Saregama, Prajay Engineers

Saregama, Prajay Engineers

JK Cement, Saregama India

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs330
Current market price: Rs246

Price target revised to Rs330

Key points

• JK Cement is expanding its capacity by 3.5 million metric tonne (MMT) through a greenfield plant at Karnataka, which will be accompanied by a 50-megawatt (MW) power plant at the site. The capital expenditure (capex) programme is in progress and the plant is expected to be commissioned by FY2009 end. This will augment the capacity of the company by 70% in FY2010 and will drive the volumes of the company going ahead.
• Refurbishment of Nihon facility is expected to be complete by the end of Q4FY2008 and would increase cement volumes by 350,000 tonne in FY2009.
• JK Cement's capex on captive power plants (CPPs) is progressing well. The company has already commissioned a 20MW pet coke based power plant and has replaced its 10MW turbine. It has partially implemented the 13MW waste heat recovery plant and expects the plant to get fully operational by FY2008 end.
• With all CPPs in place, the company will be able to save Rs150-200 per tonne on power consumption from FY2009.
• JK Cement's Q2 results were much above our expectations. The topline grew by a healthy 33% year on year (yoy) to Rs356 crore on the back of a blended volume growth of 12% yoy and a realisation growth of 17% yoy to Rs3,597 per tonne.
• Strict control on variable costs led the operating profit grow by 58% yoy and the operating profit margin (OPM) expand by 450 basis points to 28.2%. The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne jumped by 40% yoy to Rs1,030 per tonne.
• Lower tax provision of 13% during the quarter made the profit after tax (PAT) grow by a whopping 142% yoy to Rs72.7 crore. The PAT growth was much ahead of our expectations.
• We have been bullish on the business prospects of JK Cement on account of its cost-cutting measures and capex programme. Savings in power costs from the CPPs coupled with higher volumes from its greenfield facility will be the major business drivers for the stock. The stock is trading at 10x its earnings and 6.6x its enterprise value (EV)/EBITDA on FY2009 earnings estimate. Even after a significant run-up in the last couple of months, it commands an EV per tonne of USD 84, which is lower than the benchmark asset valuation of USD 100-115 per tonne. Considering the cheap asset valuations, we maintain our Buy recommendation on the stock with an upgraded price target of Rs330, leaving an upside of 30%.

Saregama India
Cluster: Ugly Duckling
Recommendation: Book Profit
Current market price: Rs296

Book profit

Key points

Saregama India Ltd (SIL) reported disappointing results for Q2FY2008. While the operating revenues fell by 2.7% year on year (yoy) to Rs33.8 crore, the operating profit declined by 57.9% to Rs2.7 crore. Consequently the net profit before extraordinary items decreased by 44.7% yoy to Rs2.6 crore.

Operating profit margin (OPM) fell sharply to 7.9% in Q2FY2008 against 18.4% in Q2FY2007. The OPM declined primarily due to a sharp jump in royalty expenses that as a percent of sales increased by 860 basis points yoy to 28.6%. Royalty payments went up as royalty model has shifted from revenue sharing model to a fixed minimum guarantee model.

SIL's audio sales declined sharply by 34% yoy in the last four quarters. Sale of cassettes and CDs is continually falling as consumers shift to non-physical formats of music such as radio and TV.

SIL's share in acquiring new music rights declined to 9-10% from about 30% in the past. With competition setting in, the cost of acquiring these rights has gone up substantially. We believe that the current scenario wherein music rights are awarded on minimum guarantee as against revenue sharing in the past has increased the risk for music companies.

Increasing competition, lack of aggression on the part of the management and sharper decline in physical sales raise concerns. We believe, the current market price of Rs295.5 fully factors the risks and rewards associated with SIL's business and thereby advice investors to book profit.

Stocks you can pick up this week

Welspun India
Research: Merrill Lynch
Rating: Buy
Current Market Price: Rs 64

Fundamentals of Welspun remain intact despite the rupee’s appreciation. The negative impact has already been factored in as the stock has corrected more than 20% over the past few months. Merrill Lynch has revised the earnings estimate on the back of growth in volumes, both for towels (27%) and bed linens (40%).

