organised cable industry has grown at an estimated CAGR of 25% in the last three years. This growth is likely to sustain over the next few years due to various favorable factors such as large-scale investment in power (generation, transmission and distribution), steel, refineries and other manufacturing sectors leading to huge demand for cables and investment in new sectors like metro rail, aviation, and wind power leading to demand for speciality cables.
  • Has a diversified client profile including from the power, cement, refineries, steel, fertilizers and chemicals sectors. Is the approved vendor for many large caps such as NTPC, Bhel, Powergrid Corporation of India, Nuclear Power Corporation, L&T, Tata Steel, Reliance Energy, Tata Power, Hindalco, ACC, HPCL, GAIL, and Honeywell. Also has been approved by almost all top consultants like Kvaerner Powergas India, Toyo Engineering India, Engineers India, and Rites.
  • Production from expanded facility to produce LT power cables and other products started in January 2008. Empanelled with most of the large corporates and top consultants comprising Bhel, Tata Steel, NTPC, L&T, Reliance Energy, Nuclear Power Corporation of India, and Cairns.
  • The barriers to enter the cable industry are pre-qualification on technical grounds and proven track records. Pre-qualification with proven track record with consistent performance will help in selling products.


  • Power-cable producers are required to get pre-qualification on technical grounds and should have proven track record. This is a long drawn out process and needs substantial investment of time and money. At present, Cords Cable Industries has pre-qualifications for LT cables but not for HT and rubber cables to be manufactured after proposed expansion.
  • Competition from large number of cable manufacturers in the organised as well as unorganised sectors and imports. Rising raw-material prices will also put pressure on margin.
  • Contingent liabilities of Rs 51.09 crore not provided for. Net worth after the issue would be Rs 69.98 crore.


Over the four-year period ended March 2007, revenue grew at a CAGR of 60% and net profit at a CAGR of 166%. Operating profit margin also improved to 15.2% in the six months ended September 2007 from 3.9% in the year ended March 2003. Order book stood at about Rs 77 crore end November 2007. Of this, around 50% comes from the power sector. The historical asset-turnover ratio of more than 6 expected to be maintained. The completed expansion may give additional revenue of about Rs 75 crore annually. Once commercial production after the proposed expansion from April 2009 would add about Rs 275 crore- Rs 300 crore to the top line from FY 2010.

On annualised EPS of Rs 9.4 in the six months ended September 2007 on post-issue equity capital of Rs 11.43 crore, the P/E works out to 13.3 – 14.4 at the price band of Rs 125–Rs 135. The trailing 12-month (TTM) P/E of listed peers Torrent Cables, KEI Industries and Universal Cables were 9.9, 16.6 and 15.3. However, they are comparatively large players. But KEI Industries and Universal Cables also make HT cables--- a product Cords Cable Industries intends to manufacture.

Cords Cable Industries IPO Note

Cords Cable Industries IPO Note

Apollo Tyres

Apollo Tyres

BL Kashyap & Sons

BL Kashyap & Sons

Ranbaxy Labs

Ranbaxy Labs



Reliance Power Grey Market premium tumbles

Future Capital Holdings 700 to 765 550 to 570

Reliance Power 405 to 450 260 to 270

J. Kumar Infraprojects 110 to 120 20 to 25

Cords Cable Ind. 125 to 135 30 to 32

KNR Construction 170 to 180 --

Onmobile Global 425 to 450 --

Bang Overseas Ltd. 200 to 207 --

Manjushree Extrusion 45 --

Emaar MGF 725 to 850 350 to 370

Are you selling Reliance Power on LISTING ? VOTE NOW !

J Kumar Infraprojects IPO Analysis

Investors can avoid subscribing to the initial public offer of J. Kumar Infraprojects (JKI). The asking price of Rs 110-120 appears stiff, given the present size of the company and the large number of unorganised players in the contracting space. Limited geographical presence, significant expansion in equity and low visibility for growth over the long term are also limiting factors for this company. However, given that the overall prospects for the company’s business appear good, investors can take a second look at the stock post-listing, if its valuation dips due to broad market factors.

