Cadila Healthcare

Investors with a long-term perspective can consider adding the stock of Cadila Healthcare to their portfolio. Though the stock price has gained considerably in the recent rally, improving visibility in the company’s exports earnings besides its positioning in the domestic market make a strong case for investing in it. Better growth expectations from its joint venture with the US-based Hospira also underscore our recommendation. At the current market price of Rs 518, the stock trades at about 17 times its likely FY-10 per share earnings.

While this is , the company’s stronghold in the US generics space in addition to its expanding presence in other key markets lend confidence to its ability to maintain the overall growth momentum over the next couple of years.
Exports to drive growth

The pro-generic healthcare reforms in the US and other key markets in Europe, Japan and other emerging markets are likely to provide the much-needed thrust to Cadila’s exports.

The company already has a fair standing in the US, with 25 products in the market and 48 ANDAs and 79 filings and plans to further add to this by filing 12-15 ANDAs per year. Its approach, however, is comparatively less risky than some of its peers as the company plans to desist from sole (first-to-file) FTF opportunities.

To that extent, it may also not enjoy the upsides from blockbuster sales. The management has guided for a 50 per cent growth in the US sales for the year. This appears reasonable given the heady sales the region enjoyed in the first quarter.

In the just ended quarter, the US grew strongly by 81 per cent over the corresponding previous period helped by product launches.

The overall export performance remained healthy, but for Brazil, which de-grew by 14 per cent due to delay in customs clearance of products. Cadila’s presence in Europe and Japan (at present insignificant) also holds immense revenue potential.
Domestic stronghold

Cadila’s presence in high-margin therapeutic segments such as female health, CVS and gastrointestinal drugs in addition to cosmeceuticals and animal health products are likely to help it deliver strong growth on the domestic front.

In what may only be early signs, the company came out with a strong set of numbers in the June quarter, when it reported a domestic sales growth of 13 per cent. Cadila launched 17 products, including extensions of existing products, last quarter. Harping on product launches and strong sales force, the management expects its domestic formulation business to grow by 13-15 per cent for the year.

Zydus Wellness, the consumer business of Cadila Healthcare that was carved out into a new company (70 per cent Cadila’s stake and is listed) is also expected to report healthy growth.

The consumer healthcare business, which owns the brands Sugar Free, Nutralite and Everyuth, posted a healthy 22 per cent growth during the quarter.
High contributions

Cadila’s joint venture with Nycomed, which supplies final active ingredient for Pantoprazole drug, is likely to see a fall in revenues in the next couple of years as the drug is set to lose patent by February 2011 in the US.

However, the extent of fall in revenues may not be as drastic as the JV continued to see better-than-expected growth in revenues even last quarter. Despite the loss of exclusivity in Canada and Europe, the global net turnover of Pantoprazole remained broadly stable for Nycomed in its second quarter. Wyeth, which sells the drug in the US, also saw better-than-expected sales, although part of that increase came from sales of Wyeth’s own generic version of the drug.

But on the whole, both Wyeth and Nycomed were able to maintain their volume share of the drug in the June 2009 quarter. And that Nycomed has begun sourcing the API exclusively from the joint venture instead of multiple suppliers may also help the cause of the JV company. What’s more, from June 2010 onwards, the scope of the Nycomed JV may get further expanded as the former is expected to source additional APIs. That said, the Nycomed JV might also not continue to operate at its earlier profitability levels.

The management, therefore, has given lower revenue guidance; it believes that Nycomed JV will contribute Rs 60 crore to the topline and Rs 35 crore to the bottomline this year compared to Rs 99 crore and Rs 68 crore in FY-9. But even as there would be a fall in revenues from this joint venture, the company’s newly operational JV with Hospira promises to offset the shortfall to a great extent.

Having commenced operations from May 2009, this JV reported Rs 23 crore and Rs 6 crore revenue and profits last quarter (Cadila’s share of pie in the two months of its operations).

The management has given a revenue guidance of Rs 60-80 crore from the Hospira JV this year. This company, which currently manufactures three products catering to the EU region, is expected to scale up to four by the third quarter.

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B L Kashyap and Sons

Investors with a long-term perspective can consider buying the stock of construction contractor, BL Kashyap & Sons (BLK), currently trading at Rs 427, at a multiple of 17.6 times its standalone trailing four-quarter earnings.