For India, home textile exports seem to be performing better than apparel exports. This is visible from the strong performance in home textile exports to the US, compared to apparel exports. Keeping in mind the strong underlying growth potential and relatively better pricing power to weather the rupee storm, Welspun is fairly priced at an estimated P/E of 11x FY08 and 0.8 P/B. The company will save power cost as it has shifted to gas-based power for its Vapi facility. The Christy manufacturing facility is being shifted to India, the benefits of which will be onstream from FY09.

Jet Airways
Research: HSBC
Rating: Underweight
Current Market Price: Rs 795

The March ’07 results were not as good as expected. Quarterly performance was inflated by including the whole year’s export credits received from the Indian government. Stripping this out, recurring earnings fell 30% to Rs 39.8 crore and were 40% below forecast.

Even after adjusting out export credits, EBIT and EBITDAR both fell YoY, gross domestic yields per available seats per kilometre (ASK) were flat and excluding surcharges, were down 14% YoY. International routes finally broke-even, almost two years after Jet’s expansion. However, HSBC doesn’t expect this to last. It has reduced FY08 forecast to reflect these risks. It estimates tangible book value per share will collapse to Rs 142 in FY08. It says that the current price levels imply that Jet can grow its EBIT at a 23% CAGR after its earnings recovery in ’10, which is unrealistic.

UTV Software
Research: Prabhudas Lilladhar
Rating: Buy
Current Market Price: Rs 509

UTV Software expects its movie business segment to report revenues in the range of $50-55 million for FY08, with EBITDA margins close to 30% for the segment. Based on the performance of recent movie releases and guidance provided by the company, Prabhudas Lilladhar has revised upwards its estimates for UTV. It expects UTV’s earnings to witness a CAGR of 98% over the next three years.

At the current market price of Rs 526, UTV Software is trading at a price-to-earnings multiple of 13.9x FY10 estimates. The company has raised $77.3 million on AIM for financing the cost of production and working capital requirements of 30 movies.

Reliance Industries
Research: ABN Amro
Rating: Sell
Current Market Price: Rs 1,711
ABN Amro has downgraded RIL to a sell on account of aggressive valuation of its E&P assets. RIL’s EEPS of Rs 100-113 over FY08-10 shows a growth of just 6% p.a. ABN Amro’s FY10 estimates are 26% below consensus on account of its cautious view on refining/petrochemicals margins and assumption of an appreciating rupee (Rs/$ will average 41 in FY08, 39.35 in FY09 and 38.40 thereafter).

The KG-D6 oil and gas production is expected to start from Q2 FY09, with oil production averaging 25,000 b/d in FY09 and 50,000 b/d in FY10. If the court order on KG-D6 gas is enforced, EPS in FY09 and FY10 may drop by 10% and 22%, respectively. The Reliance Petroleum (RPL) refinery could begin operations in H2 CY08, but commercial production will commence only from April ’09. The Singapore GRM is estimated to fall to $5/bbl in FY10, from $6.1/bbl in FY07. Petrochemical margins should remain healthy for the next 12 months, but a sharp downturn looks inevitable by ’09-10, as most new Middle East projects (ex-Iran) are on track.

Saregama
Research: ICICI Direct
Rating: Outperformer
Current Market Price: Rs 326

Saregama is set to script a turnaround, piggybacking on the emergence of new entertainment media. It has diversified into digital music, internet radio and online music sales. With a new management and more focus on new income streams such as FM and mobile ring tones, Saregama’s film and home video division will contribute handsomely, following key tie-ups with big international studios. Re-entry into the film distribution and production space and 14 hours/week of TV content production will drive growth for the non-music segment.