At the offer band, the IPO is priced at 19-21 times its per share earnings of FY 2007 on a pre-issue equity base. Post-issue, the price-earnings multiple is 14-16 times the annualised earnings for FY-08. Similar sized peers are at a discount to this valuation.

Business and offer details

JKI, a construction company with operations in Maharashtra, focusses on building roads, flyovers, buildings and piling works. The offer proceeds (Rs 72-78 crore) are to be utilised for purchasing capital equipment and for working capital requirements. At the offer price band, the market capitalisation of the company’s stock would be Rs 228-248 crore.

Sustainability, an issue

JKI, although incorporated in 1999, started operations in 2005 and saw a huge jump in revenues in 2006. This was after one of the promoter group companies — J. Kumar & Co. — transferred certain assets as well as a contract licence for public works department. JKI’s revenue grew from Rs 3 crore in FY-05 to Rs 112 crore in FY-07. The company’s current order-book of Rs 461 crore provides earnings visibility over the next couple of years. However, the annual growth over 2006 and 2007, afforded by a low base, is unlikely to repeat itself.

The present infrastructure boom in the country provides ample room for small players such as JKI to share a part of the order flow pie. However, JKI’s current business model depends more on the local municipal and metropolitan development authorities (in Maharashtra) than on the ‘infrastructure spending’ in the country. While this strategy is likely to fetch steady revenues in the medium term, the growth opportunity appears relatively less as infrastructure players moving to high-end segments could be better options from an investment perspective. The company’s valuation can, therefore, at best be at a discount to other infrastructure players.

Concentration of work in a single State also poses the risk of slowdown if the State spending declines. The company has also not stated any plans of moving to locations outside of Maharashtra.

JKI has done well to diversify its operations from predominantly bridges and flyovers to civil construction and piling works. Piling works for larger infrastructure players are likely to provide the company with superior profit margins. The OPMs for the half-year ended September 2007 have already seen a marked increase of over 500 basis points.

While the augmented volume may also have contributed to the improved profit margins, the working-capital requirements may further tighten with more projects. The increase in the proportion of debtors (as a percentage of sales) for the half-year ended September 2007 indicates that volumes could pose pressure on working capital. Increase in secured loans and rise in interest charges also point to the mounting requirement for funds. While the offer proceeds would provide some momentary relief on this front, the company may have to find other sources to fund its projects in hand.

Cords Cable Industries IPO Analysis

Investors with a lowrisk appetite and a moderate return expectation can consider an exposure in the initial public offering of Cords Cable Industries (CCIL).

In the business of manufacturing cables, CCIL offers a proxy exposure to the ongoing infrastructure and power growth story. Robust growth in sales and bottomline, diverse revenue mix, established clientele and the proposed entry into HT (high tension) power, rubber and speciality cables segment, suggest good prospects for the company.

In the price band of Rs 125-135, the stock would be valued at about 12-13 times its likely FY-08 per share earnings on a diluted equity base.

While the valuation is not a steep discount to established players such as KEI Industries, they appear attractive, considering the strong demand environment and the move by CCIL into higher value-added product segment. We would be more comfortable if the offer is priced at the lower end of the price band.

Investment rationale

The demand for cables is set to increase significantly, given the ongoing capex in power and infrastructure and strong growth in industries such as metro rail, shipping and aviation.

In the light of the robust demand undercurrents, CCIL’s capacity expansion in low tension (LT) power cables segment and the proposed addition of HT power, rubber and speciality cables to its product portfolio appear promising. CCIL’s established track record of over 15 years with approvals and pre-qualifications from companies such as NTPC, BHEL, Power Grid and Reliance Energy also lend confidence to its ability to further penetrate the cables’ market.

CCIL’s order-book pegged at about Rs 77 crore (as on November 30, 2007) lends visibility to revenues. Revenues could also get a lift from the management’s renewed focus on the export market.

While the company has so far not enjoyed any significant exposure to the export market (1 per cent in FY-07), it plans to export to over 15 countries by FY-09, broadbasing from the current spread of over five countries.

