Unichem Labs

Unichem Labs

Emkay - Tata Motors, Karvy - Unichem Labs, UTI Sec- JBF Industries

Emkay - Tata Motors

Karvy - Unichem Labs

UTI Sec- JBF Industries

Sharekhan Investor's Eye dated May 18, 2007

Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs268
Current market price: Rs251

Higher provisions restrict profit growth

Result highlights

• Canara Bank's results have been much above our and market expectations with the profit after tax (PAT) reporting a growth of 2.3% to Rs505 crore compared with our estimate of a 10% year-on-year (y-o-y) decline to Rs444 crore. The profit growth was higher than expected mainly due to a substantial jump in the non-interest income driven by a higher treasury income and cash recoveries.
• The net interest income (NII) was up by 11.3% year on year (yoy) and 5.5% quarter on quarter (qoq) to Rs1,014 crore compared with our estimate of Rs1,030 crore. The NII has been adjusted for a one-time cash reserve ratio (CRR) interest income and the interest received on the income tax refund. Our calculations suggest that the adjusted net interest margin (NIM) declined on both y-o-y and sequential bases due to a rise in the cost of funds, as the low-cost deposits remained stable but bulk deposits increased, putting pressure on the cost of funds.
• The non-interest income zoomed by 58% yoy and 120% qoq to Rs626.2 crore, primarily driven by a 172% y-o-y and 186% sequential growth in the trading income to Rs92 crore. The miscellaneous income, which increased by 57% yoy and 247% qoq to Rs343 crore, also contributed to the growth in the non-interest income.
• The operating expenses grew by a marginal 1% yoy to Rs633 crore. The operating profit was up by 48% yoy and 65% qoq to Rs1,007 crore, driven primarily by the higher non-interest income.
• The provisions increased by 66.1% yoy and 54% qoq to Rs497 crore mainly on account of higher depreciation on investments provided on the marked-to-market investments book. A higher standard asset provisioning requirement also kept the provisions elevated as the non-performing asset (NPA) provisions declined by 67% yoy to Rs102 crore from Rs306 crore in Q4FY2006. Although the operating profit increased by 48% yoy, yet the higher provisions restricted the overall profit growth to 2.3%.
• Higher cash recoveries to the tune of Rs1,025 crore during the year as against Rs972 crore during the previous financial year helped the bank to bring down its gross NPAs. In absolute terms, the gross NPAs have reported a sequential decline of Rs380 crore while the net NPA ratio has declined sequentially from 0.96% to 0.94%.
• The margins may remain under slight pressure, however the business growth is likely to boost the NII. The bank has also reduced the interest rate risk on its book by bringing down the duration of its "available-for-sale" category to 2.48 years from 3.76 years earlier and stated that the duration is expected to further come down below two years. At the current market price of Rs251, the stock is quoting at 6.6x its FY2008E earnings per share, 3.3x pre-provisioning profits and 1.1x FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs268.

Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs265

Q4 results above expectations

Result highlights

• In Q4FY2007 Unichem Laboratories (Unichem) reported a sales growth of 26.7% to Rs134.1 crore, which is much higher than our expectations of Rs124.2 crore. The sales growth was achieved on the back of a superb 71% jump in the exports to Rs41.4 crore and an 11.8% rise in its domestic sales to Rs94.4 crore.
• The operating profit margin (OPM) narrowed by 210 basis points to 16.0% in the quarter, largely due to a higher product filing cost which restricted the growth in the operating profit to 12.2% at Rs21.4 crore.
• Subsequently, an over five-fold jump in the other income, an 18% fall in the interest expenses and a lower than expected tax provisioning during the quarter resulted in a 32.1% growth in the profit after tax (PAT; profit before extraordinary items) to Rs20.5 crore in Q4FY2007. The net profit was above our expectation of Rs15.5 crore for the quarter.
• For FY2007, Unichem reported a 20% growth in its net sales to Rs545.60 crore, a flat OPM of 20% and a 26.9% growth in the bottom line to Rs88.9 crore. For FY2007, both sales and net profit were higher than our expectations of Rs530 crore and Rs85.5 crore respectively.
• At the current market price of Rs265, the stock is trading at 9.3x its estimated FY2008 earnings. In view of the positive outlook for the company, we maintain our Buy recommendation on Unichem, with a price target of Rs360.

Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs743

Q4FY2007 results: First-cut analysis

Result highlights

• Tata Motors' Q4FY2007 results are slightly below our expectations, primarily on the margin front. The Q4FY2007 net sales (excluding the foreign exchange [forex] gain) of the company grew by 20.0% to Rs8,206.8 crore, driven by a volume growth of 16.2% and a realisation growth of 3.3%.
• Excluding the effect of the forex gain/loss, the operating profit margin has fallen by 160 basis points year on year (yoy) and by 130 basis points sequentially to 11.0%. This was mainly on the back of a higher raw material cost and a sequential drop in the realisation due to a change in the product mix. Consequently, the operating profit grew by just 5.1% to Rs906 crore.
• The other income was higher at Rs60.4 crore against Rs4.4 crore last year. Further, lower interest cost and taxes, and stable depreciation aided the company to record a 25.9% growth in its profit to Rs576.7 crore.
• For the full year, the net revenues grew by 33% to Rs27,404.8 crore against Rs20,672 crore last year, while the net profit grew by 25% to Rs1,913.5 crore.
• Looking at the consolidated results, the consolidated sales for the quarter grew by 24% to Rs9,759.2 crore while the net profit grew by 31% to Rs682.3 crore.

