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Sunday, May 18, 2008

Company Background - Cipla

Cipla Ltd was incorporated in the year 1935. Today Cipla is one of the largest manufacturer and marketer in bulk drugs and formulations. It has been ranked as first in India by ORG IMS ratings 2005 in terms of retail pharmaceutical sales. All the bulk drug facilities have been approved by the US FDA and the formulation facilities have been approved by the Medicine Control Agency, UK; the Medicine Control Council, South Africa; the Therapeutic Goods Administration, Australia and other international agencies. It has manfacturing facilities at Kurkumbh, Bangalore, Patalganda and Vikroli in Mumbai. The company's products are currently registered in over 150 countries.

Cipla has a very wide product range which includes antibiotics, anti-bacterials, anti-asthmatics, anti-inflammatory anthelminites, anti-cancer and cardiovasculars. In domestic formulation market, antibiotics are the mainstay, which contributes around 50% of the company's revenue. Some of the leading brands are Ciplox (Ciprofloxacin), Novamox (Amoxycilin) and Norflox (Norfloxacin). Cipla also has in its product portfolio Zidovir (zidovudine, anti-AIDS drug). Cipla was one of the first among the Indian pharmaceutical companies to introduce ampicillin and norfloxacin.

The company is constantly maintained its lead in introducing new drug formulation. The company has very strong research and developement facilities which has been bearing fruits. Its ability to quickly duplicate a new drug introduced elsewhere and introduce it in the Indian market has played a significant role in building a basket of formulation brands. Being one of the earliest entrants into the market with a new drug, generally, enables a company achieve higher realisations. In addition to being among the early entrants, one aspect which has given an edge to Cipla's strategy is the ability to market products at a significantly lower price.

Cipla has developed the world's first budesonide-based, chlorofluorocarbons (CFC) - free anti-asthma inhaler, 'Budecort CFC-free'. Budesonide, which falls in the preventive class of anti-asthmatic drugs, is essentially a steroid and preferred due to its safety profile. The company has invested over Rs 20 cr in developing CFC-free asthma products over a period of 12 month. The product is largely being targeted at the international markets, which are CFC-sensitive and is awaiting for registration in the European markets. The fruits of the new product will be obtained in the coming years, since the company expects to increase its exports through this product.

In Dec 2000, the company cut the price of its anti-AIDS drug Nevimune (scientific name : nevirapine) by 34% to Rs 650 for a strip of ten tablets. The price was earlier Rs 985. Cipla has slashed the price of the drug thrice reducing it from the launch price of Rs 1,350 for a strip of ten to the current price. The company attributes this to improvements in technology that has enabled it to cut costs and pass on the savings to consumers.

Cipla is the only manufacturer of nevirapine from the basic stage in India. This is the fourth price cut of anti-AIDS drugs effected by Cipla in the last three years. The last reduction was in Sep 2000 when prices of its Lamivir, Duovir, Stavir and Nevimune brands were cut between 13 - 45% across six dosage forms.

Among the large pharma companies, Cipla was considered as the fastest growing company with a pre-eminent position in anti-asthma and its foray into high-growth areas like anti-cancer and anti-AIDS. However, current performance is not in line with this perception.

Cipla became the first player outside the US and Europe to launch non-CFC (chlorofluorocarbons) metered dose inhalers. After growing smartly in the domestic market, the company is now focussing on export markets. Cipla has tied up with US major Andrx to supply Omeprazole, an anti-ulcer bulk drug slated to go off patent in October. Andrx is expected to gain the 180 days exclusivity for marketing the generic Omeprazole in the US market, post-patent expiry in October 2001.

Cipla has also tied up with the US-based Zenith Goldline and United Research Labs for marketing Flutamide (an oncology drug) and Felodipine (a cardiovascular drug) in the US and European markets. Flutamide will go off patent in May, while the patent for Felodipine will expire in late 2001.

Cipla has one of the best R&D facilities for reverse engineering in the country. As in the past, its R&D division continues with its focus on finding new processes for existing products.

