Tata Motors
Cluster: Apple Green
Recommendation: Hold
Price target: Rs792
Current market price: Rs790
Downgraded to hold
Key points
- Tata Motors' total sales for September 2007 stood at 48,347 vehicles. The total sales declined by 1.3% on year-on-year basis and grew by 7% on month-on-month (m-o-m) basis.
- The commercial vehicle (CV) sales for the month grew by 2% to 30,051 vehicles. The sales growth in the CV segment continues to be driven by the sales of light commercial vehicles (LCVs). The LCV sales grew by 9.2% year on year (yoy) on the back of new launches--Magic and Winger. The medium and heavy commercial vehicle (M&HCV) sales declined by 4% to 15,299 vehicles as low demand continued in the segment.
- Lower cargo availability during the monsoon led the freight rates to fall by about 1.2% yoy. With the advent of the festive season, the truck rentals in October 2007 have recovered by 5%-7.5%. However any recovery in the CV sales is dependent upon a double digit growth in the manufacturing sector and some restraint on overloading of trucks.
- The passenger vehicle sales in September 2007 continued to remain weak and declined by 6.3% to 18,296 vehicles. Indica sales grew by 6.4%, while Indigo sales declined by 34.8% to 2,328 vehicles. Sumo and Safari sales dropped by 24% yoy during the month. Lack of new product offerings has been the prime reason for the decline in the passenger vehicle sales.
- Export sales for the month registered a growth of 15.5% yoy, but on m-o-m basis the sales declined by 15.5% to 4,305 vehicles. Export sales as a percentage of the total sales volume was down to 8.9% the lowest in the year as compared with 12.4% in June the highest in the year.
- We are revising our Q2FY2008 estimates released earlier to account for the actual sales numbers. Consequently, the sales estimate for the quarter now stand at Rs6,653 crore from the earlier estimate of Rs6,557.8 crore. The profit after tax (PAT) is estimated at Rs356 crore as against the earlier estimate of Rs349.2 crore.
- The company’s management has said that it is planning to offer discounts on its vehicles to jump start the sales that have been hit by rising interest rates. Rising raw material prices, appreciating rupee and expanding capacity is not expected to substantially improve the company’s profitability.
- In view of the recent run up in the stock price very close to our price target of Rs792, we downgrade the stock to a Hold. At the current market price of Rs790, the stock discounts its FY2009E consolidated earnings by 12.2x and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) by 6.1x. We would review our recommendation on the stock after the announcement of Q2FY2008 results.
Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs439
Increases stake in Zenotech
Key points
- Ranbaxy Laboratories (Ranbaxy) is increasing its stake in Zenotech Laboratories (Zenotech) from 7% currently to 45% at a price of Rs160 per share, resulting into a total investment of Rs214 crore. The above increase in stake in Zenotech to 45% will trigger a mandatory open offer by Ranbaxy to other shareholders of Zenotech, at a price of Rs160 per share or as determined by the Securities and Exchange Board of India (SEBI) regulation.
- Zenotech is a Hyderabad-based research driven pharmaceutical company that develops new biological entities in the areas of cancer and neurology. The company currently has a portfolio of ten oncology injectables and five anesthesiology injectables developed and marketed in India. Zenotech also has an existing agreement with Ranbaxy for developing and marketing 14 injectables (Abbreviated New Drug Applications [ANDAs]) including seven in oncology in the US and Canada.
- By increasing its stake in Zenotech, Ranbaxy is preparing to capitalise the huge opportunity that awaits pharmaceutical companies in the field of biologics and oncology. The opening up of biosimilars or biogenerics in the regulated markets of the USA and Europe further enhances the attractiveness of this segment. Ranbaxy aims to enter the European Union biologics market through this acquisition by end of 2010-11. With the Zenotech acquisition, Ranbaxy plans to file seven ANDAs in the oncology segment for the US market in the coming months.
- As per media reports, Ranbaxy is in advanced stages of negotiation with numerous private equity players to hive off its new chemical entity (NCE) research division into a separate entity by 2008. Ranbaxy's current pipeline consists of two molecules in the clinics and another six-seven molecules in the pre-clinical stages. The demerger of the NCE division will unlock value for investors, generate new funding options for discovery research and de-risk the company's main generic business.
- We maintain our positive outlook on Ranbaxy and feel that it is among the best placed companies to leverage the global generic opportunity with its extremely diversified business model and a large product portfolio. At the current market price of Rs439, Ranbaxy is trading at 23.7x its estimated CY2007 and 24.8x its estimated CY2008 earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs500.
SECTOR UPDATE
Cement
Cement prices rise in the North
As per our expectations (refer note dated September 7, 2007), cement companies are believed to have hiked cement prices by Rs5 per bag in the North effective October 1, 2007.