Ranbaxy Labs, Tourism Finance Corporation, Kanoria Chemicals

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs352

Price target revised to Rs500

Key points

• Pfizer Inc has lost the initial bid for a new patent on Lipitor, the world's best-selling drug that could extend the company's monopoly on the medicine until June 2011.
• The rejection of Pfizer Inc's plea to reissue the invalidated '893 patent by the US Patent & Trademark Office brightens Ranbaxy Laboratories' (Ranbaxy) chances of entering the $8.5-billion Lipitor market in March 2010, 15 months ahead of the expiry of the invalidated '893 patent.
• Lipitor is the world's largest selling drug with annual sales of $8.5 billion in 2006. Using the discounted cash flow (DCF) method, we have valued the Lipitor exclusivity opportunity for Ranbaxy at Rs48 per share.
• Ranbaxy has created a rich pipeline of one-time opportunities for itself, the current ones being for Pravastatin 80mg, Valtrex and Isoptin SR (an authorised generic). Further, the company has a First-to-File (FTF) status on approximately 20 Para IV abbreviated new drug application (ANDA) filings, representing a market size of about $26 billion. The management is confident of monetising one such opportunity every year during CY2008-10.
• Ranbaxy has underperformed the market by over 30% over the last one year, largely due to the overhang of the regulatory issues with the company's Paonta Sahib plant and the raid by the US Food and Drug Administration (USFDA) on its US offices. However, we believe that all the negatives relating to the company have been priced in, with limited downside potential from the current levels.
• To account for the lower dollar/rupee exchange rate for CY2007, we have adjusted our CY2007 revenues and earnings estimates by 5.7% and 10.9% respectively. Our revised earnings estimate for CY2007 now stands at Rs18.5 per share. We are also introducing our CY2008 estimates for Ranbaxy in this report. We estimate a 14% growth in its revenues to Rs7,456.2 crore and a 4.7% decline in its profits to Rs706.0 crore in CY2008, yielding earnings of Rs17.7 per share in CY2008.
• At the current market price of Rs352, Ranbaxy is trading at 19.0x its estimated CY2007 and 19.9x its estimated CY2008 earnings. We maintain our Buy recommendation on the stock, with a revised price target of Rs500.

Tourism Finance Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs30
Current market price: Rs25

Operating performance to improve going forward

Result highlights

• For Q1FY2008 Tourism Finance Corporation of India (TFCI) has reported an 86% year-on-year (y-o-y) growth in its profit after tax (PAT) to Rs1.6 crore. The profit growth was aided by improved operating performance and lower provisions. The quarter-on-quarter (q-o-q) comparison has not been presented as we feel it is not relevant for TFCI since most of its earnings are back-ended with the fourth quarter accounting for over 65% of its FY2007 PAT.
• In the first quarter, the net interest income (NII) grew by 40.7% year on year (yoy) to Rs4.7 crore, mainly driven by a y-o-y decline of 10.3% in the interest expense to Rs8.2 crore. Going forward, we expect the interest expense to remain subdued due to the limited borrowing requirements of TFCI for FY2008. The existing funds coupled with the recoveries and planned capital raising should be sufficient for TFCI's business plans.
• TFCI's operating expenses jumped by 47.8% mainly due to a significant increase in the lease rentals for its office space. The increase had come into effect from October 2006—hence the full impact of the same would keep the operating expenses elevated in FY2008. The operating profit was up by 35.4% to Rs3.8 crore.
• Provisions and contingencies declined by 33.3% to Rs1 crore, reflecting the lower provisioning requirement as the net non-performing asset (NPA) was almost nil and incremental defaults were contained during the first quarter.
• The tax outflow jumped up significantly during the quarter due a higher income and also a higher effective tax rate of 38% for Q1FY2008 compared with 23% in Q1FY2007 and 18% in FY2007. Going forward, the management expects the effective tax rate to decline but the overall tax outflow to remain higher due to a higher income.
• We expect TFCI's earnings to grow at a 32% compounded annual growth rate over the period FY2006-09. The business prospects for the company have improved significantly on the back of the capacity expansion planned in the hotel and tourism sectors for the next three to four years. At the current market price of Rs25 the stock is quoting at 6.1x its FY2009E earnings and 0.7x FY2009E book value. We maintain our Buy recommendation on the stock with the price target of Rs30.

