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Investor's Eye money.umakant.info Q2 2010

VIEWS: 17 PAGES: 11

									Visit us at www.sharekhan.com                                                                         June 11, 2010




                                                            Index


                     Pulse Track >> April IIP growth robust at 17.6%


                     Stock Update >> Reliance Industries


                     Sector Update >> Fast moving consumer goods


                     Viewpoint >> Strides Arcolab




For Private Circulation only
                                                  Sharekhan Ltd
    Lodha iThink Techno Campus, 10th Floor, Beta Building, Off. JVLR, Opp. Kanjurmarg Station, Kanjurmarg (East),
                                          Mumbai – 400 042, Maharashtra.
investor’s eye                                                                                                                                                                                pulse track


 Pulse Track

April IIP growth robust at 17.6%                                                                                                                The growth in the industrial output during April 2010
   The Index of Industrial Production (IIP) for April 2010                                                                                      was led by the manufacturing segment, which posted
   registered a robust growth of 17.6% year on year (yoy),                                                                                      a robust growth of 19.4% yoy (vs 0.4% in April 2009)
   which was well above the consensus estimate of 14.3%                                                                                         followed by the mining and electricity segments with
                                                                                                                                                11.4% y-o-y and 6% y-o-y growth respectively. .
   yoy. However, it is important to note that the healthy
   growth numbers for April 2010 were aided by the low                                                                                          From a use-based perspective, the capital goods
   base of the previous year when the IIP had grown by                                                                                          segment registered a compelling growth of 72.8% vs
   just 1.1% yoy.                                                                                                                               the 5.9% contraction seen during April 2009 and the
                                                                                                                                                28.4% y-o-y growth seen during March 2010. Growth
   The growth in the industrial output during April 2010
                                                                                                                                                in capital goods production is the highest since
   was led by the manufacturing segment, which posted
                                                                                                                                                inception of the series in April 1995. Consumer goods
   a robust growth of 19.4% yoy followed by the mining
                                                                                                                                                growth stood at a strong 14.5% led by the 37% y-o-y
   and electricity segments with 11.4% year-on-year (y-                                                                                         growth in the consumer durables segment while
   o-y) and 6% y-o-y growth respectively.                                                                                                       consumer non-durables grew by 6.6% yoy.
   The growth in the capital goods segment stood at a
                                                                                                                                                Importantly, the output of intermediate goods
   compelling 72.8% yoy. Consumer goods too posted a
                                                                                                                                                recorded a healthy y-o-y growth of 10.8% vs 7.9% seen
   strong growth of 14.5% yoy led by consumer durables.                                                                                         during April 2009. The growth for basic goods improved
   On an absolute basis, the April 2010 IIP reading came                                                                                        to 8.8% on a y-o-y basis as compared to the 4.4% y-o-
   in at 316.7, lower by 31.8 points from 348.5 in the                                                                                          y increase seen during the previous year.
   previous month.
                                                                                                                                             In % yoy chg         Apr 2010    Mar 2010     Apr 2009
   After the first revision, the IIP growth for March 2010                                                                                   IIP                      17.6         13.9         1.1
   was revised upward to 13.9% yoy from provisional                                                                                             Basic                  8.8         10.4         4.4
   estimates of 13.5%.                                                                                                                          Intermediate          10.8         13.1         7.9
Highlights of April 2010 IIP numbers                                                                                                         General
                                                                                                                                             Manufacturing            19.4         14.7          0.4
   The Index of Industrial Production (IIP) for April 2010
                                                                                                                                             Mining                   11.4         11.8          3.4
   registered a robust growth of 17.6% yoy, which was
                                                                                                                                             Electricity               6.0          7.8          6.7
   well above the consensus estimate of 14.3% yoy.
                                                                                                                                             Use based
   However, it is important to note that the healthy
                                                                                                                                             Capital goods            72.8         28.4         -5.9
   growth numbers for April 2010 were aided by the low
   base of the previous year when the IIP had grown by                                                                                       Consumer goods           14.5         10.7         -4.6
   just 1.1% yoy.                                                                                                                            - Durables               37.0         32.6         17.6
                                                                                                                                             - Non-durables            6.6          3.3        -10.5