Given the robust growth in the high-margin business like publishing and home video, coupled with effective utilisation of the music library, ICICI Direct expects Saregama to command improved valuations given its high earnings visibility. At the current price of Rs 302, the stock trades at a P/E of 21.15x FY08E EPS of Rs 14.28 and 16.77x FY09E EPS of Rs 18.01.

Wipro
Research: ICICI Direct
Rating: Hold
Current Market Price: Rs 519

AT the current market price, the stock trades at 23.2x FY09E EPS of Rs 23.2, which factors in the impact of a strong rupee. Wipro has acquired a number of firms in FY07 to add domain expertise across a number of verticals.

The benefits of these acquisitions will accrue going forward, aiding volume growth and pricing power. The company will be impacted by the current strength in the rupee, which is evident from ICICI Direct’s EPS estimates derived from a rupee-dollar rate of 40 in FY09E. Margins could fall by 445 bps in FY08E and by 155bps in FY09E, with the company’s current state of operations. However, it’s too early to ring the alarm bells.

The rupee impact will be offset by reduction in average employee costs by employing more freshers, increasing utilisation, a growing non-ADM (non-application development & maintenance) business portfolio with higher margins, and maturing BPO practice building strong domain-specific, platform-based solutions that will drive realisations.

Kamat Hotels
Research: Tower Capital & Securities
Rating: Buy
Current Market Price: Rs 180

Room demand is growing at a rapid pace of 13% YoY. Tower Capital expects the pick-up in average room rates (ARRs) and occupancy rates (ORS) to continue at least till FY09. Kamat Hotel’s blended ARR will rise at a CAGR of 21% from FY06-FY09E. This, coupled with the expansion in both properties, will add to the bottomline.

By ’10, the company plans to increase its room capacity by 223%. KHIL is envisaging management of eight properties that will provide better visibility in earnings from FY09. Revenues are expected to see a CAGR of 35% and PAT a CAGR of 41 % during FY06-FY09E. At 10x FY09 FDEPS, it is a good buy, which Tower Capital believes is conservative, taking in account the huge growth, healthy margins, peer comparison and cyclicality of the industry.

Indian Hotels, Hotel Leela

*Indian Hotels *consolidated profits grew by 49% in FY07, in line with our estimates. Future growth will be driven by the group's plans to add c.6,500 rooms over the next three years to its existing inventory of 9,900 rooms. We believe that pricing power will remain with the industry for the next 12months and have upgraded our earnings estimates for FY08 and FY09 by 3% and 6% respectively. Given the company's diversified portfolio across the country and increasingly internationally, Indian Hotels is our top pick in the sector.

*Hotel Leela's *revenues grew by a disappointing 16.5% during FY07. Ebitda margin declined by 70bps as inspite of increase in tariffs, as other expenses increased with increase in advertisement and marketing budgets. However, net profit grew by 72.5% on the back of higher other income from sale of Business Park in Mumbai and non cash interest income on the deposits with Hudco. With no major additions to room inventory before FY10, we expect Leela's growth to lag its peer group. Further with Bangalore accounting for an estimated 45% of its room revenues, the impact of any correction in tariffs in Bangalore is the highest for Leela.

*Saregama *is India 's leading music company with a repertoire of over 300,000 tracks. The company's revenue mix is fast changing led by publishing income from mobile, radio and internet mediums. Saregama's FY07 publishing income was up 132% driving the 70% jump in Ebitda. For physical sales Saregama is now focussing on large format retail stores and corporate clients. While its distribution muscle in the international markets, esp. in US/UK is growing it is expanding its TV content and films production also. We see Saregama's 46% Cagr in publishing income leading the 50% Cagr in Ebitda over FY07-09CL. The stock trading at 15x FY09CL earnings is an
attractive music play.

*Entertainment Network* , a subsidiary of Times Group, is India 's leading FM radio broadcaster. ENIL's radio business turned around with the shift from licence fees to revenue share. Today the brand Radio *Mirchi *operates in 12 cities, including four metros and is targeting to rollout 20 new stations in FY08. ENIL's out of home media order-book is rising and includes Rs5bn contract of three years for Mumbai/Delhi Airports. It is also ramping up the event management business to be a "city-centric solution" media company. Led by the business ramp-up we estimate ENIL profits to rise 65%Cagr over FY07-09CL however valuations at 28x FY09CL earnings are rich.