In this context, CCIL has already tied up with companies in West Asia such as Petroleum Development Oman and Saudi Electric Supply Company.

CCIL witnessed a compounded earnings growth of over 328 per cent supported by a 67 per cent growth in revenues during the last four years. During the period, operating profits enjoyed a CAGR of about 127 per cent; operating profit margins expanded by 8.9 percentage points to about 14.7 per cent.

Going forward, margins may witness a further expansion given CCIL’s foray into higher value-added products. Besides, post-expansion, CCIL may also benefit from better utilisation of its capacities.


CCIL has a diversified clientele and product portfolio. Its current order-book, with the major portion leaning towards power sector (about 48 per cent), is spread across sectors such as cement, refineries and petrochemicals and steel.

The company may be able to further extend its reach to sectors such as railways, shipping and wind power after the proposed expansion of its capacity and the addition of new products. On the product front, it offers an extensive range of high quality control and instrumentation cables, power cables and special cables for oil wells. The company plans to utilise proceeds from the issue towards setting up of production facilities. About Rs 6 crore from the proceeds will be diverted towards working capital requirements.


While CCIL does hedge its price risk on copper to an extent, any steep increase in price of copper and aluminium (about 50-70 per cent of the raw material cost) may adversely affect its earnings.

Offer details

The offer is open from January 21-24. Collins Stewart Inga is the book running lead manager to the issue.

Via Businessline

Exide Industries

Shareholders can subscribe to the rights offer from Exide Industries. The offer is attractively priced at Rs 30, a steep discount to the market price of Rs 78. The company is raising Rs 150 crore through a 1:15 issue (one share for every 15 held) to meet its working-capital requirements. This is part of its Rs 400-crore capex plans announced in April 2007.

The rollout of new models by passenger car makers, the continued buoyancy in the automotive replacement segment and the potential for high growth in the telecom and UPS battery segments lend a positive outlook to the company’s earnings prospects. The stock has run up sharply with a return of over 70 per cent in the last six months. At the current market price, the stock trades at 29 times the estimated FY-08 and 22 times the estimated FY-09 earnings per share.


Exide is the market leader in the storage batteries business, selling mainly under the Exide and Standard Furukawa brands. While the automobile batteries segment generates 60 per cent of the revenues, the industrial batteries division chips in with the rest. Exide batteries power most of the models of Toyota, Honda, Hyundai, Tata Motors, Maruti and Mahindra and Mahindra. The company also supplies two-wheeler batteries. The industrial applications extend to power, telecom, mining and railways. They also export batteries to West Asia, Japan and CIS countries.


As telecom service providers expand their networks and foray into infrastructure sharing, the company will benefit from the increased demand for batteries that support tower and exchange infrastructure.

UPS battery sales will be propelled by growth in the IT and ITES industry, which requires back-up power, and the demand from households and offices due to the continued power shortage situation.

Besides, the company is also engaged in the production of the high-margin miner’s cap lamp and submarine batteries, which are likely to improve the product mix.

In the automotive segment, a key positive for the company is its diversification — it caters to the passenger car, two-wheeler, commercial vehicle and tractor markets. This de-risked sales mix will help the company tide over a slowdown better.

The introduction of new models by OEMs (Original Equipment Manufacturers) provides an opportunity to become sole suppliers for that model, ensuring a steady revenue stream. Such supplies will also help boost volumes and make up for the lower margins (margins in OE are lower than replacement segment). Exide, which has been the key supplier for Tata Motors, is likely to be the chief supplier to the Tata Nano (Rs 1-lakh car) as well. This inspires confidence and bodes well for volume growth.


The last few quarters have seen prices of lead, a key raw material, shoot up by more than 100 per cent. This explains the steady decline in the operating margins from 20 per cent in the June quarter to 17 per cent in the September quarter and 15 per cent now.

However, buoyant replacement market sales and periodic price increases (to partially pass on increase in raw material costs) have seen both the net sales and profits grow by a robust 60 per cent on a year-on-year basis to Rs 722 crore and Rs 55 crore respectively.