Cipla is now focussing on high-margin areas like anti-AIDS, cardiovascular and anti-cancer, in order to reduce its exposure to the highly competitive anti-infectives segment. In July 2001, the company has effected another round of price cuts of its anti-AIDS drug segment. This is the fourth price cut in AIDS segment during the last nine months (last one was in May 2001). The company has cut prices of its triple drug regimen by as much as 39%. The three-drug combination of lamivudine, stavudine and nevirapine, which has the potential to reduce the HIV virus in the body to very low levels, will now cost the patient Rs 2,130 per month down from Rs 3,495 per month.

The company is one of the three Indian pharma companies who will jointly market the anti-anthrax drug, Ciprofloxacin, in India. The company is also to benefit in case if USA allows the Indian companies to sell their anti-anthrax dose over there . Anthrax has gripped the world, mainly the USA recently and is suspected to be a form of biological terrorist attack. During 2001-02 a number of Active Pharmaceutical Ingredients which was made in house was introduced, This will definitely scale up the overall sales growth in the near future.

During 2004-05 the company launched many new products and APIs in the country. Some of them are Duova, Duovir E Kit, Duonase, Levolin, Mucinac, Seroflo Multi-Haler and Voltanec. The first phase of the new formulation plant at Baddi, Himachal Pradesh for the manufacture of tablets and capsules was completed and the unit commenced commercial production in April 2005.

In 2005-06 the company has enhanced its installed capacity of Bulk Drugs (including Malts), Tablets & Capsules, Creams, Aerosols/Inhalation Devices and Injections/Sterile Solutions by 79 Tonnes, 2828 Millions Nos, 400 Tonnes, 7800 Thousand Nos and 461 Kilolitre respectively. With this expansion the total installed capacity of Bulk Drugs (including Malts), Tablets & Capsules, Creams, Aerosols/Inhalation Devices and Injections/Sterile Solutions by 1598 Tonnes, 12296 Millions Nos, 616 Tonnes, 53580 Thousand Nos and 1071 Kilolitre respectively.

The company's new export-oriented manufacturing unit for APIs and drug formulations is nearing completion at Patalganga. It is expected to commence production in the second quarter of 2006-07. The company expanded its facilities at Baddi in Himachal Pradesh. The company is planning to set up a large drug formulation manufacturing facility for various dosage forms as a Special Economic Zone (SEZ) in Goa and also planned major additions to its manufacturing facilities at Kurkumbh and Bangalore.

Company Background - Suzlon Energy

Suzlon Energy, a leading WTG manufacturers in India is Asia's strongest growing fully integrated wind power company and ranks amongst the top ten in the world. Suzlon integrates consultancy, design, manufacturing, operation and maintenance services to provide customers with total wind power solutions

Suzlon is one of the fastest growing Wind Energy companies in the world. The key to companies meteoric growth has been companies vision of creating world-class products by adopting the best of everything from around the globe. Suzlon has a subsidiary in Germany for technology development, an R&D facility in the Netherlands for rotor blade molding and tooling, and Wind Turbine and rotor blade manufacturing facilities in India. All this is backed up by stringent international quality control and assurance systems like ISO 9001:2000 and Type certification.

The Company was incorporated in 1995 by Tulsi Tanti. Tulsi Tanti was primarily in the textile business and was introduced to wind energy through a wind power project that he had commissioned for his textile factory. The first subscribers to the Memorandum were the family members and friends of Tulsi Tanti.

The Company entered into a technical collaboration agreement in 1995 with a German company, Sudwind GmbH Windkrafttanlagen to source the latest technology for the production of WTGs in India. Sudwind GmbH Windkrafttanlagen was subsequently taken over by Sudwind Energiesysteme GmbH ('Sudwind'). The parties entered into a fresh agreement dated September 30, 1996, under which Sudwind proposed to share technical knowhow relating to 0.27 MW, 0.30 MW, 0.35 MW, 0.60 MW and 0.75 MW WTGs in consideration for royalty to be paid on the basis of each WTG sold over the course of five years from the date of this agreement. The Company obtained the official non-exclusive, non-transferable license for the manufacturing, marketing, dealing and servicing of APX-60 type blades from the trustee of Aerpac B.V. upon its liquidation, for consideration of Euro 200,000 vide an agreement that was entered into between the trustee of Aerpac B.V. and the Company dated June 4, 2001. This license is valid for an indefinite period. The Company entered into an agreement dated April 10, 2001 with Enron Wind Rotor Production B.V. for the acquisition of the moulds and the production line and technical support and assistance for the production of the rotor blade type APX 60-P in India for total consideration of Euro 500,000. Enron has granted these rights for the manufacturing, marketing and dealing with the products for an indefinite period.