Sharekhan Investor's Eye dated May 29, 2007

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs165

Strong growth across segments

Result highlights

In Q4FY2007 the net revenues of ITC grew by 24.4% year on year (yoy) as most of its businesses saw a strong growth: cigarettes (revenue up 14.3%), fast moving consumer goods (FMCG; revenue up 63%), hotels (revenue up 15.6%), paperboards (revenue up 12%) and agri-business (revenue up 16%).

The company's earnings before interest, tax, depreciation and amortisation (EBITDA) margin dropped by 220 basis points to 23.9% in Q4FY2007 primarily due to higher other expenditure.

The tax provisioning was on the higher side during the quarter which along with a decline in the operating profit margin (OPM) led to a lower than expected profit after tax (PAT). The Q4FY2007 net profit grew by 14.7% yoy to Rs650 crore.

We believe that the company's cigarette business would see a stable growth despite the slowdown in demand witnessed by the cigarette industry earlier in the year.

The non-cigarette FMCG business is the only business in ITC's portfolio that is not making a profit. However, its losses were stable despite the roll-out of the Bingo brand of products throughout the country which led to higher sales and promotion expenses during the quarter. We expect this business to break even by FY2009.

In the hotel segment, the profitability was lower primarily due to a one-time transition cost incurred on account of upgrading 7 Sheraton Hotel to Starwood Hotels and Resorts' The Luxury Collection brand.

At the current market price of Rs165, the stock is attractively quoting at 20.6x FY2008E earnings per share (EPS) and 13.1x FY2008E enterprise value (EV)/EBIDTA. We maintain our Buy recommendation on ITC with a price target of Rs200.

Saregama India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs295

Hitting a musical note

Result highlights

The business mix of Saregama India Ltd (SIL) is undergoing a change. Until now the company used to generate the bulk of its revenues by selling cassettes, CDs and DVDs (physical sales). However with the increasing preference of consumers for non-physical formats like radio and the continuing high rate of piracy, the physical sales business is witnessing a downtrend. At the same time, SIL has found a new high-margin revenue stream in radio stations and telecom companies that pay it royalty for use of its content (non-physical sales). This new revenue stream is going to be the driver of SIL's growth in future as is evident from its results for the fourth quarter and FY2007.

In the fourth quarter, the revenue from operations remained almost flat year on year (yoy) at Rs29.3 crore. As expected physical sales declined by 23.8% yoy to Rs19.1 crore while non-physical sales grew sharply by 117.4% yoy to Rs9.5 crore.

The share of the non-physical sales for the quarter increased to 33.3% from 14.9% in Q4FY2006; the same rose to 30.2% in FY2007 from 14.9% in FY2006. This is a big positive as the revenue mix of the company is shifting towards this high-margin business.

The operating profit margin (OPM) improved manifold yoy, from a meagre 1.7% in Q4FY2006 to 10.1%. The margin improvement was possible because the total cost declined during the quarter despite flat revenues. Also, the contribution of non-physical sales to total revenues was higher yoy. Consequently, the operating profit grew from Rs0.5 crore in Q4FY2006 to Rs3.0 crore.

With flat depreciation and interest charges, a slightly lower other income and a higher tax outgo, the company recorded a pre-exceptional net profit of Rs1.6 crore for Q4FY2007 against a loss of Rs0.4 crore in Q4FY2006.

Several growth triggers are in the offing which make the SIL stock an attractive investment. These triggers include (1) the expected roll-out of many new radio stations by H1FY2008; (2) the increase in the music content rate; (3) a rapid growth in the number of telecom subscribers and the inclination of telecom customers towards value-added services (ring tones, caller tunes etc); (4) the expected commissioning of its portal in Q1FY2008 (containing its large portfolio of musical tracks); and (5) the value creation on listing of Global Wholesale Club.