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VIEWPOINT

Kanoria Chemicals & Industries

Capex of Rs150 crore for expansion
We attended the analyst meet of Kanoria Chemicals & Industries Ltd (KCIL) to discuss the future prospects and expansion plans of the company. We present the key takeaways from the meet.

Orient Paper and Industries, TFCI

Orient Paper and Industries
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs680
Current market price: Rs427

Price target revised to Rs680

Result highlights

• In Q4FY2007 the cement revenues of Orient Paper and Industries (Orient Paper) grew by a robust 33% year on year (yoy) to Rs166.7 crore, helping the overall business to grow by a healthy 22% yoy to Rs340.3 crore. Backed by the stellar performance of the cement division, the company's net profit for FY2007 doubled to Rs59.6 crore.
• For the full year, the company registered a robust top line growth of 28.5% yoy to Rs1,102 crore backed by a 100% growth in its cement revenues to Rs591 crore. The fan business grew by 26% yoy to Rs242 crore whereas the paper revenues were flat at Rs262 crore over the same period.
• With the realisations growing by 25-30% in FY2007, the earnings before interest and tax (EBIT) of the cement division grew by a mammoth 431% yoy to Rs226 crore whereas its margin expanded by a whopping 2,380 basis points to 38% in FY2007. On the back of the superb performance of the cement division the EBIT of the company grew by 235% yoy to Rs252 crore whereas the margin expanded by 1,100 basis points to 22% in FY2007. The margin could have been higher but for the margin pressure faced by the paper and fan businesses during the fiscal.
• With the company not adding any asset during the year, the depreciation provision stood flat at Rs26 crore whereas the interest cost reduced by Rs9 crore to Rs32.7 crore in FY2007, as the company repaid debt to the tune of Rs111 crore during the year.
• The company received Rs6.4 crore as the estimated net realisable value of Certified Emission Reduction (CER) units received during the quarter ended March 2007 at its cement plant. The other income component for the fiscal stood at Rs14 crore. Backed by the stupendous performance at the operating level, the adjusted net profit grew six fold to Rs130 crore.
• The company has planned capital expenditure (capex) of Rs640 crore for the next three years (it has already spent about Rs60 crore of the same) to augment its cement capacity by 2.6 million metric tonne (MMT) including a captive power plant (CPP) of 50 megawatt. It is also augmenting its tissue paper capacity by 20,000 tonne and has already increased its fan capacity.
• As mentioned in our earlier reports, the company is raising Rs160 crore through a rights issue at a price of Rs360 per share. This will result in additional capital of Rs4.44 crore, thereby diluting the equity share capital by 30%. The company will use the proceeds to part finance its capex drive.
• The incremental volumes from the augmented cement capacity, higher blending and savings from power costs will drive the company's earnings in the next three years at a compounded annual growth rate (CAGR) of 15%. We believe that the company will be willing to sell its investment in Century Textiles, if need be, to fund its capital requirements. Thus we have considered it as part of liquid investments which provides a cushion of Rs54 per share to the stock. At the current market price of Rs427 the stock trades at 4.6x its FY2009 earnings per share (EPS) estimate whereas the cement business trades at a valuation of USD24.
• Taking cognisance of the positive outlook for the company as well as the stock's attractive valuations we maintain our Buy recommendation on the stock with a reduced price target of Rs680.

Tourism Finance Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs30
Current market price: Rs22.7