The Company introduced the concept of total solutions wherein, in addition to the supplies of equipments, the client is offered project execution work comprising land acquisition, site development, erection and commissioning, foundation and other civil work and O&M services. These services are offered in conjunction with the Associate Companies. SWSL, a subsidiary of the Company, was incorporated in 1998 with the objective of providing O&M for wind power projects set up by the Company. The Company has also set up technological development centres in Germany and The Netherlands through wholly-owned subsidiaries. SEG, incorporated in 2001 and earlier known as AX 215 Verwaltungsgesellschaft mbH became a wholly-owned subsidiary of the Company in 2002. AERT, a wholly owned subsidiary of AERH, which in turn is a wholly owned subsidiary of the Company, was incorporated in 2001 to engage in the development of technology for rotor blades, a key component of WTGs. Further, Suzlon Energy A/S, a wholly-owned subsidiary of the Company was incorporated in August, 2004 to supervise the international marketing activities of the Company. It is proposed that the entire non-India marketing activities of the Company shall be coordinated through Suzlon Energy A/S. SWECO, now a wholly-owned subsidiary of the Suzlon Energy A/S, was incorporated in 2001 to market, the WTGs manufactured by the Company in U.S.A. Further, Suzlon Energy A/S has another wholly-owned subsidiary, Suzlon Energy Australia Pty Limited, which was incorporated in 2004 to access the wind energy market in Australia. Suzlon Energy B.V. earlier known as AE-Rotor B.V., The Netherlands, a wholly-owned subsidiary of AERH, which is a wholly-owned subsidiary of the Company, was incorporated in 2001 to market the rotor blades manufactured by the Company. Cannon Ball Wind Energy Park-I, LLC ('Cannon Ball') was incorporated as a limited liability company in July, 2002 for the purpose of setting up a wind power project in North Dakota, USA. Cannon Ball is a wholly-owned subsidiary of SWECO which is a subsidiary of Suzlon Energy A/S. Further, a representative office of the Company was also set up in China in 2003 to explore the Chinese market.Suzlon's

Suzlon Energy Limited has taken a step further for establishing its presence in China by commencing the establishment of a wind turbine generator manufacturing facility in China through its wholly owned subsidiary Suzlon Energy (Tianjin Limited, The said manufacturing facility which is scheduled to commence its commercial operations by about Second quarter of financial year 2006-2007 would cater to the energy needs of China.

The companies product range includes 0.35 MW, 0.60 MW, 0.95 MW, 1.00 MW, 1.25 MW and 2.00 MW WTGs

Suzlon Energy also has the distinction of introducing the concept of large wind parks in Asia and has gone on to build some of the largest wind parks in Asia including the world's largest wind park of its kind.

Further, Suzlon's status as a force to reckon with in the wind energy industry came with the World Wind Energy Association's award for the year 2003, recognizing its contribution in disseminating wind energy worldwide.

ACC: Hold

Investors in the stock of ACC can hold on to their investments. The company’s aggressive expansion plans are expected to push up its total cement capacity to 30.4 million tonne per annum (mtpa) by 2010, from the current 22.4 mtpa.

Also on the anvil are the company’s 30 MW captive power plant at Bargarh, Orrisa (to be commissioned by mid-2009) and 25 MW power plant at Chanda, Maharashtra (2010).

With cement prices unlikely to witness any strong increase in the near term and ACC’s expansion plans likely to contribute only after two years, the company may post moderate earnings growth in the near term.

At the current market price of Rs 680, the stock trades at nine times its 2007-08 earnings.

ACC is a leading player in the Northern and Eastern cement markets and the largest cement player in the country with a capacity of 22.4 mtpa. Swiss cement major Holcim holds a 41 per cent stake in the company’s stake. After its acquisition by Holcim in 2005, the company saw a substantial improvement in performance, with the operating profit margins expanding from 28.7 per cent in 2005 to 33.6 per cent by 2007.

Holcim’s operational efficiencies and edge in technology has lent strong support to ACC over the years, with benefits expected in future as well.