At the current market price of Rs295, the stock is quoting at 18.4x its FY2008E earnings per share (EPS) of Rs16 and 12.9x its FY2008E enterprise value (EV)/earnings before interest, deprecation, tax and amortisation (EBIDTA). We reiterate our Buy recommendation on the stock with a price target of Rs375.

Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs765

In investment mode

Result highlights

Mahindra and Mahindra's (M&M) stand-alone net sales grew by 20% year on year (yoy) to Rs2,747 crore in Q4FY2007. The operating profit margin (OPM) for the quarter declined by 48 basis points to 11.4% yoy. Higher other income and interest income resulted in a 59% growth in the pre-exceptional profit after tax (PAT) to Rs247.1 crore. An extraordinary income of Rs166 crore realised from the sale of shares of Mahindra and Mahindra Financial Services Ltd (MMFSL) last year depressed the reported PAT. The reported PAT declined by 21% to Rs233 crore from Rs255 crore in Q4FY2006.

On a stand-alone basis, the net sales for FY2007 grew by 22% to Rs10,050 crore. The operating profit rose by 30% to Rs1,263 crore. In the automotive business, the domestic volumes grew by 17.8% while the exports surged by 45%. The tractor segment however recorded a strong growth of 22%.

On a consolidated basis, the net sales for FY2007 grew by 43% to Rs17,617 crore. The OPM surged to 15.3% from 14.0% in FY2006. Consequently, the operating profit grew by 56% to Rs2,704 crore. The consolidated pre-exceptional PBT for the year stood at Rs2,320 crore, marking a growth of 50.7% yoy.

The company plans to increase its capital expenditure (capex) for the year to Rs2,000 crore, which is going to be utilised for capacity expansions, new product launches and research and development (R&D) activities. Apart from this, the company also needs to carry out the Punjab Tractor Ltd (PTL) and Swaraj Engine acquisitions, and invest in joint ventures. All these projects would be financed through a combination of debt and equity which would lead to nominal equity dilution.

The contribution of the non-automotive business has increased significantly in the recent years. For FY2007, the non-automotive business contributed 39% to the top line and 51% to the bottom line.

We expect FY2008 to be the year of consolidation for the company while all new product launches would take place in FY2009. At the current market price of Rs764, the stock discounts its consolidated FY2009 earnings by 8.7x. We maintain our Buy recommendation on the stock with a sum-of-the-parts (SOTP) price target of Rs1,050.

Sharekhan Investor's Eye dated November 06, 2006

WS Industries India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs99
Current market price: Rs54

Results below expectations

Result highlight

• The Q2FY2007 results of WS Industries (WSI) are below expectations primarily because of a lower-than-expected top line growth and higher-than-expected power and fuel costs.
• The operating profit for the quarter grew by 30% year on year (yoy) to Rs4.91 crore as the operating profit margin (OPM) expanded by 180 basis points to 12%. The OPM expanded because of a 10% decline in the other expenditure and strict control on the employee cost. However WSI's power and fuel costs increased by 31%. As a percentage of sales the same increased by 340 basis points to 20.9% on account of rising crude oil prices. The crude prices have, however, cooled off substantially from their highs and the same should provide some respite going forward.
• The interest cost increased by 16% and the depreciation rose by 18% on account of a 20% expansion in the manufacturing capacity of hollow core insulators. The net profit at Rs1.89 crore grew by 51% yoy.
• In a significant development, WSI has diluted its stake in its relity subsidiary, WS Electric, from 98% to 59% by placing 42,200 shares @Rs4,325 each and 50 lakh convertible preference shares with Schroder, thereby mobilising Rs23.25 crore. This puts the value of WS Electric at Rs60 crore.
• The total value of the realty subsidiary is more or less in line with our estimates, but the equity dilution in WS Electric is against our expectations.
• Out of the 15 lakh square feet of area to be developed into an IT park , WS Electric will get a total of 300,000 square feet of developed area and the rest shall go to its partner TCG (the Chatarjee group). Assuming that the company sells it at the current rate of Rs3,500 per square feet, it would realise Rs105 crore.

