India Equity Analysis, Reports, Recommendations, Stock Tips and more!
Search Now
Recommendations
Sunday, March 02, 2008
Divi's Laboratories
Investments with a two-three year perspective can be considered in the stock of Divi’s Laboratories, a leading player in the pharma contract manufacturing space.
The growing size of its bulk drug business catering to both generic and custom synthesis clients, sustainable operating efficiencies (high EBITDA margins of 40 per cent) and presence of future growth drivers such as peptides and carotenoids point to good earnings prospects for Divi’s.
Divi’s clocked a robust performance driven by organic growth in the third quarter of 2007-08 (September-December) with 90 per cent increase in sales. Custom chemical synthesis vertical (where it provides custom-made compounds) witnessed over a 100 per cent growth, and the generics bulk drugs business clocked nearly a 60 per cent growth on a year-on-year basis. Given its solid performance, Divi’s may be expected to breach the Rs 1,000-crore sales mark for the full 12 months and sustain high operating margins and lower effective tax rate.
At the current market price of Rs 1,400, the stock trades at around 19 times its likely 2008-09 per share earnings. This appears reasonable given Divi’s historical earnings growth (five-year compounded annual profit growth rate of 24 per cent) and expected ramp-up in earnings in 2008-09 owing to additional earnings from the nutraceuticals venture.
Business scenario
At present, the revenues of Divi’s Laboratories are derived in equal parts from the generic bulk drug and custom chemical synthesis segments. Improved product mix in favour of the high-margin custom synthesis business, has translated into higher margins (from 32 per cent to 40 per cent) as the contribution from custom synthesis has grown to 50 per cent from less than 30 per cent in 2006.
Divi’s is engaged in developing processes and custom synthesis of several drug ingredients and intermediate compounds for multinational companies for their discovery products.
These are under various stages of clinical trials (over 60 compounds). As trials progress, volumes in the custom synthesis business tend to be scaled up, especially in the run up to the commercial launch of the molecule. It is to be noted that during 2006-07, the company spent Rs 240 crore on capital expenditure towards enhancing capacities as it set up new production and utility facilities in SEZ (near Vizag) and EOU units (Chippada village in AP).
The other major business segment relates to manufacturing off-patent bulk drugs and also those that are about to enter generic status shortly (catering to generic clients); this has also done well. Divi’s has over 30 drug master files and currently has over 60 products in its bulk drug portfolio. In July-August, a blockbuster epileptic drug will face generic competition and Divi’s is expected to partner the first-to-file generic company for supply of ingredients.
Broad-based products
At end-FY07, on a product basis, Divi’s largest product accounted for one-fifth of the sales, while the top five products contributed more than half of the revenues.
These ratios are expected to change in FY-08 as its product and customer basket widens. Furthermore, revenues from niche segments such as the peptides and carotenoids products manufactured by Divi’s would also gain market approval. Peptide drugs are one of the emerging areas of drug discovery (especially in cancer medicines) presenting significant opportunity as Western companies completely outsource the peptide segment and related derivatives to Asia. Divi’s currently has exposure to around 90 peptide building blocks.
Carotenoids, on the other hand, are pigments that are important in human nutrition as a source of vitamins and preventive agents for cancer and heart diseases. Divi’s two 100 per cent subsidiaries — Divi’s Laboratories (USA) Inc and Divi’s Laboratories Europe AG (Switzerland) are specifically constituted for marketing its nutraceuticals. Divi’s nutraceuticals project is housed at its Rs 102-crore SEZ. The nutraceuticals venture (with nine products spread across dietary supplement, health and personal care etc.) is expected to pay-off soon with key production facilities commissioned recently.
Risks
Divi’s operates predominantly in export markets and has substantial exposure to foreign exchange fluctuations. However, it has a natural hedge in the form of a import component of about 50 per cent in raw materials. Sales from contract manufacturing are linked to long-term contracts, which reduces flexibility in pricing.
There has been a significant reduction in the effective tax rate for Divi’s, due to time-bound tax-breaks availed by the company as commercialisation of its SEZ and EOU units have occurred; but old units may lose these benefits soon.
JMC Projects
JMC Projects has managed a successful turnaround, transitioning from a company with eroding net worth to one with a strong balance sheet in two years. Investors can consider exposure in the stock with a 2-3 year perspective. A strong order book, improving financials, enhanced bidding capacity and a strong corporate promoter who is actively involved in the management, buttress our recommendation.
At the current market price of Rs 373, the stock trades at 13 times its expected earnings for 2008-09. The stock has a small market cap of Rs 680 crore and may be subject to sharp volatility linked to movements in broad markets, necessitating phased investments.