Increasing signs of a revival in the real-estate segment and diversification into other business streams could augur well for the company’s revenue growth after a lacklustre performance in FY-09.

The company’s sound track record of quality and timely construction in industrial, commercial and residential real-estate has enabled it bag projects from some of the leading developers in the country.
Bright spots

BLK suffered heavily as a result of the realty slump that started in 2008, when construction contracts dwindled as a result of lower off-take across various user segments.

Note that the company still leans heavily towards realty developments — residential, retail, commercial and IT projects constitute 46 per cent of the order book .

Post-March 2009, these segments have shown a slow uptick in off take. Increase in demand in the residential real-estate now appears evident what with some developers hiking the price of their new projects.

Further, according to a Cushman & Wakefield report, even while the office market is expected to witness a fall in demand in 2009, a 19 per cent compounded annual growth is expected between 2009-13.

Both these developments, if sustained, would bode well for BLK’s earnings growth.

The re-rating being witnessed by realty developers in the stock market could also offer some clues on the prospects in store for BLK.

Hotels, where the company has a 19 per cent concentration, however, remains a grey area, as the segment is yet to demonstrate clear signs of pick-up.

Revenue streams

After the slump in its core business provider — real estate — last year, BLK diversified into the promising infrastructure segment in early 2009.

Of its March 31 ‘09 order book size of Rs 2000 crore, about 6 per cent (Rs 125 crore) is for infrastructure and PSU contracts, and the company is the lowest bidder for a further Rs 200 crore. BLK goes in for joint bids where it cannot qualify for projects on its own.

That apart, almost 30 per cent of the order-book comes from industrial projects and projects from corporate end-users such as HCL and Tech Mahindra and order book, thus, does not depend entirely on the fortunes of the real estate sector.

Affordable housing is another area which the company will focus on. Total order book stands at 1.37 times its FY-09 sales, lower than some peers, but a quick execution schedule of 12-18 months could serve it well.

BLK will also generate revenues from monetising land parcels held in its wholly-owned realty subsidiary, Soul Space Projects, as well as selling developed space to its clients.

About Rs 110 crore is expected to flow in by the end of FY10, with a further Rs 60 crore in the pipeline, according to company estimates.

Financials

Sales fell 5 per cent in FY-09, while net profits slid far more by 32 per cent due to high labour costs and interest.

However, the company managed a three-year CAGR of 46 per cent and a net profit growth of 39 per cent.

Though the company has not seen cancellation of projects, it has slowed down execution on a few where it has foreseen payment delays. Working capital turnover has been affected, dropping from 4.8 times in FY-08 to 2.4 times in FY 09.

Operating margins have slipped 2.8 percentage points in FY 09 from the previous year, but have held at 10.6 per cent, improving further to 12 per cent in the June 2009 quarter. However, interest and depreciation costs have dragged net profit margins.

That said, debt-equity ratio is low at 0.26 times, and the company will use proceeds derived through Soul Space to meet debt obligations.

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Uttam Galva

Investors holding shares in steel company Uttam Galva can consider not tendering their shares in ArcelorMittal’s open offer.

While the Rs 120 per share offer in the midst of a commodity slump is very generous, the potential upside with a brand such as ArcelorMittal taking a stake and the scope for an exponentially increased scale and product line make for a good investment.

The company has been valued at 15.7 times trailing diluted earnings with a market cap of close to Rs 1,370 crore.

Peers such as Bhushan Steel are valued at 12 times earnings. Shree Precoated Steel, with slightly higher capacities and a similar product line, is being acquired by Essar Steel for Rs 700 crore.
WHO THEY ARE

Uttam Galva has a single production unit at Khopoli, Maharashtra. It purchases and processes hot rolled steel into cold rolled steel (1 million MTPA) and other value added processes include galvanising (7,50,000 MTPA), annealing and colour coating (90,000 MTPA).

Consumers for its products include automobiles, consumer durables, industrial machinery majors such as Bajaj, Force motors, BHEL, Whirpool, LG, Tata Steel among others.

In 2008-09 exports accounted for 52 per cent of sales, with Europe and the US being its major markets. While the high percentage of exports would normally be a worrying factor considering the global scenario, in Uttam Galva’s case, the company’s low production volumes can easily be absorbed given the robust domestic demand.

Proximity to the Nava Khera port is an advantage, given the high percentage of exports.