ACC has also gradually exited its non-core businesses, with the sale of its refractory business in 2005, subsidiary ACC Nihon Castings Ltd in July 2007 and ACC Machinery Company in March 2008. The company’s ready mix concrete business was also hived off as a separate entity with effect from January 2008.

On the acquisition front, ACC has purchased 100 per cent equity stake in Lucky Minmat Private Ltd, Rajasthan, to augment the company’s limestone reserves. Further, the company has also taken up 14.3 equity stake in Shiva Cement to strengthen its market presence in Orissa.
Expansion Plans

ACC’s proposed addition of 8 million tonne per annum (mtpa) to its existing 22.4 mtpa by end-2010 is planned by way of augmenting grinding capacities at Madukkarai and New Wadi by 0.8 mtpa (total) and additions of 1.18 mtpa, 3 mtpa and 3 mtpa at three locations at Bargarh (Orissa) New Wadi (Karnataka) and Chanda (Maharashtra) respectively.

While the smaller additions to grinding capacity will contribute in 2008, the larger additions are expected to be commissioned by 2009 and 2010. The expected outlay for the Chanda green-field expansion is around Rs 1,450 crore.

The addition of significant capacities in the Western and Southern markets may help the company achieve a better regional balance in its sales mix. This may make it relatively less vulnerable to regional demand-supply disparities. For 2007-08, the northern markets reported a cement demand growth of 8.6 per cent and the Eastern markets 3 per cent.

Demand growth in the West at 14.6 per cent — was supported by an over 13 per cent growth in Maharashtra while growth in the South remained strong at 12 per cent.

The Northern and Western regions are expected to sustain strong growth with huge infrastructure and construction projects. ACC’s expansion in the relatively high demand pockets (West and South) may also strengthen its average realisations.
Soaring Operating expenses

Although ACC is a long standing player in the cement industry, input cost escalations have muted financial performance in recent times. For the quarter ending March 2008, ACC’s total expenses rose 15 per cent, led by power and fuel expenses rising by 25 per cent compared to the same period previous year.

ACC’s raw material cost, as a proportion of sales, also rose to13.4 per cent from 10.8 per cent over the above period . Further, the company has announced a price hold for two-three months after the Government’s request targeted at curtailing inflation.

Sales for quarter-ended March 2008 was up 12.6 per cent excluding the RMC business which was demerged this quarter.

The cumulative despatches between January-March 2008 rose 7.1 per cent to 5.29 million tonnes from 4.94 million tonnes in the corresponding previous period. However, strong volume growth did not translate into profit growth due to cost escalations.

Net profit after tax showed a marginal decline, after excluding profit from the disposal of ACC Machinery Company Ltd. Cost-pressures, flat realisation and sedate volume growth may contribute to moderate earnings growth from ACC over the next few quarters

PVR Cinemas: Buy

Investors with a long-term perspective can consider accumulating the stock of PVR Cinemas in small lots. A lacklustre season at the box office and the migration of movie audiences to cricket with the onset of the Indian Premier League tournament have resulted in the stock languishing in the bourses in recent weeks.

However, the current market price offers a good entry point for investors willing to hold on to the stock for a two-three year period.

The stock trades at 21 times its trailing four quarters’ per share earnings. While the near-term outlook for earnings is likely to be dimmer than the past, amidst a sluggish period for the film industry, the long-term prospects for the company remain bright.
Earnings outlook

PVR has reported a strong performance in recent quarters on the back of ramp up in screen presence and expanding margins. A key positive for the company has been the strong performance of its existing properties, which have been clocking robust double-digit growth in footfalls. This means that earnings growth will be less dependent on the timely opening of theatres.

The fourth quarter is typically a relatively subdued one for multiplex operators. With the exception of Jodhaa Akbar and Race and some spillover collections from Taare Zameen Par, the box office did not have much to report. The dry spell appears to have continued into the summer, which may dampen box office collections in the first quarter of FY-09 as well.

New theatre openings may be the main revenue driver in the near term, if content remains sluggish. PVR continues to add screens, although there have been delays in screen openings across the industry.

The company has tied up with mall developers such as the Prestige group to broaden its presence in the South. It has a target of opening an additional 250 screens by 2011 from the current 95.