From posting net losses in 2005, JMC Projects has returned to profitability in 2007 on the back of restructuring measures. The company reduced the proportion of fixed price contracts and passed on the burden of raw material costs to project owners. Wherever it had to undertake supply of raw materials, the company ensured that it has price escalation clauses built into contracts.
Two, JMC received a healthy infusion of equity through issue of warrants and rights offers. Three, with Kalpataru Power Transmission becoming a corporate promoter (JMC became Kalpataru’s subsidiary in February 2007), the company has received cash infusion and full support from the former, which has helped it capitalise on the opportunities in the infrastructure space.
The above measures resulted in efficient cost management, substantial reduction of debt, improved bidding capacity (as a result of higher net worth) and entry into newer areas of infrastructure such as civil works for power projects.
JMC Projects had an order book of Rs 2,100 crore in December 2007, with infrastructure accounting for about 40 per cent and civil and power projects for the rest. While the order book of over four times sales for FY 2007 does appear challenging, change in management, doubling of workforce and a 54 per cent increase in asset base in 2007 suggest that the company has been preparing to face execution challenges.
Given JMC’s strength in civil construction, the company may be among the beneficiaries of the recent increase in Budget allocation for urban infrastructure, drinking water and sanitation development projects to be taken up by the States. We believe that orders in these segments would be more in number but less in terms of value, involving higher participation by mid-sized companies such as JMC.
While Kalpataru appears to view JMC as a partner to supplement its own skills in the civil and infrastructure space, any move by Kalpataru to merge JMC remains a key risk, as the returns in that event will depend on the swap ratio.
Saturday, March 01, 2008
Monday Jolt Likely
Specifically for Monday, we see a gap-down opening after a fairly bad close on Wall Street on Friday in the wake of fresh bad news on the US economy and the financial sector mess. With the budget out of the way, the focus in the market will once again turn to global events, though the aftereffects of the budget will continue to linger for a while. We expect sector-specific action in the coming days on the back of announcements in the budget. However, the same may taper off soon and the market is likely to remain choppy and rangebound amid persistent global uncertainties. We will have sun outage from March 4 till March 18. Historical evidence suggests that the Indian market tends to be sluggish and lackluster during the sun outage. Its being called a year of consolidation after a 4-5 year rally. In light of that prediction, we see the market struggling for a quite a while before any meaningful rebound takes place. A major recovery and a return to earlier record peaks is possible only if FII inflows resume in a big way. Also, the confidence among retail investors needs to be restored.
Union Budget - Ajit Dayal
The greatest thing about India is the joint family system. The elders are always there to look after the younger members. The strong are always there to help the weak. When a relative - no matter how distant - is out of luck and falls on bad times, the patriarch places a hand on the sunken shoulders of the disappointed young man, pats him on the cheek, and says to the young man, “Fikr na karo, beta, hum hain na.” Reassured by the patriarch the young man gets a new zest of life and is happy to face the world again. We have seen this scene so many times in Bollywood films. And have cried in happiness.
And now we see this “Do not worry, my son, I am there” approach in the budget. This is not an election budget. This is a “joint family” budget. A Hindu Undivided Family (HUF) budget. With “Hindu” not being used in terms of religion but a geographical description of those who lived by the banks of River Indus. Hence, the word Hindu; hence, the country Hindustan.
Any budget, any action by the family patriarch, is an attempt to balance the need of one group against the demands of another. Many of the budgets – and government policies - in the past have been skewed. They have either robbed the rich to pay the poor (nationalisation or penalty rates of taxation) or they have gifted corporate India at the cost of others (cutting tax rates for corporate India, introducing land grab schemes like the SEZ, and not investing in schools and teachers and health for the poor). This budget brings the patriarch-ruled HUF system to the fore. And as the patriarch announces his generosity to one group, the others – in an ideal situation of family harmony - should smile.
But this is the modern India, the one with mobile labour, fractured families, and a country with the new in-your-face arrogance that sees the glass as half empty because you drank their rightful share of the water. Family harmony is what you saw in the old movies while you ate your salty popcorn - now it is the serials that pollute our innocence while we eat our Jain pizzas.
So when the Rs 60,000 crores of loans given to small farmers was declared as a gift and no longer needed to be repaid, there was a spontaneous flow of tears. But – unlike the films in Bollywood - the spontaneous crying from all of us city folks glued on to ticker-tape TV was not in happiness, but more in protest. The BSE-30 Index took a vertical drop and plunged to a new intra-day low. For a minute (and that is the time horizon of most viewers of TV serials these days) it looked like this drop was going to force everyone to change the scale of their graphs to accommodate what could be a circuit down move. A red blooded -10% day. A Freaky Friday.