Trend in IIP growth                                                                                                                          Robust manufacturing growth
  20%                                                                                                                                        The growth in the manufacturing segment came in at
  18%                     IIP yoy (%)                IIP 3 MMA (%)                                                                           19.4%, significantly higher than the 0.4% y-o-y growth seen
  16%
                                                                                                                                             in the same period of the previous year. In terms of
  14%
  12%                                                                                                                                        industries, 15 out of 17 industry groups showed growth
  10%                                                                                                                                        during April 2010. This was higher than the 14 industry
   8%
                                                                                                                                             groups, which showed growth during March 2010.
   6%
   4%
                                                                                                                                             “Machinery and Equipment” led the industry segment with
   2%                                                                                                                                        the highest growth of 55.6% yoy, followed by a 51.9% y-o-
   0%                                                                                                                                        y growth in “Metal products”. Among the laggards, “Wood
        Apr-97

                 Apr-98

                          Apr-99

                                   Apr-00

                                            Apr-01

                                                      Apr-02

                                                               Apr-03

                                                                        Apr-04

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                                                                                          Apr-06

                                                                                                   Apr-07

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                                                                                                                                Apr-10




  -2%
                                                                                                                                             and wood products” contracted by 16.6% followed by
                                                                                                                                             Beverages, tobacco and related products.




                                                                                                                     Sharekhan           2     June 11, 2010                        Home           Next
investor’s eye                                                                                                              pulse track


IIP for March 2010 revised upward                                       Outlook
The IIP growth for March 2010 was revised upward to 13.9%               The industrial output continued to register a double-digit
from the provisional 13.5% yoy. From a segmental                        growth and recorded a robust growth of 17.6% yoy for
perspective, manufacturing and mining growth were                       April 2010. With the industrial growth rate sustaining at
revised upward to 14.7% and 11.8%. From a used based                    higher levels, the Indian economy is well on course for a
perspective, capital goods, basic goods and intermediate                more broad-based economic recovery. The steady
goods were revised upward from the provisional                          momentum in IIP growth coupled with persistently high
estimates.                                                              inflation could lead the RBI to undertake more aggressive
                                                                        hikes in policy rates in the policy review scheduled next
Revision in IIP        Quick estimate        Revised estimate           month. However, it is important to note that the strong
                            Mar 2010                Mar 2010
                                                                        growth comes on the back of a low base for the previous
Sectoral
                                                                        year. The low base effect is expected to prevail until May
General (IIP)                      13.5                  13.9
Manufacturing                      14.3                  14.7           2010 after which industrial production growth is likely to
Mining                             11.0                  11.8           moderate.
Electricity                         7.8                   7.8
Use based
Basic goods                        10.1                  10.4
Capital goods                      27.4                  28.4
Intermediate goods                 12.7                  13.1
Consumer goods                     10.6                  10.7
- Durables                         32.0                  32.6
- Non-durables                      3.3                   3.3


Industries                                                  Weights (%)             Apr 2010        Mar 2010   Apr 2009
Food products                                                          9.1               22.9           26.0       -33.3
Beverages, tobacco and related products                                2.4                   -2.7        0.8        -4.6
Cotton textiles                                                        5.5                   6.9         7.7          0.6
Wool, silk and man-made fibre textiles                                 2.3                   0.1        -4.6       23.5
Jute & jute textiles                                                   0.6                   1.3        -9.6          2.8
Textile products incl. wearing apparel                                 2.5                   1.5        -0.3       12.2
Wood and wood products                                                 2.7               -16.6          16.9       22.8
Paper & paper products                                                 2.7               11.5            7.9        -3.2
Leather & leather products                                             1.1                   3.5        12.0       -11.1
Chemicals & chemical products                                      14.0                      9.9         5.6        -0.9
Rubber, plastic, petroleum & coal products                             5.7               19.2           14.8          7.2
Non-metallic mineral products                                          4.4                   2.5         5.8          9.6
Basic metal and alloy industries                                       7.5               11.2           16.0          4.7
Metal products                                                         2.8               51.9           42.4        -3.7
Machinery and equipment                                                9.6               55.6           23.3          5.2
Transport equipment                                                    4.0               32.3           23.1          6.7
Other manufacturing industries                                         2.6               41.4           39.7        -5.0