Raw material costs account for about two-thirds of sales and lead constitutes 70 per cent of the raw material used. Although lead prices appear to have peaked, any unfavourable movement in prices will affect the company. Also, any future price increase may not be welcomed by OEMs, who are themselves surviving a slowdown and are focused on cost cutting.

To reduce dependence on imported lead, Exide has recently acquired the Pune-based Tandon Metals, a lead smelting company that will help Exide use more recycled lead in its battery manufacturing facilities. Until the company is able to put this facility to full use, input costs will remain a concern.

Glaxo Pharma

Investors can retain their holdings in GlaxoSmithKline Pharma (GSK Pharma), the listed subsidiary of global pharma major GlaxoSmithKline, despite the stock under-performing over the past year. A slew of product launches (both patented and in-licensed), sharper focus on pharmaceuticals (after having divested the animal healthcare and fine chemicals businesses) and opportunities for uptake of clinical research by the parent company indicate that prospects may change for the better.

At the current price of Rs 1,010, the stock discounts its FY-08 per share earnings by about 19 times. The valuation is not cheap, given GSK Pharma’s muted top line and profit growth over the past three years (compounded annual growth rate of 4 per cent in sales and 3 per cent in profits including sold-off businesses).

However, the valuation is justified by the expected ramp up in earnings from at least four exclusive launches (a cancer drug and vaccines), which will also help it foray into new niches. GSK Pharma holds a 4.8 per cent share in the domestic drug market, making it one of the top three manufacturers.

Any delay in product launches due to an uncertain patent regime and the looming threat of more drugs being brought under the Drug Price Control Order (GSK Pharma now derives around 30 per cent from price-controlled products) are risks to the company’s prospects.

Launches to drive growth

In 2005, GSK Pharma had announced that it would leverage its parent’s robust pipeline by launching four vaccines (Rotarix, Cervarix, Streptorix and Infanrix) latest by 2009. Being new drugs targeting key areas, 2008 will see the company finally benefiting from Infanrix (combo vaccine for tetanus, diphtheria and pertussis in infants), Boostrix (Infanrix but targeted at the preteen/teens) and Rotarix (vaccine against Rotavirus — the main cause of diarrhoea).

The company does not produce vaccines in India and sources them from its parent’s facilities worldwide.

Revenues from vaccines contributed around 6 per cent of the company’s first half turnover in 2007. This will be scaled up, driven by launches; the easing of supply constraints at its global vaccine production facilities augurs well.

After December 2008, GSK Pharma is also tipped to launch Cervarix (vaccine for cervical cancer) and, post-2010, other vaccines for malaria, tuberculosis, dengue and Streptorix (combo vaccine for 11 indications) are also on cards.

Once launched, these could provide a significant upside to earnings, but are subject to the hurdles of pricing pressure and delays in patent approvals and subsequent registrations.

In patent protected drugs, GSK Pharma is slated to launch Tykerb (first in class breast cancer medicine for a focus patient group) by second quarter in 2008, which would ensure exclusivity for some years. Other launches could be in the form of Allermist (targeting allergic rhinitis), Alvimopan (first in class medicine to treat impairment of bowel motility due to surgery) and Pleuromutilin (topical antibiotic). These could be launched in 2008/2009. However, regulatory delays and legal hold-ups akin to those being recently faced by innovator companies in India, pose risk to these plans. (None of GSK’s vaccines and in-licensed products are claimed to have incremental innovation.) Patented products are expected to contribute 10 per cent of the company’s revenues by 2010.

With around eight in-licensed products under its belt, GSK Pharma is well-placed to leverage on a strong sales and marketing set up to access doctors and retailers. This year, the company may introduce two such products (one might be a patentable drug).

Overall, these initiatives in the form of launches in vaccines, patented drugs and in-licensing opportunities could help GSK Pharma maintain operating margins at current levels (about 31 per cent), as pricing power may enable the company to bear heavy promotional expenses. Disposal of non-core businesses has also been a margin accretive step in this light.