But then a few minutes later, the Finance Minister announced an across the board reduction in the effective tax rates for the more fortunate. Later at a press conference he indicated that this reduction in tax rates was going to reduce taxes by Rs 4,000 for the lowest slab of tax payers; Rs 24,000 for the next slab; and Rs 44,000 for the third slab. The graph of the BSE-30 Index recovered. The weeping seemed to be in happiness. It was the patriarch’s hand on the shoulder telling the young man that he could go out and shop a bit. Or save more for the future. A -10% blood bath seemed impossible now as the collective cheers of salaried people heaved the Index northwards. We could not hear the farmers’ voices as they probably were not aware what was happening or were too busy trying to find water to drink. In nay case, there was no TV channel interviewing them.
Taking a cue from the Bollywood movies again, the Finance Minister was ready for the next twist and turn in his plot. This time he said that the short term capital gains tax would be increased from 10% to 15%. The 300,000 punters that mis-represent India’s capital markets did not take kindly to that. The knocked the Index down again. I wish the tax had gone to 30%, frankly, to take the punters and their excess liquidity out of the system.
The details of the budget and all the minute tax implications for various companies will be agonisingly scrutinised for the next few months as it winds its way through the Parliamentary process to become a Bill. But that is not material. What is material is that the movements of the Index as the markets absorbed the 3 important items (loan write-off for farmers, changes in the effective rate of personal income tax, and the short term capital gains tax) confirmed that there are two Indias.
There is the Index-watching India that is focused on its wealth and has a voice which can ask questions to a Finance Minister. And then there is the other India – the one which can only commit suicide to be heard.
The reality is that there is an HUF budget required in India every year for the next two decades. There are over 400 million people who need to climb up the economic ladder. Those who have the market cap, need to pay for it. We cannot hide – or fight – that reality. We need a patriarch in the HUF, a generous karta. Finance Minister Chidambaram and his government have recognised their role and may they have much success. And now we need another 19 HUF budgets.
By Ajit Dayal, Director, Quantum Mutual Fund
Markets - Weekly Wrap
The 30 share index, Sensex, gained 229.65 points during the week ended Feb. 29, 2008, to close at 17,578.72, whereas the broad based NSE Nifty advanced 112.75 points to close at 5,223.50.
On Monday, the BSE Sensex ended the day with a gain of 301.50 points, or 1.74%, at 17,650.57, while the broad-based NSE Nifty closed at 5,200.70, up 89.95 points, or 1.76%. The 30-share benchmark index opened with a positive gap of 174.74 points at 17,523.81 on account of good global cues in the early trades. Later, the index fell into the negative and traded for a long period in the negative terrain. However, the index recovered and moved up in the positive zone. The index proceeded to trade high on the back of intense buying interest in frontline stocks before the final hour of the closing to touch a high of 17,674.06.
On Tuesday, the BSE Sensex ended the day with a gain of 155.62 points, or 0.88%, at 17,806.19, while the broad-based NSE Nifty closed at 5,270.05, up 69.35 points, or 1.33%. The 30-share benchmark index, Sensex, opened with a positive gap of 148.99 points at 17,799.56 mirroring buoyant global cues in the early trades. Finally, the index closed on a firm note after touching an intraday high of 17,860.10.
On Wednesday, BSE Sensex ended the day with a marginal gain of 19.80 points, or 0.11%, at 17,825.99, while the broad-based NSE Nifty closed at 5,268.40, down 1.65 points, or 0.03%. The Sensex, opened with a positive gap of 177.23 points at 17,983.42 following encouraging global cues in the early deals. Later, the index proceeded to trade in the positive terrain on account of sustained buying activity in frontline stocks. However, the index could not sustain its ground and slipped into the negative. However, it moved up in the positive terrain before the final hour of the closing. Finally, the index closed on a flat note after touching an intraday high of 18,137.28.
On Thursday, BSE Sensex ended the day with a marginal loss of 1.51 points, or 0.01%, at 17,824.48, while the broad-based NSE Nifty closed at 5,285.10, up 16.7 points, or 0.32%.The 30-share benchmark index, Sensex, opened negative at 17,810.52 but soon moved up in the positive for a brief period. However, it again fell into the negative in the early trades due to weak global cues. The index proceeded to trade in the negative on the back of intense selling pressure in frontline stocks amidst volatility. Finally, the index closed on a flat note after touching an intraday low of 17,690.16.