                                                       Sharekhan   3         June 11, 2010                     Home              Next
investor’s eye                                                                                                                                stock update



 Reliance Industries                                                                                                                        Evergreen

 Stock Update

 Forays into broadband market; focuses to strengthen E&P assets                                                                   Hold; CMP: Rs1,046


                   Company details                              Key points
                                                                   After Mukesh Dhirubhai Ambani and Anil Dhirubhai Ambani scarpped the non-
 Price target:                                     Rs1,215
                                                                   compete agreement between them, Reliance Industries Ltd (RIL; led by Mukesh
 Market cap:                            Rs342,163 cr               Ambani) has announced its foray into the broadband and data services market.
 52 week high/low:                      Rs1,186/840                The company has entered into an agreement to acquire 95% stake in Infotel
                                                                   Broadband Services (P) Ltd (Infotel) for Rs4,800 crore through fresh issue of
 NSE volume:                                       48 lakh
 (No of shares)                                                    equity shares at par. RIL would be largely focusing on the enterprise and the
                                                                   corporate side of the data market that presently is less competitive and provides
 BSE code:                                          500325
                                                                   high margins. Infotel is the only company to win a pan India (22 circles)
 NSE code:                                    RELIANCE             broadband wireless license for Rs12,848 crore.
 Sharekhan code:                                        RIL        On the exploration and procurement (E&P) front, RIL has made large number
 Free float:                                       168.5 cr        of discoveries in Cambay Basin and has indicated towards considerable
 (No of shares)                                                    hydrocarbon potential in the block. Though we agree that the discoveries are
                                                                   yet to be certified by the directorate general of hydrocarbons (DGH) and though
                 Shareholding pattern
                                                                   the exact amount of hydrocarbon reserves cannot be ascertained at the moment,
                                                                   three discoveries in less than two months’ time make us comfortable in regard
        Public &
        Others                        Foreign
                                                                   to RIL’s E&P portfolio going forward.
         18%                           22%                         The overseas acquisition has also been on the high focus of the company in the
                                                                   recent times. On this front, the media reports are indicating that RIL is
                                         Institutions              considering acquiring stake in two energy assets in the US: 1) Shale gas assets
                                            10%                    of Pioneer Natural Resources in the Eagle Ford Shale play in South Texas and 2)
                                                                   Some energy assets (including shale gas) from East Resources. The news indicates
                                       Non-promoter
  Promoters                             corporate
                                                                   RIL’s focus on non-conventional energy assets and its plans to enter the US gas
     45%                                   5%                      market. We highlight here that RIL has not confirmed the news as yet.
                                                                   RIL’s foray into the broadband and data services market and its recent joint
                        Price chart
                                                                   venture with Atlas Energy coupled with the news of acquiring assets from Pioneer
                                                                   Natural Resources and East Resources would ensure utilisation of cash flows
 1200
 1150
                                                                   (around USD10-12 billion over FY2010-FY2012E) that the company is expected
 1100                                                              to generate from the start of Krishna-Godavari (KG) D-6 field and new Jamnagar
 1050                                                              refinery.
 1000
  950                                                              The company however still faces uncertainties on the following fronts: (1) The
  900
                                                                   gas pricing in the ongoing court case with National Thermal Power Corporation
  850
                                                                   (NTPC; though RIL’s position has strengthened now) and (2) The tax benefits on
                                          Mar-10
        Jun-09




                                                       Jun-10
                    Sep-09



                             Dec-09




                                                                Valuaton table
                  Price performance                             Particulars                   FY2008      FY2009    FY2010E     FY2011E      FY2012E
                                                                Net sales (Rs crore)       133,443.0    151,224.0   192,461.0   248,036.4   262,731.4
 (%)                1m       3m           6m 12m                Adj. net profit (Rs crore) 15,261.0      15,299.0    16,236.0    23,311.4    26,645.8
                                                                Shares in issue (crore)        290.7        314.6       328.6       328.6       328.6
 Absolute           -5.9     1.3         -4.7 -11.4
                                                                Adj. EPS (Rs)                   52.5         48.6        49.4        70.9        81.1
 Relative -4.1               1.7         -3.9 -20.4               % y-o-y change                26.4         -7.4         1.6        43.6        14.3
 to Sensex                                                      PER (x)                         19.9         21.5        21.2        14.7        12.9
                                                                EV/EBIDTA (x)                   15.3         14.9        11.5         8.6         7.1