From a long-term perspective, however, PVR’s ability to maximise spends on tickets, food and advertisements augurs well for its overall profitability. PVR derives about 20 per cent of its revenues from food and beverages and, thanks to its large screen presence in metros, another 10 per cent from advertisements. Maximising revenue streams beyond the box office is key to maintaining profitability at a time when film hire costs (the cost to exhibit a film in a multiplex) are on the rise. PVR appears to have fared better than its peers on this score.
Focus on metros

This may be partly due to PVR’s focus on metros even as its peers scout for properties in Tier-2 and Tier-3 cities. The company believes that metros remain the most profitable centers for multiplex operators, as spending habits are yet to mature in smaller towns and cities.

This view appears to be validated by its ability to command higher ticket prices in cities such as Delhi and Mumbai. Its existing properties clock superior occupancy levels of over 40 per cent, charge an average ticket price of Rs 130 and there has been an increasing trend in spends per head.

The company’s operating margins are likely to remain higher than its peers, who are now foraying into smaller towns and cities.

PVR recently launched PVR Premiere for the urban elite, with ticket prices ranging from Rs 150-750. The company also operates a low-cost multiplex model PVR Talkies in towns such as Aurangabad and Latur, where tickets are priced at Rs 40. The use of multiple formats that straddle across income segments enables the company to capitalise on both increasing footfalls and the increasing willingness to spend on entertainment.
Building on distribution

With increasing screen presence, PVR is well-placed to build on its distribution business, operated by subsidiary PVR Pictures. Although it is early days still, we expect PVR Pictures to make an increasing contribution to revenues and profits over the next couple of years.

The company’s first co-production Taare Zameen Par with Aamir Khan Productions was a runaway hit. More such projects have been lined up, including one from Aamir Khan Productions expected to release in July 2008.

PVR Pictures, which already has a track record of distributing strong English movie titles, has distributed fairly successful Hindi movies such as Bheja Fry, Omkara and Honeymoon Travels over the past year.

The distribution business appears to be closely tied with the exhibition business, considering that these films clicked particularly well with multiplex audiences. PVR’s multiplexes are present in six of the nine territories for film distribution, which makes it easier for PVR Pictures to drive distribution through its own multiplexes.

A presence in distribution will also keep a check on film hire costs for the multiplex chain.

Cadila Healthcare: Buy

Investments with a two-year perspective can be considered in mid-sized pharma company, Cadila Healthcare. Good momentum in generics business outside India, diversified product portfolio in the domestic market and bright prospects of cornering a chunk of the contract manufacturing pie, form the basis of our recommendation.

The company’s sales and net profits have grown by 13 per cent annually in the last five years. On a like-to-like basis (excluding acquisitions), Cadila’s revenues have grown by around 20 per cent in FY-08.

Over the long term, positive surprises, once validated through out-licensing deals, could also spring from the elaborate drug discovery set-up, which is currently working on five molecules in areas of obesity, diabetes, metabolic disorders etc. At the current market price of Rs 315, the stock discounts its likely consolidated FY 2009 earnings per share by 13 times. The valuation appears attractive when compared to formulation-based players of similar size and scale.

With a business skewed towards high-margin formulations — finished dosages (contribution from bulk drugs is less than 15 per cent), Cadila Healthcare is among the top five in the domestic market. Formulation exports have grown annually at 60 per cent over the last three years, helped by acquisitions and presence in key markets.

Going forward in the next two years, Cadila could emerge as an important contract manufacturing player (sales contribute less than 5 per cent now) through joint-ventures, which are in place, even as it consolidates its position in the Indian market and builds on a viable generics business in countries such as US, France, Brazil and Japan.
Indian business

On the domestic front, Cadila is likely to build on the 13-15 per cent growth in branded formulations space through new launches (own pipeline as well as in-licensing) and through entry as well as consolidation in profitable therapeutic areas such as nutraceuticals, orthopaedics, dermatology and cosmetology.

Cadila also has major interests in the consumer products business (8-9 per cent of consolidated sales) through brands such as low-calorie sweetener ‘Sugar Free’, skin-care product ‘EverYuth’ and butter alternative ‘Nutralite’.