Better focus

Till 2006, GSK Pharma had to divide its attention between the pharmaceutical business and non-core businesses such as animal health and fine chemicals business. The company exited the animal health business in April 2006 and the fine chemicals business in July 2007. These initiatives have not only brought substantial cash flows (around Rs 450 crore from both) but also allowed GSK Pharma to focus on its strength: Pharmaceuticals.

The company still has minor interests in diagnostics, laboratory equipment and exports related to drugs, but are aligned with the pharma-model. In the first half of 2007, GSK Pharma’s revenues were distributed between the focus, other segments and price-controlled drugs in the proportion of 29 per cent, 27 per, 27 per cent respectively.

With divestment of the non-core businesses complete, GSK can now target higher double-digit growth in its focus group of drugs, which have hitherto grown at a slower rate than the overall market. Skincare and cardiovascular therapeutic segments are high-growth areas for the company. Progress on this front would be important as the company looks to offset flat growth and reduced contributions from the price-controlled products (consisting mainly of anti-infectives and dietary supplements).

The policy proposal to increase the number of price-controlled drugs to five times the existing number (currently 74), if carried out by the government, may expand this contribution to around half its current revenues. This scenario bears watching as it could lead to a knock-on effect on GSK Pharma’s sales and profitability.

Clinical research is another promising segment for the company. GSK Pharma has till date carried out clinical trials for the parent company covering a significant 9 per cent of its global patient populace. The year 2007 saw 31 trials against 16 in 2006.

This trend might continue as the MNC subsidiary conducts trials across oncology, neuropsychiatry, cardiovascular and metabolic segments. Revenue contribution from clinical research is pegged at Rs 30 crore for 10 months of FY-07 and is slated to grow in future with the company exploring the possibility of bringing in Phase I/II trials, as Indian regulatory clearances are rigorous for overseas companies.

Furthermore, job cuts in the global pharma industry may also benefit Indian arms such as GSK Pharma as bulk drug production may witness increased uptake. GSK Pharma now manufactures a single API for the global parent.

Dabur India

Investors with a two-three-year horizon can consider using the recent decline in price to accumulate the Dabur India stock. Dabur India appears set to deliver earnings growth of 22-25 per cent (annualised) over the next three years, on the back of proposed forays into FMCG categories such as personal and home care, scaling up of the foods portfolio, and recent launches in health supplements and skincare.

A diverse basket of brands that lends itself to extensions and a strong ‘ayurvedic’ and herbal association should help Dabur capitalise on the high-growth potential for the personal and healthcare businesses within the FMCG space. At its current market price of Rs 113, the stock trades at a premium valuation of about 23 times its expected earnings for 2008-09. This, however, appears justified in the light of the high return ratios enjoyed by the business and superior growth prospects.

Of the diversified portfolio that spans consumer products, health products and foods, the consumer-care business contributes two-thirds of Dabur’s current revenues. This straddles oral care (Babool, Meswak, Dabur Red), hair care (Vatika, Anmol), health supplements (Chyawanprash, honey), digestives (Hajmola) and home care (Odomos, Odonil, Sanifresh). Dabur’s brands in most of these segments sustained double-digit growth recently. Relatively slow-movers such as health supplements may also move into a higher growth trajectory if recent launches pay off. New product launches in the last few months include skin-cream extensions under Gulabari and brand extensions of Chyawanprash, apart from a household cleaner, Dazzle. Dabur also plans to leverage on its national distribution network to substantially expand its food offerings. Though competitive pressures in the new categories will be high, the company’s ability to connect with consumers on the ayurvedic and natural planks may stand it in good stead. That the company has managed robust growth in its oral-care portfolio despite being a late entrant, is evidence of this.

Dabur India has also lined up a retail foray in the health and beauty segment, with plans to open 350 stores in five years. Though funding for this venture may not be a challenge given the healthy cash coffers, the payoffs carry uncertainty given the likely competition in this segment. Rising input costs are also a risk, but may be offset by Dabur’s ability to take price increases.