Dishman Pharma,Dwarikesh, ITC, Oil Marketing Companies

Edelweiss in their result update on Dishman Pharma

Dishman announced results for Q4FY07, the revenues were higher than our estimates but lower EBITDA margins resulted in lower than expected EBITDA. Higher other income and lower depreciation and negative tax rate compensated for the lower EBITDA margin and the net profit was in line with expectation. Sales increased by 139% on Y-o-Y basis to INR 2057 mn, EBITDA increased by 20%, and net income grew by 255%. This quarter’s financials carried the impact of adjustment related to change in accounting nos. to IGAAP from UK GAAP for Carbogen Amcis.

Dishman’s outlook remains positive as it has announced several new initiatives which
might turn into new sizable contracts and Synergy derived from Carbogen-Amcis. At CMPof INR 258, the stock trades at a P/E of 14.6x on FY08E estimates. We retain our ‘BUY’ recommendation.

Edelweiss in their report on Dwarikesh Sugar

The stock has corrected by ~12% from our sugar sector update of February 2007,
paradise Lost, where we had downgraded the sector and DSIL to ‘REDUCE’ from ‘ACCUMULATE’. On SS07 capacity, the stock trades at 0.8x EV/replacement cost. Although valuation looks compelling vis-à-vis peers, we reckon it to be primarily attributable to DSIL continuing to be a relatively purer play on the sugar cycle with limited integration benefits. If current sugar prices continue, leading to funds’ crunch for holding on to working capital commissioning delays of its cogen unit in SS08 cannot be ruled out. Due to lack of any medium term triggers to revive sugar prices, highly levered balance sheet (D/E of ~2x), and over reliance on sugar segment, we maintain ‘REDUCE’ recommendation.

ABN in their report on ITC say,

4QFY07 results reflect strong underlying performance ITC reported 16% yoy EBITDA growth, driven by 16% EBIT growth in cigarettes, 23% EBIT growth in paper and 20% EBIT growth in hotels. The FMCG business recorded higher losses yoy, partly driven by heavy launch expenses for the Bingo range of potato chips. While ITC's reported PAT growth was lower at 15% yoy, the underlying growth was 19% adjusting for the higher base in 4QFY06 due to tax refunds. Cigarette prices raised proportionately more than tax increases ITC needed to raise prices by around 15% to neutralise the impact of the VAT and excise increases. However, the company has raised cigarette prices at a weighted average of 20%. In some brands, like Wills Navy Cut, Scissors and Capstan, the price hikes have been sharper, while in its key king-size brands like Classic and Gold Flake, the hikes have been close to the tax increases.

We estimate ITC's FY08 cigarette volumes will decline 2% (factoring in segments that are price inelastic and relatively inelastic), but expect cigarette net sales to grow 5.2% as price hikes have been sharper. Investing in paper and hotels for the next leg of growth FY07 EBIT for the hotels and paper businesses came in at Rs3.5bn and Rs4.2bn, respectively.

ITC is planning investments of Rs10bn in each of these businesses over the next three years, to be funded by their respective cash flows. The company plans to raise paper-board capacity from 0.32m mt to 0.42m mt, double its paper-pulp capacity from 0.1m mt to 0.2m mt, and set up uncoated-paper capacity of 0.1m mt (by 4QFY08). In hotels, ITC plans to set up two 900-room hotels, one each in Bangalore and Chennai. Maintaining Buy, with a lower target price of Rs205 (from Rs215) We cut our FY08F EPS by 9.1% to Rs7.75 to account for our lower cigarette volume estimate, but expect 15% EPS growth from FY09. ITC has underperformed the market 13% since the Budget and 9.3% ytd, which we believe largely discounts the earnings moderation we had expected. In line with our earnings downgrade, we reduce our DCF-based target price to Rs205, from Rs215.

Edelweiss in their report on Oil Marketing Companies

Based on our new oil price and INR/USD assumptions and revised under-recovery sharing between government, upstream and OMCs, we have revised our FY08 and FY09 earnings estimates for the oil marketing companies. For BPCL, our revised consolidated FY08 and FY09 EPS estimates stand at INR 52.4/share and INR 62.1/share. For HPCL, our revised FY08 and FY09 EPS stand at INR 38.2/share and INR 56.3/share and for IOCL we have revised our FY08 and FY09 EPS estimates to INR 59.9/share and INR 64.8/share.


We estimate the fair value of BPCL, HPCL and IOCL at INR 376, INR 266 and INR 529,
respectively. Both, BPCL and IOCL provide marginal upside from current levels. Though HPCL’s fair value is lower than CMP, it is explainable considering the higher earnings growth in FY09 due to increase in refining capacity and complexity. Further, current political scenario makes it unlikely that the government may reduce its controls on the sector. We believe that any reduction in crude price may only provide an opportunity for the government to reduce the auto fuel prices (run up to the elections in 2009). On the other hand the low P/BV and high dividend yield valuations provide support to the oil marketing companies. We therefore downgrade the R&M stocks (HPCL, BPCL, and IOCL) from ‘BUY’ to ‘ACCUMULATE’.