                                                                              Sharekhan   4     June 11, 2010                        Home           Next
investor’s eye                                                                                                                                                                      stock update


    the natural gas business under section 80-IB (on which                 RIL is the operator of the block and holds 100%
    clarity is still awaited). Further, in spite of the light              participating interest.
    heavy price differential (currently at USD3.1 per barrel
    from USD1.7 per barrel in January 2010) showing signs           Significant oil discoveries in Cambay Basin
    of improvement with the Organisation of Petroleum               Recently, RIL has made large number of discoveries in
    Exporting Countries (OPEC) increasing its heavy crude           Cambay Basin and has indicated towards considerable
    production, the weak commodity prices are likely to             hydrocarbon potential in the block. Though we agree that
    keep the middle distillate crack spread weak and thus           the discoveries are yet to be certified by DGH and though
    keep the gross refining margin (GRM) under check.               the exact amount of hydrocarbon reserves cannot be
    Hence, we maintain our Hold recommendation on the               ascertained at the moment, three discoveries in less than
    stock with a price target of Rs1,215 in spite of around         two months’ time make us comfortable in regard to RIL’s
    16% upside at the current market price. At the current          E&P portfolio going forward.
    market price, the stock trades at a price/earnings ratio
    of 12.9x FY2012E earnings and an enterprise value               RIL considering to acquire two energy assets in the US
    (EV)/earnings before interest, depreciation, tax and            According to the media reports, RIL is considering to
    amortisation (EBIDTA) of 7.1x FY2012E.                          acquire stake in two energy assets in the US – 1) Shale gas
                                                                    assets of Pioneer Natural Resources in the Eagle Ford Shale
Event—RIL’s foray into broadband segment
                                                                    play in South Texas and 2) Some energy assets (including
    RIL has agreed to acquire substantial stake in Infotel          Shale gas) from East Resources. The news indicates RIL’s
    Broadband Services (P) Ltd. Under the terms of the              focus on non-conventional energy assets and its plans to
    agreement, RIL would invest around Rs4,800 crore by             enter the US gas market. We highlight here that RIL has
    way of subscription to fresh equity capital at par to           not confirmed the news as yet.
    be issued by Infotel. Post this, RIL will own 95% of
    Infotel’s equity thereby making it a subsidiary of RIL.         Pioneer’s Eagle Ford Shale status
    Infotel is a start-up with focus on providing Internet                 3,10,000 acre with 11 trillion cubic feet of gas of gross
    broadband services using WIMAX as access technology                    resource potential.
    and currently has around five lakh customers. It is the                6 plus BCFE per well gross estimated ultimate recovery
    only company to win a pan India (22 circles) broadband                 (EUR).
    wireless license for Rs12,848 crore.
                                                                           70% of locations are located within liquids-rich window.
    The acquisition marks RIL’s entry into the lucrative
                                                                    Eagle Ford Shale—A promising liquid-rich shale play
    broadband and data services market, where the
    penetration level is abysmally low and which provides                  It is believed to be liquid rich and hence could produce
    a high growth opportunity. As per RIL’s press release,                 much more liquids and condensate compared to the
    it would be largely focusing on the enterprise and the                 other shale fields.
    corporate side of the data market that currently offers                It has a much higher carbonate, thus making it easier
    less competition and high margins as compared to the                   to break.
    retail voice side of the business that is overly
    competitive.                                                           Break-even price at USD2.73 per mmbtu for Eagle Ford
                                                                           Shale is lowest for shale plays.
RIL makes sixth discovery in block CB-ONN-2003/1
                                                                    Break-even gas prices for shale plays
    RIL has announced its sixth oil discovery in the
                                                                                  7                                                                                                     6.35
    exploratory block CB-ONN-2003/1 (CB 10 A&B)                                                                                                                             6.18
                                                                                  6
    awarded under NELP-V round of exploration bidding.
                                                                                  5                                                                               4.25
                                                                      USD/mmbtu