While the steep growth witnessed in this segment is partly on account of an acquisition, the division holds strong potential given the market share enjoyed by the brands.
Growing overseas

Exports account for around one-third of Cadila’s revenues. While its limited exposure to the highly competitive US generics market could be seen as a negative, its relatively late entry has enabled it to avoid the massive price-corrections in generic landscape in the US.

Though the outlook in the US still remains cautious, the worst is perhaps over now and players such as Cadila with distribution tie-ups and a portfolio of 18-20 products could grow from here on.

The company also has more than 40 unapproved drug filings in the US which are likely to materialise over the next 18-24 months, lending greater mass to its business. In France (presently 7 per cent of sales) Cadila’s business broke-even and turned profitable in 2007-08.

The company has sealed certain local tie-ups, which can be expected to scale up revenues, as it sells more number of products than the 20-25 it already has. It has also obtained 25 site transfers for products currently made in France to India, which will see an improvement in profitability. Cadila’s Brazilian operations hinge around an acquired entity called Nikkho which gives it both front-ended presence (marketing force and channels) as well as local manufacturing facilities (helps to get approvals quicker). A major portion of Nikkho’s portfolio is yet to be tapped, which may provide upsides for Cadila.
Contract manufacturing

Cadila’s relationship with innovators and conspicuous absence in patent-infringing generic products in its own US business indicates that it harbours larger contract manufacturing ambitions.

Cadila currently has three large long-term supply contracts for drugs. It also has over 20 smaller contracts, which together offer a peak revenue potential of $35-40 million annually. Cadila’s JV with Nycomed for a certain bulk drug product is starting to face early genericisation with generic alternatives launched in the US. Though a small proportion of sales, it has very high profit margins and forms a chunk of Cadila’s profits.

However, revenues from this JV have declined by 20 per cent in 2007-08 with increasing competition. Nycomed has now planned to shift all its bulk drugs manufacturing to India (to cut costs) for 17 products, expected to be operational by 2010; Until such time, Cadila may see some dent in contribution from the JV. Meanwhile, Cadila’s JV with U.S-based Hospira for oncology injectables, expected to commence in October-November 2009, may partially offset the decline in revenues from Nycomed.

Cadila’s balance-sheet carries a net debt of Rs 860 crore (80-85 per cent is denominated in foreign currency). Interest costs could put pressure on operating margins in the medium-term. Organic growth in 2008-09 may be hampered due to integration issues, product delays, regulatory interferences etc.

Container Corporation: Buy

Investors with at least a two-year perspective can buy the stock of Container Corporation, a leading player in the multi-modal logistics space.

A massive infrastructure network, huge wagon inventory and strategic tie-ups with potential competitors in the logistics space inspire confidence in the company’s ability to scale future growth. At the current market price of Rs 901, the stock trades at about 14 times its likely FY09 per share earnings.

Concor had suffered significant de-rating in the recent past on the back of concerns over growing competition given the entry of 14 new private players in the container rail logistics space. The company nevertheless retained its leadership position; it contributed to over 94 per cent of the container rail traffic as against the 6 per cent carried by the new entrants last year.

This dominance may remain given Concor’s pan-India infrastructure network of over 57 inland container depots and 8,500 wagons. Plans to further add to these capacities (capex of Rs 700 crore) would help sustain its leadership. Concor also boasts of a highly depreciated asset base. Backed by a low per unit cost, Concor is also likely to enjoy the best returns on incremental investments while its competitors may continue to grapple with high investment costs.

In a bid to further strengthen its service offering and address competition from road transport businesses, Concor has formed joint ventures with companies such as Reliance Logistics and Transport Corporation of India. Through these ventures, Concor would provide end-to-end inter-modal logistics solutions to its customers.

Further, Concor also proposes to enter new businesses such as container shipping and air cargo. Entry into these segments would be a logical extension of its current business offerings and will help Concor establish presence in the entire length of the logistics chain. In an attempt to overcome any hiccup arising from lack of prior experience in these initiatives, the company plans to carry the new businesses through joint ventures. Concor reported a compounded earnings growth of over 23 per cent on the back of 18 per cent growth in revenues over the last five years.

Notwithstanding this, operating margins declined last year by 2 percentage points to about 27 per cent. Margins came under pressure due to the running of empty rakes as there was a drop in export volumes last year. While Concor has since then taken necessary steps to address this problem, the recent depreciation in the rupee may provide some respite.