On Friday, the BSE Sensex ended the day with a loss of 245.76 points, or 1.38%, at 17,578.72, while the broad-based NSE Nifty closed at 5,223.50, down 61.6 points, or 0.32%. The indices opened on a negative note at 17,779.54 on the Union Budget day. The 30-share index later fell by 400 points as soon as the Finance Minister P. Chidambaram unveiled the Budget. However, the Sensex recovered smartly before the final one hour of trading backed by Pharma, FMCG, banks and auto stocks. Finally, the BSE barometer wrapped the day on a dull note after touching an intraday low of 17,258.20.
Economy
Pushing for reforms, the Economic Survey stated that inflationary impact of foreign funds flow, a slowdown in the US, an appreciating rupee and sluggish infrastructure sector were major challenges before economy that is projected to slow down to 8.7% in 2007-08.
India`s wholesale price inflation rose 4.89% for the week ended Feb.16, 2008, as against 4.35% for the previous week.
All India Consumer Price Index Number for Industrial Workers (CPI-IW) on base 2001=100 for the month of January 2008 remained stationary at 134. The point to point rate of inflation, during January 2008 based on the CPI-IW on base 2001=100 has remained constant at the previous month`s level of 5.51%.
Budget 2008-09
To give a boost to the agricultural sector, the scheme of Debt Waiver and Debt Relief for farmers has been announced by the Finance Minister, P Chidambaram. All agricultural loans distributed by scheduled commercial banks, regional rural banks and cooperative credit institutions upto Mar. 31, 2007 and overdue as on Dec. 31, 2007 will be covered under Debt Waiver and Debt Relief scheme.
For marginal farmers and small farmers there will be a complete waiver of all loans that were overdue on Dec. 31, 2007 and which remained unpaid until Feb. 29, 2008. In respect of other farmers, there will be a One Time Settlement (OTS) scheme for all loans that were overdue for the above period. Under the OTS, a rebate of 25% will be given against payment of the balance of 75%.
In the General Budget 2008-09, Banking Cash Transaction Tax (BCTT) has been withdrawn w.e.f. Apr. 1, 2009. The step is in view of the fact that the information gathered by means of BCTT is also available to the Income Tax Department through other instruments introduced in the last few years.
Gross Domestic Product (GDP) grew at 8.4% for the third quarter (October- December) 2007-08 as against 8.9% 2007-08 according to the Central Statistical Organization (CSO) at factor cost.
NSE Bulk Deal Watch - Feb 29 2008
Date,Symbol,Security Name,Client Name,Buy/Sell,Quantity Traded,Trade Price / Wght. Avg. Price,Remarks
29-FEB-2008,ADORWELD,Ador Welding Limited,HDFC M F A/C HDFC GROWTH FUND,BUY,416757,177.50,-
29-FEB-2008,CANDC,C & C Constructions Limit,HDFC MUTUAL FUND A/C INFRASTRUCTURE FUND,BUY,200000,210.00,-
29-FEB-2008,INDOCO,Indoco Remedies Limited,RELIANCE ASSET MANAGEMENT PMS,BUY,100000,275.00,-
29-FEB-2008,KALINDEE,Kalindee Rail Nirman (Eng,HDFC MUTUAL FUND A/C HDFC MIDCAP OPPORTUNITIES FUND,BUY,100000,450.00,-
29-FEB-2008,NAGARFERT,Nagarjuna Fert & Chem,CLEAN FINANCE & INVESTMENT LTD,BUY,3765217,56.77,-
29-FEB-2008,NAGARFERT,Nagarjuna Fert & Chem,P R B SECURITIES PRIVATE LTD,BUY,2287285,56.50,-
29-FEB-2008,NORTHGATE,Northgate Technologies Li,GEOMATRIX - HK LIMITED A/C. MARSHAL ASIA CAPITAL,BUY,600000,542.58,-
29-FEB-2008,PUNJABCHEM,Punj Chem & Crop Prot Ltd,SHREE GOPAL CHEMICALS & TRADING PRIVATE LIMITED,BUY,35000,198.37,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,CPR CAPITAL SERVICES LTD.,BUY,76665,110.99,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,MANSUKH SECURITIES & FINANCE LTD,BUY,79594,109.91,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,R.M. SHARE TRADING PVT LTD,BUY,189338,110.46,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,RUPESH KIRIT DALAL,BUY,64409,109.91,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,SANJAY BHANWARLAL JAIN,BUY,104334,110.10,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,TRANSGLOBAL SECURITIES LTD.,BUY,105420,110.80,-
29-FEB-2008,ADORWELD,Ador Welding Limited,HDFC ASSET MANAGEMENT COMPANT LTD,SELL,416757,177.50,-