Strong demand from hotels to benefit TFCI

Result highlights

• For Q4FY2007 Tourism Finance Corporation of India (TFCI) has reported a 33.1% year-on-year (y-o-y) growth in its profit after tax (PAT) to Rs9.6 crore, which is ahead of our estimate of Rs8.6 crore. The quarter-on-quarter (q-o-q) PAT growth stood at 281.3% but since the earnings of the company are back-ended, the q-o-q PAT figure is not relevant.
• TFCI has managed to register a healthy y-o-y growth of 81% in sanctions to Rs240 crore and of 36% in disbursements to Rs120 crore. The revival in the demand from the hotel and tourism sectors has helped TFCI register an 81% y-o-y growth in sanctions for FY2007 compared with a 20% sanction growth in FY2006.
• The net interest income (NII) was up by 8.2% to Rs15.4 crore for Q4FY2007 and by 1.2% to Rs28.9 crore for FY2007. The substantial y-o-y growth in the other income to Rs0.45 crore from Rs0.01 crore in Q4FY2006 was achieved due to the consultancy services provided by the company.
• The operating profit was up by 6.3% to Rs13.7 crore for Q4FY2007 but down 3% to Rs24.9 crore for FY2007.
• Provisions and contingencies declined by 43.4% for Q4FY2007 and by 27.5% for FY2007, reflecting the lower provisioning requirement as the incremental non-performing assets (NPAs) remained very low. The net NPA was almost nil in March 2007.
• We have made changes to our initial provisioning assumptions based on the significant improvement in the company's asset quality during FY2007. This has resulted in 12.3% and 14.2% increase in our PAT estimates to Rs20.2 crore and Rs27.5 crore for FY2008 and FY2009 respectively.
• We expect TFCI's earnings to grow at a 32% compounded annual growth rate over the period FY2006-09. The business fundamentals of the company have improved significantly on the back of the capacity expansion in the hotel and tourism sectors planned for the next three to four years. Higher sanctions and significant improvement in the company's asset quality are testimonies to this fact. Again as per our expectations, the company has resumed dividend payment and declared a 5% dividend, which gives a 2.2% dividend yield. At the current market price of Rs22.7 the stock is quoting at 5.6x its FY2009E earnings and 0.6x FY2009E book value. We maintain our Buy recommendation on the stock with the price target of Rs30.

Orient Paper and Industries, TFCI

Sharekhan Investor's Eye June 28, 2007

Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,271
Current market price: Rs2,094

Annual report review

Key points

• FY2007 was an interesting year for BAL as the company rendered a strong performance in the first nine months of FY2007, even though the performance faltered in the last quarter of the fiscal due to the rising interest rates and certain actions taken by the Reserve Bank of India (RBI) to control the growth in non-food credit.
• A number of variants in the motorcycle segment in all sub-segments, good export performance, a launch of new ungeared scooter Kristal led the growth during the year.
• The company continued its productivity improvements during the year as the turnover per employee increased from 132 in FY2004 to 266 in FY2007. BAL also continues to enjoy negative working capital. The high capital expenditure (capex) of the company during the year affected the return ratios as the return on capital employed reduced from 25.5% to 22.3% and the return on net worth reduced from 20.9% to 18%.
• The company expects this slowdown to be an aberration and is hopeful the situation would improve going forward. However, hardening raw material prices, the competitive scenario and possible lower demand in the first half of FY2008 would restrict the margins and the same are expected to remain in the region of 13-15%. The company has plans to launch a new bike in the second quarter of FY2008 and the management believes that the bike will be a blockbuster.
• At the current market price of Rs2,094, the stock trades at 16.1x its FY2009E and at an enterprise value/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 9.2x. We maintain our Buy call on the stock with a price target of Rs2,271.

Tourism Finance Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs30
Current market price: Rs20.65

Q4FY2007 results: First-cut analysis

Result highlights

• For Q4FY2007 Tourism Finance Corporation of India (TFCI) has reported a 33.1% year-on-year (y-o-y) growth in its profit after tax (PAT) to Rs9.6 crore, which is ahead of our estimate of Rs8.6 crore. The quarter-on-quarter (q-o-q) PAT growth stood at 281.3% but since the earnings are back-ended (the fourth quarter earnings comprise 60-65% of the total annual earnings) the q-o-q PAT growth figure is not relevant.
• In FY2007 TFCI's PAT stood at Rs14.3 crore, up 20% year on year and ahead of our estimate of Rs13.3 crore.
• The net interest income was up by 8.2% to Rs15.4 crore for Q4FY2007 and by 1.2% to Rs28.9 crore for FY2007.
• The operating profit was up by 6.3% to Rs13.7 crore for Q4FY2007 but down 3% to Rs24.9 crore for FY2007.
• Provisions and contingencies declined by 43.4% for Q4FY2007 and by 27.5% for FY2007, reflecting the lower provisioning requirement due to lower incremental non-performing assets (NPAs). We expect TFCI's net NPAs as percentage of loans to have improved from 2.5% in FY2006 to 1.8% in FY2007.
• As per our expectations the company has resumed dividend payment and declared a 5% dividend, which gives a 2.5% dividend yield. At the current market price of Rs20.65, the stock is quoting at 5.8x its FY2009E earnings and 0.6x FY2009E book value. We maintain our Buy recommendation on the stock with the price target of Rs30.