                                                                                                                                        3.7       3.95
    The block is located in Cambay Basin (Gujarat) and                            4                 3.25         3.44    3.57
                                                                                      2.73
    covers an area of 635 km.                                                     3
                                                                                  2
    RIL has drilled 16 exploratory wells in the block so far.
                                                                                  1
    The company has said that the discovery is significant                        0
                                                                                                                 Lower
                                                                                                                 Huron

                                                                                                                          Haynesville
                                                                                       Eagle Ford


                                                                                                     Marcellus




                                                                                                                                                   Fayetteville
                                                                                                                                        Barnett




                                                                                                                                                                  Barnett




                                                                                                                                                                                         Pearsall
                                                                                                                                                                             Woodford




    and expected to open more oil pool areas and thus
                                                                                                                                                                   Tier




    result into better hydrocarbon potential within the
    block.


                                                  Sharekhan     5    June 11, 2010                                                                                Home                              Next
investor’s eye                                                                                                           stock update


Valuation and view                                                    under section 80-IB (where clarity is still awaited). Further,
RIL foray into the broadband and data services market                 in spite of the light heavy price differential (currently at
and its recent joint venture with Atlas Energy coupled                USD3.1 per barrel from USD1.7 per barrel in January 2010)
with the news of acquiring assets from Pioneer Natural                showing signs of improvement with OPEC increasing its
Resources and East Resources would ensure utilisation of              heavy crude production, the weak commodity prices are
cash flows (around USD10-12 billion over FY2010-FY2012E)              likely to keep the middle distillate crack spread soft and
that it is expected to generate from the start of KG D-6              thus keep the GRM under check. Hence, we maintain our
field and new Jamnagar refinery.                                      Hold recommendation on the stock with a price target of
                                                                      Rs1,215 despite around 16% upside from the current
However, the company still faces uncertainties on the                 market price. At the current market price, the stock is
following fronts: (1) The gas pricing in the ongoing court            trading at a price/earnings ratio of 12.9x FY2012 earnings
case with NTPC (though RIL’s position has strengthened                and an EV/ EBIDTA of 7.1x FY2012.
now) and (2) the tax benefits on the natural gas business

Eagle Ford Shale comparison
Shale gas play         Eagle Ford            Barnett        Fayetteville         Woodford          Haynesville       Marcellus
Dept (TVD ft)         10000-14000          6000-9000          4000-6500         6000-12000       10000-140000        5500-8500
Thickness                 120-350            200-250             50-300             90-300            150-350           50-300
IP (MMCFED)                  3-17                2-8                2-4               2-10               5-25              3-8
TOC (%)                       3-6                3-8                2-4              4-10+                2-3              4-6
GIP (Bcfe/mi2)                180                150                 50                135                200              100




                       The author doesn’t hold any investment in any of the companies mentioned in the article.




                                                     Sharekhan    6     June 11, 2010                             Home           Next
investor’s eye                                                                                                     sector update