Saregama India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs375
Current market price: Rs217

An operationally strong quarter

Result highlight

• The net profit before exceptional items of Saregama India Ltd (SIL) is in line with our expectations.
• During Q2FY2007 SIL's revenues grew by 26.2% year on year (yoy) backed by a three-fold jump in the licence fee income.
• The pre-exceptional operating profit for Q2FY2007 grew by 105.5% yoy with a 700-basis-point expansion in the margins as the licence fee income rose steeply.
• However, during the quarter under review SIL did one-time provisions of Rs1.4 crore and incurred an asset impairment charge of Rs0.87 crore. Hence, the reported operating profit grew by only 8.4%.
• The pre-exceptional profit grew by 66.4% yoy to Rs4.6 crore. With the above-mentioned provisioning, the reported net profit grew by 16% to Rs3.2 crore.
• We believe there are several positive triggers lined up for SIL over the next two years, viz the revision of the rates with radio stations, growth of value-added services in the telecom sector and the turn-around of its subsidiaries.
• At the current market price of Rs217, the stock is quoting at 13.1x its FY2008E earnings per share (EPS) and 9.7x its FY2008E enterprise value (EV)/earnings before interest, deprecation, tax and amortisation (EBIDTA). In view of the stock's attractive valuations, and cash and cash equivalent of Rs28 per share, we reiterate our Buy recommendation on the stock with a price target of Rs375.

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs210

Strong growth potential ahead

Result highlight

• Orchid Chemicals reported a 2.7% increase in its net sales year on year (yoy) to Rs245.7 crore in Q2FY2007. The growth in the sales was low on account of a high base in the corresponding quarter of the previous year. On a sequential basis, the sales grew by 21.8%. The growth in the sales was in line with our expectations, and was driven mainly by the US generics business and a recovery in the sales of active pharmaceutical ingredients (API) to the regulated markets.
• Orchid's operating profit margins (OPMs) improved by 90 basis points to 31.7% in the quarter under review. The improvement in the margins was driven by a 20.4% decline in the company's material costs. The sharp drop in the material costs was on account of an improved product and geographical mix, as the company continued to derive an increasing share of its revenues from the high-margin formulation exports to the regulated markets. However, the steep drop in the raw material costs was largely offset by an increase in the staff costs and regulatory expenses. Consequently, the company's operating profit (OP) grew by 5.5% to Rs77.8 crore in Q2FY2007.
• Orchid's interest expenses have risen from Rs22 crore in Q1FY2007 to Rs25 crore in Q2FY2007. The increase in the interest cost is due to a general hardening of the interest rates. Further, the company has raised its debt level in H1FY2007 by Rs100 crore. The highly leveraged financial structure of the company continues to remain a cause of concern.
• Orchid's net profit for the quarter rose by 8.2% to Rs29.5 crore. The growth in the net profit was aided by lower depreciation charges and a lower tax provisioning in the quarter. The earnings for the quarter stood at Rs4.5 per share.
• During the quarter, the company filed 4 drug master files (DMFs), 2 abbreviated new drug applications (ANDAs) and 4 dossiers for marketing authorisations (MA) in Europe. The company plans to continue this accelerated pace of filings in the upcoming quarters.
• Going forward, the addition of non-antibiotic products to the US generics portfolio, the ramp-up in the European business and contract research and manufacturing (CRAMS) deals are likely to drive the company's growth. With these growth drivers in place, Orchid aims to become a $1 billion company by FY2012.
• At the current price of Rs210, Orchid is quoting at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 8.1x for FY2007 and 5.8x for FY2008. This is way below its peers like Lupin, Wockhardt and Aurobindo Pharma, which are trading at an EV/EBIDTA range of 9.0-10.2x. Given the strong growth drivers of the company and the untapped potential, we maintain our Buy recommendation on Orchid with a price target of Rs390.