Sharekhan Investor's Eye dated May 18, 2007

Karvy - Liberty Shoes & Unichem

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Sharekhan Investor's Eye dated February 23, 2007

Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs265

Gearing up

Key points

• The domestic formulation business of Unichem Laboratories (Unichem) contributes 65% of its consolidated revenues. With a therapy-focused field force, expanding reach in semi-urban and rural areas, a steady stream of new product launches and a strong brand building ability, we believe, this business will organically grow at a CAGR of 12.8% over FY2006-08E.
• Niche Generics (Niche), which has recently become a wholly owned subsidiary of Unichem, will be used to expand into the European market. With the shift of Niche's manufacturing base to India, Unichem will also derive cost synergies. Against the current turnover of GBP12.3 million, we expect Niche to record sales of GBP12 million in FY2007E and of GBP13 million in FY2008E. Further, Niche is expected to report losses to the tune of GBP1-1.5 million in FY2007 and break even in FY2008.
• For the USA Unichem plans to develop a portfolio of 25-30 products over the next two to three years. These products will be sold through its marketing partners in the USA. Unichem has already filed two ANDAs, and plans to file another two to three in the current fiscal and eight to ten per year from FY2008 onwards. Even though the US revenues will start flowing in towards the second half of FY2008, the full potential of the US business will be realised only from FY2009 onwards.
• Unichem has set up wholly owned subsidiaries in South Africa, Brazil, the UK (Niche) and the USA in order to carry out its operations in those markets. The subsidiaries have not started generating revenues as yet. With increasing product registrations, the management expects the subsidiaries in South Africa and Brazil to start generating revenues in FY2008 and break even in FY2009.
• We expect Unichem's margin to improve by 70 basis points over FY2006-08. While the rising R&D cost due to a ramp-up in filings will put pressure on the margin, the improving product mix, the rising share of exports and excise savings arising from the shift of domestic manufacturing to the Baddi plant will aid the margin growth.
• In view of the M9FY2007 financial performance of Unichem, we are revising our estimates for the company. We are downgrading our FY2007 sales projections by 3.2%, and the profit and EPS projections by around 3.8% each. We are also marginally upgrading our FY2008 estimates. Our revised earnings estimates now stand at Rs23.8 per share for FY2007 and Rs28.5 per share for FY2008. At the current market price of Rs265, the stock is trading at 11.1x its FY2007E earnings and 9.3x its FY2008E earnings, on a stand-alone basis. We maintain our Buy recommendation on Unichem with a price target of Rs360.

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Sharekhan Investor's Eye dated December 15, 2006

Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs262

Niche Generics to have marginal impact

Key points

• Unichem Laboratories Ltd has acquired the balance 40% stake in its subsidiary, incorporated in the United Kingdom, Niche Generics Ltd, from a group of managers of Niche Generics.
• Prior to this acquisition, Unichem held a 60% majority stake in the said Niche Generics.
• Niche Generics, UK, is engaged in the business of product development, dossier filing and manufacturing pharmaceutical formulations for the European markets.
• Niche recorded revenues of GBP12.3 million (approximately Rs108.2 crore) in FY2006, with profits of GBP0.1 million (approximately Rs0.9 crore). The performance of the company has been poor largely due to the severe pricing pressures being witnessed in the UK generics market.
• We do not expect the acquisition to impact the profitability of Unichem significantly. However, strategically the company may exploit the strengths like product development, dossier filing and manufacturing of the wholly-owned subsidiary and may accelerate its fillings in the European region, leading to an expansion of its footprint across Europe.
• At the current market price of Rs262, the stock is trading at 9.2x its estimated FY2008E earnings. We maintain our Buy recommendation on the company with a price target of Rs360.

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SECTOR UPDATE

Cement

Concrete road ahead

Key points

• Continuing with the growth momentum of the past few months, the cement dispatches for November grew by a strong 13% year on year (yoy) to 12.4 million tonne against a marginal growth of 5% in the same month last year. The cement prices followed suit, surging by 25-30% yoy to the levels of Rs205-210 per 50-kilogram bag for the month.
• The southern region witnessed the highest year-on-year (y-o-y) growth in dispatches in the month at 18%.
• With all the three demand drivers, ie the housing, industry and infrastructure sectors, showing strong signs of growth, the consumption of cement is expected to grow at a compounded annual growth rate (CAGR) of 10-10.5% for the next three years.
• In such a scenario, we expect the cement prices to sustain at the current levels for as long as beyond FY2009. That the industry shares our expectations is evident from Sanghi Industries' recently-announced plan to scale up its cement capacity by 5.7 million tonne over the next two to three years. Even the cash-rich companies including Shree Cement (which is already raising its capacity from 4.5 million metric tonne [MMT] to 10MMT) are looking to expand further and this only reinforces our view that cement prices will remain buoyant for the next two to three years.
• Tamil Nadu will implement the value-added tax (VAT) with effect from January 1, 2007, migrating to a sales tax rate of 12.5% from 14.5% currently. This will spell good news for the south-based cement companies, namely India Cements and Madras Cement.
• Recently, Holcim upped its stake in Gujarat Ambuja Cement Ltd (GACL) by 3.7% to 18.67% for a price of Rs690 crore. This translates into a mammoth enterprise value (EV) of USD270 per tonne. We believe the stake hike would provide a fresh trigger for the cement stocks that have under-performed the Sensex in the last three months.
• We maintain our positive view on the cement sector and believe that the companies that have taken a lead in announcing capacity expansions, such as Grasim Industries, Shree Cement, Jaiprakash Associates, UltraTech Cement and Madras Cement, will benefit the most in a scenario of buoyant prices. We rate Grasim Industries, UltraTech Cement and India Cements as our top large-cap picks in the sector. Among the mid-caps we like Shree Cement and Madras Cement. We also like Orient Paper and Industries and JK Cement on account of their compelling valuations, which are much less than the sector average

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