 Fast moving consumer goods
 Sector Update

 India FMCG—the monsoon connect

Normal monsoon to keep the rural growth momentum                      farmers despite lower yields. Further, the
ticking, soften input prices for some FMCG companies                  government’s push in terms of schemes like the
After a drought prone year that led to soaring food prices,           National Rural Employment Guarantee Act (NREGA),
India is expected to witness a normal monsoon in 2010                 loan waivers and additional spends on infrastructure
that is likely to lead to a strong growth in food grain               activity acted as significant aids to keep the rural spend
production. Thus, higher production coupled with                      buoyant.
remunerative prices will ensure high disposable incomes               Consequently, almost all FMCG companies experienced
for farm-based households and lead to the sustenance of               a higher rate of growth in rural sales compared to the
the strong growth in rural consumption. We believe this               urban sales. The realisation of continuity of good
bodes well for the growth of the fast moving consumer                 growth prospects in rural India (that is significantly
goods (FMCG) companies in general as they continue with               dependent on farm incomes) has led the FMCG
their thrust on increasing their rural presence to tap this           companies to expand reach/distribution, lower price
growth opportunity.                                                   points of different products, and innovate marketing
Also, compared to 2009 the likely softening of prices of              and other strategies to capture the growth opportunity
farm (agriculture) based inputs, such as wheat, milk and              in the hinterland.
milk powder, sugar and tea, will particularly benefit                 FMCG companies had a tough time absorbing input
companies such as Britannia Industries, Nestle (India) and            cost inflation: The higher prices of food articles
GSK Consumer in FY2011 and should lead to an                          benefited FMCG companies in terms of a strong
improvement in the profitability of these companies.                  demand from rural India. However, on the flip side
FY2010—drought year—bolstered farm incomes but                        this led to high raw material cost pressures in a
pressurised margins for food companies                                competitive environment. Prices of inputs such as
                                                                      wheat, milk and milk powder, sugar and tea have seen
    In 2009 one of the country’s worst monsoons led to
                                                                      a sharp rise specifically affecting the profit margin in
    soaring food prices: In 2009 India faced one of the
                                                                      categories such as biscuits, snack foods,
    worst droughts in several decades. The 22% rainfall
                                                                      confectioneries, baby foods, health drinks, ready-to-
    deficit in the monsoon (which accounts for 4/5th of
                                                                      drink beverages and the like. Thus, margin contraction
    the annual rains) led the food grain output to decline
                                                                      has been noticed for food companies, such as GSK
    by 7% year on year (yoy) to 218 million tonne. This
                                                                      Consumer, Britannia Industries, Nestle (India) and Tata
    was specifically acute as the country’s population and
                                                                      Tea, that has sharply affected their bottom line
    per capita consumption are both on the rise. The prices
                                                                      performance.
    of food grains and other edibles (including vegetables
    and fruits) saw an alarming increase, causing food             FY2011—a good monsoon to help improve margins for
    inflation to rise at 15%+ levels over a long stretch of        some FMCG companies, maintain strong momentum
    time (- since November 2009 till date).                        in rural sales
    Farm incomes bolstered by high realisations of food            Lower input costs to propel profitability for a few FMCG
    articles: The high food inflation certainly affected the       companies: We believe lower costs of food articles should
    offtake of the consumer products (more pronounced              bring in a sigh of relief for manufacturers in food
    in the later half of FY2010) from the urban poor who           categories such as biscuits, snack foods, confectioneries,
    were the worst hit, as fooding took away the higher            baby foods, health drinks and ready-to-drink beverages.
    share of the wallet while the incomes suffered on              Thus, we believe companies such as Britannia Industries,
    account of the economic slowdown. However, rural               Nestle (India) and GSK Consumer are likely to be the key
    consumption got a boost with high realisations for the         beneficiaries of a normal monsoon from a sourcing
    farm output leading to increased net income of the             standpoint and would witness the easing of profitability



                                                 Sharekhan     7    June 11, 2010                          Home            Next
investor’s eye                                                                                                              sector update


pressures. Also, the other FMCG companies that have small              FMCG companies with a relatively higher proportion of
presence in food and beverages categories should benefit               their revenues coming from the rural markets, such as
though the benefit is likely to be much smaller (compared              Dabur India, would continue to derive a strong growth
to that for the companies mentioned above) since a small               from the hinterland. On the other hand, the others such
portion of their total revenues comes from these                       as Marico, Godrej Consumer Products, Colgate-Palmolive
categories.                                                            India and Hindustan Unilever, which are focusing on
                                                                       increasing their rural sales through increased rural reach/
Better income of farm households to keep rural
                                                                       better distribution, focused brand connect with rural
consumption growth ticking
                                                                       India, affordable price points and a strengthening rural
Monsoon rains are the main source of irrigation for                    product platform, should see a good growth coming from
approximately 23.5 crore farmers in the country. Thus,                 these markets.
the higher net income from farming following a good
monsoon and a sustained non-farm income from                           Company                                Rural sales as % of
employment schemes such as NREGA and increasing                                                                  domestic sales
infrastructure spend augur well for the disposable incomes             Hindustan Unilever                                     40
of the rural households. We believe the consumption                    Marico                                                 25
                                                                       Godrej Consumer                                        38
growth in rural India is, therefore, likely to remain strong.
                                                                       Dabur                                                  50
                                                                       Colgate                                                35