South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs183

Read between the lines

Result highlight

• For Q3CY2006 South East Asia Marine Engineering & Construction Limited (Seamec) reported a net profit of Rs0.5 crore, which is below our expectations. However if we read between the lines, there are three extraordinary costs, to the extent of Rs13 crore that are not related to the fleet that was operational during the quarter under review. Adjusted for these extraordinary costs, the pre-exceptional net profit at Rs13.5 crore is ahead of our estimates.
• The extraordinary costs include a Rs8 crore mobilisation and repairs cost incurred on Seamec Princess, a newly acquired vessel all set to begin its operations. Further Rs4 crore were paid as salary to the crew of this vessel, which anyway was not operational during the quarter. There was also an additional depreciation cost of Rs1 crore, charged on account of Seamec Princess.
• The revenue for the quarter increased by 90% year on year (yoy) to Rs33.6 crore, as all the company's vessels operated for a higher number of days and that too at higher charter rates.
• The operating profit for the quarter, adjusted for the extraordinary costs mentioned above, grew by 232% to Rs16.5 crore. The reported operating profit declined by 9%.
• The other income declined by 52% as the company utilised its excess cash to buy Seamec Princess. The depreciation charges jumped by 52%, as there was an additional depreciation of Rs1 crore charged on account of Seamec Princess.
• Adjusted for the three extraordinary costs, the net profit for the quarter grew by 413% to Rs13.5 crore. The reported net profit at Rs0.5 crore declined by 81%.

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VIEWPOINT

Glenmark Pharmaceuticals

Rides high on milestone anticipations

Highlights of analyst meet

• Glenmark believes that the creation and ownership of intellectual property (IP) are critical for differentiation and value creation; therefore it plans to focus on building IP assets and out-licencing these to drive its growth.
• The company expects to receive $30 million from Forest Laboratory in FY2008. As per the company, the said milestone payment is already due, but has been delayed. Currently, the company is scouting for a partner in Europe to out-licence the GRC 3886 molecule for the European market, which would also trigger a milestone payment.
• In October 2006, the company signed an out-licencing agreement with Germany's Merck KgaA for its prospective diabetes molecule GRC 8200 for a total of €190 million (approximately Rs1,110 crore), including an up-front payment of €25 million (approximately Rs146 crore).
• For the USA, the company believes that to maintain the growth momentum it must continuously expand its product basket either by its own product filings or by product development alliances or by licencing marketing rights or by acquiring registrations in the USA.
• For Europe, Glenmark plans to focus on select branded generic markets like Spain, Italy and Eastern European countries. It is looking to acquire a company in Europe (having sales of 8-12 million euros and a strong product pipeline) to establish a front end. It plans to conclude the acquisition by the end of FY2007.
• Glenmark has a target for a 100% growth in Latin America in FY2007.
• Glenmark currently has 6 new chemical entity (NCE) molecules in its pipeline; 2 in Phase II trials, 3 entering the Phase I trials shortly and one in the pre-clinical stages. Its target is to take one molecule into the clinical trials every year. The company plans to conclude one more out-licencing deal in the current financial year.
• The company is upbeat on its growth prospects for the next two years. It has raised its growth guidance and its profit guidance for FY2007 and FY2008. As per the company's projections, it is planning to grow at a compounded annual growth rate (CAGR) of 52% over FY2006-08E, with profits growing at a CAGR of over 137% over the same period. It has raised its earnings per share (EPS) guidance from Rs36 earlier to Rs42. But the projected EPS has been powered largely by the anticipated milestone payments of $31 million in FY2007 and $69 million in FY2008. Considering the uncertainty of the milestone receipts, if we remove them from the projected earnings of Glenmark, the revised EPS would reduce by 50%.
• At the current market price (CMP) of Rs437, the stock is trading at 18.9x its consensus FY2008 earnings.

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