This also allows import of steel if the domestic market prices are higher than international prices. The stake acquisition by ArcelorMittal may guarantee timely supply of steel for Uttam Galva’s operations.
THE NUMBERS

Over the last five financial years the company’s sales have grown at an average of 23 per cent for the last five years, with FY09 registering a higher 38 per cent growth.

The operating margins have averaged at 9.8 per cent over the past five years, but fell to 8.2 per cent for FY09, with higher interest expenses and firmer steel prices for the first nine months of the year.

Being a ‘processor’ of steel, the largest cost component for the company is hot rolled steel. However, the ability to pass on input changes to customers has helped the company weather raw material price swings over several years quite well.
WHERE THEY FIT IN

ArcelorMittal currently has plans to set up steel plants in Jharkhand and Orissa which are expected to start production in 2014 with a expected capacity of 14 million TPA. These will be fully integrated plants with access to iron ore and coal.

Uttam Galva’s facility would neatly complement ArcelorMittal’s India plans, by using the supply of hot rolled steel from the latter’s plants to fill in a lucrative niche of the vertical. This gives Uttam Galva a full four-five years to ramp up capacities.

The company could also draw from ArcelorMittal’s vast product line in coated steel including alloy coatings and organic coatings.

Speciality coatings such as zinc-aluminium (Galfan), speciality surface treatments, aluminium silicon alloy coatings are a few of the products which are likely to find application in energy, automobiles and the consumer durables sector.

Such competence, which would have taken years for Uttam Galva to attain as a standalone company, can now potentially be tapped quite easily from the co-promoter.

This would confer a first-mover advantage on Uttam Galva to enter emerging niche segments.
SECTOR PROSPECTS

While global steel production dropped 21 per cent for the first six months of 2009, Indian production grew by 1.3 per cent. Demand for washing machines, air-conditioners, cars, etc, have grown 10-26 per cent for the five years ending 2007-08.

As demand for consumer durables, automobiles and industrial machinery grows, the steel pie follows suit. In this scenario, the share of speciality cold rolled steel products for niche industries is likely to grow at a faster clip than long products and generic flat products.

While major steel companies such as Tata Steel, JSW Steel, SAIL, Essar Steel produce cold rolled galvanised and colour coated steel, very few players other than Uttam Galva have cold rolled and derived products as their sole focus.

Backed by ArcelorMittal financially and for product development, Uttam Galva can potentially double or triple its sales in five years, albeit with additional borrowing which might take a bite out of the slim margins in the near term. The current interest cover ratio stands at 1.54 times, which may turn into a worry if sales stagnate.

OFFER DETAILS

Arcelor Mittal’s open offer is for 29.39 per cent of the non-promoter holding of the company. The current promoter group holds 39.7 per cent.

ArcelorMittal will hold roughly equal stakes of about 35 per cent in the company if the open offer succeeds.

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Television Eighteen

Shareholders can avoid subscribing to the rights offer of Television Eighteen (TV18) considering the business uncertainties and relatively expensive valuation that the offer is being made at. The company has several properties across broadcast and Internet that are leaders in their genre.

TV18 is offering one share for every two held in this rights issue, priced at Rs 84. Although this is at a 14 per cent discount to the current market price, the valuations are still expensive. At the offer price, the enterprise value-to-sales (EV/Sales) multiple of TV18 would be four times its 2008-09 sales, which is much higher than a profit-making Zee News or its loss-making peer, NDTV.

Advertising volumes and pricing — the key revenue drivers for the media industry — are stabilising, but are yet to return to high growth levels. Given that TV18’s businesses are highly reliant on advertising revenues, most of its divisions are currently reporting operating losses.

The company reported an operating loss in 2008-09 with the picture improving to a 3 per cent positive operating profit margin in its June quarter financials. The entry of newer business channels may also pose a threat to market share over the long term.

News operations, the key

TV18 owns two of the leading business channels in the country — CNBC TV18 and CNBC Awaaz — which are leaders in their respective genres in both the English and Hindi languages. In Hindi especially, this is more pronounced as the market has CNBC Awaaz and Zee Business as the only players.

In the English business news space, there is competition, but CNBC-TV18 still maintains a considerable lead over the other channels. But recent TAM reports on viewership suggest that ET Now, a new launch, has managed considerable inroads; this has now become available on DTH platforms.