Increase in support prices of edible commodities
Commodity                         Variety                    MSP 2010-11                 CAGR crop year            2011 over 2010
                                                          (Rs per quintal)        2005-06 to 2010-11 (%)                       (%)
Kharif crops
Paddy                             Common                               1000                            11.9                    0.0
                                  Grade 'A'                            1030                            11.4                    0.0
Jowar                             Hybrid                                880                            10.9                    4.8
                                  Maldandi                              900                            12.8                    4.7
Bajra                                                                   880                            10.9                    4.8
Maize                                                                   880                            10.3                    4.8
Ragi                                                                    965                            12.9                    5.5
Arhar(tur)                                                             3000                            16.5                   30.4
Moong                                                                  3170                            15.8                   14.9
Urad                                                                   2900                            13.8                   15.1
Cotton                            F-414/H-777/J34                      2500                             7.3                    0.0
                                  H-4                                  3000                             8.7                    0.0
Groundnut in shell                                                     2300                             8.6                    9.5
Sunflower seed                                                         2350                             9.4                    6.1
Soyabeen                          Black                                1400                             9.2                    3.7
                                  Yellow                               1440                             7.4                    3.6
Sesamum                                                                2900                            13.3                    1.8
Nigerseed                                                              2450                            15.3                    1.9
Commodity                                                    MSP 2009-10                 CAGR crop year            2010 over 2009
                                                          (Rs per quintal)            2005-06 to 2009-10                       (%)
Rabi crops
Wheat                                                                  1100                            12.0                    1.9
Barley                                                                  750                             8.1                   10.3
Gram                                                                   1760                             5.2                    1.7
Masur (lentil)                                                         1870                             5.1                    0.0
Rapeseed/Mustard                                                       1830                             1.6                    0.0
Safflower                                                              1680                             1.8                    1.8



                        The author doesn’t hold any investment in any of the companies mentioned in the article.




                                                      Sharekhan    8     June 11, 2010                              Home             Next
investor’s eye                                                                                                                                                                                  viewpoint



 Strides Arcolab
 Viewpoint

 Growth at a faster pace                                                                                                                                                             CMP: Rs382


Domain play (sterile injectables)—receiving approvals                         Highest number of filings by Strides
on a fast track                                                                  50.0
                                                                                 45.0                          Oncology            Speciality
Strides Arcolab (Strides) has been receiving approvals on                        40.0
a fast track in CY2010, with eight abbreviated new drug                          35.0
application (ANDA) in the sterile injectable space getting                       30.0
                                                                                 25.0
approval in the last three months. With this quantum                             20.0
leap—only three sterile injectable approvals in CY2008                           15.0
to 23 approvals in the space in CY2010 till date—we                              10.0
                                                                                  5.0
believe that the company is well on track to achieve its                          0.0
guidance of developing around 120 products per annum                                           2006                    2007               2008                           2009           2010e
translating into 40+ filings for sterile generic products
                                                                              Highest number of sterile filings approved of Strides
for the next couple of years each, resulting into a robust
portfolio of more than 180+ products. Strides’ focus on                          16                                                                                       2007             2008
the sterile injectable space could be well supported by                          14
                                                                                 12
its collaboration with Pfizer for 40 generic injectables in                      10
the US market. The first product under this agreement is                          8
                                                                                  6
expected to be commercialised in CY2010.                                          4
                                                                                  2
Large number of ANDA filings awaiting monetisation                                0




                                                                                                                                              GeneraMedix




                                                                                                                                                                            Baxter
                                                                                        Teva




                                                                                                                         Hospira




                                                                                                                                                                                       Sandoz


                                                                                                                                                                                                  Orchid
                                                                                                Bedford labs




                                                                                                                                                            Sun pharma
                                                                                                                                    Strides
                                                                                                                 APP