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VIEWPOINT

Do financial service cos have any steam left?

In the past 12 months valuations of financial services firms, have shown significant appreciation. Are such valuations justified? Is anymore upside left? In order to find answer to these burning questions we did a small exercise to capture the valuations of five leading financial service firms engaged in brokerage, investment banking, insurance, consumer finance, banking etc using the sum-of-the-parts (SOTP) method. The valuations assigned are relative and based on the current multiples given to the various businesses of these firms by the market (except for ICICI Bank which is under our coverage).

Sharekhan Investor's Eye June 28, 2007

Sharekhan Investor's Eye June 25, 2007

Tourism Finance Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs30
Current market price: Rs17.1

Riding on improved prospects for tourism sector

Key points

• To benefit from the positive outlook on tourism sector: Tourism Finance Corporation of India's (TFCI) deteriorating financial performance and increasing NPAs were a direct consequence of the downturn in the tourism sector in the late 1990s. However, the positive outlook for the tourism sector going forward would significantly benefit TFCI in terms of higher loan growth.
• Substantial improvement in asset quality: TFCI has significantly improved its asset quality. Its net NPAs, which were high at 11% in FY2004, were at 2.6% in FY2006 and are expected to fall further in FY2007. Higher recoveries and lower incremental NPAs have helped reduce the level of its NPAs.
• Possible foray into private equity space to boost future earnings: TFCI is also reported to be in talks with major private hotel chains, real estate funds and private equity players to raise private equity to finance large hotel projects. This will enable TFCI to generate a fee income, and increase its ability to co-invest and lend.
• Dividend payment now possible: Due to its high NPAs, TFCI was not permitted by the RBI to pay dividends in FY2005 and FY2006. TFCI had paid a dividend of Rs0.7 per share in FY2004. If it resumes dividend payment at the earlier historical rate, the dividend yield would work out to 4%, which could provide a margin of safety for the stock.
• Stock could trade at Rs30: TFCI had a reported book value of Rs27 per share in FY2006. The stock is trading at 0.6x trailing book and is cheaper than most other financial stocks. At our target price/book value of 0.8x for FY2009, the price target for the stock works out to Rs30 per share. We believe that the valuation at 0.8x is reasonable given that the company has never made losses, its NPAs have turned around and its loan growth is expected to be strong with the improving prospects of the hotel and tourism industry. We therefore recommend a Buy on TFCI with a price target of Rs30.

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STOCK

UPDATE

Alphageo India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs395
Current market price: Rs370

Price target revised to Rs395

Result highlights

• Alphageo India has reported a 56.7% growth in its revenues to Rs29.5 crore for the fourth quarter ended March 2007. This is in line with our estimate of Rs29 crore.
• The operating profit margin declined by 5.3% to 44.5% during the quarter, largely due to the incremental cost related to the third 3D crew. The crew became operational only in the latter part of Q4FY2007 but the staff cost for the same was reflected in the entire quarter.
• The net profit grew by 41% to Rs6 crore which is marginally higher than our estimate of Rs5.9 crore.
• On the full year basis, the revenue and earnings have grown by 127.5% to Rs54.3 crore and 80.2% to Rs7.5 crore respectively.
• Along with the results, the board has approved a dividend of 15% (or Rs1.5 per share) for the existing shareholders.
• The company had a pending order book of Rs110 crore as of end March 2007. The order book is executable over the next five quarters and provides a strong visibility for the revenue growth in FY2008. Accordingly, we have revised upwards our estimates for FY2008. At the current market price the stock trades at 11.2x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs395 (12x FY2008 estimated earnings).

Hindustan Unilever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs188

To prune margins at stockists
According to media reports, Hindustan Unilever Ltd (HUL) is expected to prune the margins of the stockists with an intention to bring in efficiencies. It is still not clear to what extent the company would bring down the margins though. Till now, the company had allowed its stockists to keep a little less than 5% as margins. The other fast moving consumer goods companies in the business like Amul pay their dealers margins in the region of 3%

Sharekhan Investor's Eye June 25, 2007

Tourism Finance Corporation of India

Tourism Finance Corporation of India