29-FEB-2008,CANDC,C & C Constructions Limit,RANJAN GUPTA,SELL,110000,210.56,-
29-FEB-2008,CHAMBLFERT,Chambal Fertilizers Ltd.,CITIGROUP GLOBAL MKTS MAURITIUS PVT LTD- SELL CODE,SELL,2100000,64.78,-
29-FEB-2008,INDOCO,Indoco Remedies Limited,SBI MUTUAL FUND,SELL,100000,275.00,-
29-FEB-2008,KALINDEE,Kalindee Rail Nirman (Eng,INDEX EQUITIES PVT.LTD,SELL,98008,450.00,-
29-FEB-2008,NAGARFERT,Nagarjuna Fert & Chem,CLEAN FINANCE & INVESTMENT LTD,SELL,3765217,56.79,-
29-FEB-2008,NAGARFERT,Nagarjuna Fert & Chem,P R B SECURITIES PRIVATE LTD,SELL,2287285,56.59,-
29-FEB-2008,NIITLTD,NIIT Limited,CITIGROUP GLOBAL MKTS MAURITIUS PVT LTD- SELL CODE,SELL,1612000,125.58,-
29-FEB-2008,NORTHGATE,Northgate Technologies Li,TALMA CHEMICAL INDUSTRIES PVT.LTD.,SELL,175000,547.53,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,CPR CAPITAL SERVICES LTD.,SELL,76665,111.14,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,MANSUKH SECURITIES & FINANCE LTD,SELL,79594,110.17,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,R.M. SHARE TRADING PVT LTD,SELL,189338,110.66,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,RUPESH KIRIT DALAL,SELL,64409,110.24,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,SANJAY BHANWARLAL JAIN,SELL,104334,110.26,-
29-FEB-2008,TULSI,Tulsi Extrusions Limited,TRANSGLOBAL SECURITIES LTD.,SELL,106020,110.84,-
US Markets slump
Stocks fell sharply Friday after a series of depressing economic and corporate reports and high oil prices stoked concerns about the health of the U.S. economy. The major stock indexes fell more than 2.5 percent and the Dow Jones industrials lost 315 points.
Investors were unnerved by disappointing quarterly results from American International Group Inc. and Dell Inc. And an index of regional business activity that Wall Street regards as a good indicator of a broader report set to arrive next week had its weakest showing in more than six years.
Oil prices continued to stir concern about inflation after pushing past $103 per barrel for the first time.
While stocks made sharp gains in the first three days this week even amid somewhat lackluster economic readings, the litany of concerns investors succumbed to Friday reflected the undercurrent of uncertainty that has kept Wall Street on edge for months.
``We really had to face a plethora of negative news,'' said Art Hogan, chief market strategist at Jefferies & Co. in Boston.
Hogan said while stocks had managed big gains for much of the week, Fridays have been difficult days for Wall Street in the past year or so since cracks began to appear in the credit markets and as concerns have emerged about the economy. Investors worry that unwelcome news might break on the weekends, and that has caused selling pressure in the week's final session.
According to preliminary calculations, the Dow fell 315.79, or 2.51 percent, to 12,266.39. The decline more than erased the week's 200 point gain and sent stocks lower for February, the fourth straight month of declines.
Broader stock indicators also tumbled. The Standard & Poor's 500 index lost 37.05, or 2.71 percent, to 1,330.63, and the Nasdaq composite index declined 60.09, or 2.58 percent, to 2,271.48.
Bond prices rose sharply as stocks lost ground. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.52 percent from 3.67 percent late Thursday.
The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the ``fear index,'' jumped 12.5 percent.
Budget Impact 2008
Finance Minister P Chidambaram presented the federal budget for 2008-09 on Friday, the fifth and final full one of the administration. Here is the impact of the Budget on the following commodities.
Cheap
# Washing Machine
# Air Conditioner
# Motor Cycle 5% discount
# Two wheelers
# Hyundai vehicles Rs 12-14000 less
# Set Top Box
# Dairy Products
# Tea and Coffee
# Live saving drugs
# IT products
# Sport Materials
# Small Car
# Paper and its products
# Rates of 3-4 star hotels
# Packaged coconut water
# Fertiliser
# Puffed rice
# Shampoo
# Hair Oil
# Jewellery
# Water Puriifier
# Naptha
Costly
# Mobile (Nokia Express phone, Samsung)
# Cigarette
# Packaging Software
# On ULIP Service Tax will be charged
# Bulk cement
# Unbranded petrol and diese
Subscribe to:
Posts (Atom)