                                                                                                                                    Akorn-
Strides currently has about 125 cumulative ANDA filings,
out of which 92 comprises sterile injectable products.
The company topped the listed of new ANDA flings by the
Indian companies in 2009 (filing 51 ANDAs in total, including
                                                                              Strides stands among the leaders in terms of ANDA
44 ANDA filings in the sterile injectable space). The
                                                                              filings
company’s cumulative ANDA approvals till date stand at
33. Further, it has invested aggressively in its manufacturing                The chart below clearly depicts that Strides now stands
infrastructure (capacity scaled up by 10x spread                              among the big league of pharmaceutical companies in
strategically across India, Poland and Brazil), which will                    terms of ANDA filings and this is impressive as the
adequately support the strong revenue growth in future.                       commercialisation of the same will result in strong
                                                                              revenues for the company.
Strides receives a slew of approvals from the USFDA in CY2010
Date                   Products approved                JV               Usage                                                                                                       Market
                                                                                                                                                                                 size ($mn)
Feb-10                 Labetalol HCL injection          Sagent           Blood pressure in hypertension                                                                                           -
Apr-10                 Granisetron HCL injection        Sagent           Prevent nausea and vomiting caused by chemotherapy                                                                      26
Apr-10                 Mesna Injection                  Sagent           Prophylactic agent in chemotherapy                                                                                      12
Apr-10                 Metoprolol Tartarate injection   Sagent           Acute myocardial infarction                                                                                             13
Apr-10                 Adenosine injection*             Sagent           -                                                                                                                      124
May-10                 Bacitracin injection             Sagent           Anti-infective                                                                                                          32
May-10                 Vecuronium Bromide               Akorn LLC        Anesthesia                                                                                                              10
Jun-10                 Fosphenytein sodium              Akorn LLC        Anti-apilepsy                                                                                                           60
* Tentative approval




                                                             Sharekhan    9      June 11, 2010                                                                       Home                             Next
investor’s eye                                                                                                                   viewpoint


Foraying in the big league                                             Strides appears to be an attractive investment in the near
  250.0                 ANDA Filed        ANDA approved                to medium term in the mid-cap pharmaceutical space
  200.0                                                                and we remain bullish on the company’s future growth
  150.0
                                                                       prospects. At the current market price of Rs382, the stock
                                                                       is available at 10.9x CY2010E and 7.5x CY2011E earnings.
  100.0

   50.0                                                                Valuation table

    0.0                                                                Particulars             CY07     CY08    CY09    CY10E    CY11E
            Sun     Aurobindo   Strides     Lupin    Dr Reddy          Net sales (Rs cr)       744.3 1020.3 1304.8      1786.8   2191.3
           pharma
                                                                       Net profit (Rs cr)       -50.1   108.0   109.7    154.8    226.5
                                                                       Adj. net profit (Rs cr) -123.0    19.3    63.5    159.8    231.5
Valuation and view
                                                                       Shares in issue (cr)       3.5     4.0     4.0      4.5      4.5
With a strong focus on the sterile injectable business,                Adjusted EPS (Rs)        -35.1     4.8    15.8     35.2     50.9
Strides has re-jigged its research and development                     Reported EPS (Rs)        -14.3    27.0    27.3     34.1     49.8
portfolio to move up the value chain. A faster slew of
                                                                       PER (x)                  -10.9    79.1    24.2     10.9      7.5
approvals re-imposes our confidence in the company’s
                                                                       EV/Ebidta (x)           -108.0    39.9    15.0      8.4      5.7
ability to monetise its hefty ANDA pipeline. The company
                                                                       Book value (Rs/share)    79.0    103.7   208.1    223.8    289.7
has been continuously reporting an improvement in its
                                                                       P/BV (x)                   4.8     3.7     1.8      1.7      1.3
performance at the operating level, which signifies the
                                                                       Mcap/sales                1.8      1.5     1.2      1.0      0.8
underlying strength of its fundamentals. Further, the
                                                                       ROCE (%)                  -2.1     7.1     7.6     10.9     12.9
multiple product launches from the new capacities and a
                                                                       RONW (%)                 -18.1    26.0    13.1     15.2     17.2
strong licensing income in the core specialties business
would provide a steady income.

We believe a focused approach towards oncology sterile
injectables will enable Strides to unlock value across
different divisions. Its de-leveraging balance sheet would
provide further impetus to its growth. In recognition of
the strong growth potential, we expect the company’s
                                                                         The author doesn’t hold any investment in any of the companies
earnings to grow at a compounded annual growth rate                                         mentioned in the article.
(CAGR) of 44% over CY2009-11E.




                                                      Sharekhan   10     June 11, 2010                             Home             Next
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