UTVi is reportedly tying up with Bloomberg TV and may also be able to offer competition, though not of the scale of ET Now. However, all the three competitors (including the second largest viewed NDTV Profit) have some way to go before they manage to edge out CNBC from its leadership position.

Revenues from this segment were down 25 per cent in the June quarter over last year. But with a revival in advertising in key segments such as Telecom and BFSI, as well as that from a spate of new IPOs and NFOs, the sector, as a whole, and TV18, in particular, may benefit.

Television advertising is estimated to grow by 12.2 per cent annually to Rs 15,000 crore by 2013, according to a recent report on media by PWC.

This would be one of the key reasons for investors to hold on to the stock apart from the fact that being a pay channel, subscription revenues may increase given that DTH subscribers are increasing rapidly and number over 11 million currently.
Web18 holds potential

Web 18 has many properties such as moneycontrol.com, in.com and indiaearnings.com that are among the top visited Web sites in India, with moneycontrol leading the way. The company also holds stakes in sites such as Yatra.com, a leading travel booking Web site.

Other sites such as in.com, though gaining hits, face considerable competition from Rediff, Indiatimes and Sify that offer a complete range of content, subscription and transaction-based services.

But this segment has been increasing contribution to revenues (14-15 per cent of revenues currently) and grew at eight per cent in FY-09 and even in the recent June quarter and has reduced operational losses.

Internet advertising is set to touch Rs 2,140 crore by 2013, growing at 27.9 per cent annually, according to a FICCI-KPMG media report.

The publishing foray with Forbes, where Rs 30 crore of the rights issue proceeds are set to be invested and Newswire18 which has reduced operational losses substantially are two additional segments to watch out for.
The offer

The company is looking to raise a little over Rs 504 crore from this issue. This is mainly to repay a part of its debt (Rs 300 crore) and the rest for investment in some of its divisions and general corporate purposes. For the year-ended March 2009, TV18 held over Rs 977 crore in the form of secured and unsecured loans from banks and public deposits. Despite the repayment of some loans, the debt level still appears high. It may come down to some extent if the Rs 164 crore that the company has in the form of cash and bank balances are used to for repayment.

The investors have the option of paying 25 per cent of the issue price on application, 35 per cent on the ‘first call’ and the balance 20 per cent and 20 per cent on the ‘second call’ and the ‘third call’ respectively.

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Engineers India

Investors with a two/three-year perspective can consider an exposure to the stock of Engineers India.

A well-entrenched position in high-end project consulting provides the company an edge in participating in the reviving spends on hydrocarbon, metal and infrastructure projects.

Further, headway made in lump-sum turnkey projects and Engineering, Procurement and Construction (EPC) makes the company unique in the Indian listed space, comparable to international players such as Technip and McDermott International.

At the current market price of Rs 1,134, the stock trades at 12 times its expected per share earnings for FY-11. Though not strictly comparable, this valuation is at a discount to large infrastructure players. Investors can use any declines linked to broad markets to accumulate the stock. Investors may have to, however, stomach lumpiness in revenues across quarters.

Project consultancy has traditionally been Engineers India’s core business operation. However, over the last couple of years, with the aid of successful joint ventures, the company has ramped up its presence in turnkey projects. This has aided in a 107 per cent growth in revenues in FY-09 to Rs 1,532 crore.

Turnkey project division accounted for 46 per cent of sales last year. Key orders in the refinery segment during the year have resulted in the segment accounting for close to 70 per cent of the order inflows of Rs 3,929 crore for the year. These are clear indicators that this segment would emerge as the key revenue driver for the company over the next couple of years. We view this as a diversification strategy that would widen opportunities in the oil and gas space.

Even as the turnkey segment is expected to fast track sales growth, this segment’s profit margins are not as lucrative as the consulting division; perhaps that is why operating profit margins dipped marginally by about 2 percentage points to about 20 per cent, despite a superior profit margin.

While Engineers India has been a regular recipient of projects from other state-owned companies such as ONGC, GSPC, GAIL and public sector refineries, it has managed to break free from being typecast as a Government service provider by bagging projects from private players as well. This could also enrich profit margins.

Engineers India was perhaps one of the few companies unaffected by the slowdown in 2008. Even as earnings grew 61 per cent in FY-09 to Rs 345 crore, there was a 23 per cent increase in new orders, taking the order book to over Rs 7,000 crore (4.5 times the FY-09 revenues). A disinvestment in the Government’s holding, when it happens, could act as a trigger for the stock.

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