10 August 2013

CLSA upgrades Cipla to OPF, Tgt 470 from 400

CLSA upgrades Cipla to OPF, Tgt 470Cipla 1QFY14 results were higher than expectations with net sales growth of
20%+ as both exports formulations (28% YoY) and domestic (17%) performed well. Notwithstanding sharp rise in staff costs (29% QoQ), Ebitda margins recovered 390bps QoQ but down YoY due to high margin product in the base. Milestone payment from partner Meda boosted other income resulting in substantial beat to our profit estimates. We have raised our estimates by 3-5% due to operational beat as well as inclusion of Medpro acquisition. With valuations at median level, we upgrade to O-PF. Target Rs 470 from Rs 400

MS : India Strategy : Whats Your Style?

MS : India Strategy : Whats Your Style?
 
Market Reverts to Quality
What's working? Quality is back to the fore. After losing ground to growth factors for a few months in 2013, ROE and FCF/sales are once again at the helm of affairs. ROE became the best style to pick stocks in July - high ROE companies delivered the best performance. Free cash flow was ranked next to ROE in terms of how its stock picking efficacy changed in July. In contrast, growth factors, notably EPS growth, lost ground. That said, EPS growth is still a better stock selection factor than revenue growth, implying that the market is still looking for stocks of companies with expanding margins.

The best three factors in July were ROE, high PB and high 12M performance - so the market is paying respect to quality, ignoring valuations and buying trailing winners. Beta remains the worst factor to pick stocks followed by debt-equity and 1-month performance. The appearance of 1M performance on this list of worst performing styles just backs up the change in style from growth to quality that happened in July.

The market, which was becoming pro-cyclical in 1H2013, is dithering on a growth recovery. We think this makes sense given the severe tightening initiated by the RBI in July. Over the past five years, the market has leaned towards quality (high ROE, low capex, high FCF and low financial gearing) followed by momentum and ownership. Value continues to be a losing style as it has been for the past five years. Low PE, low P/B and high yield are still losing money. Counter-consensus views appear to be gaining precedence in contrast to the market's preference for the consensus opinion over the past several months. Mega cap has been winning all along and we have not seen any perceptible shift in the market's choice for size.

Following the RBI policy change, we have shifted our style preference to defensive over cyclicals, quality over junk and growth over value. The risk to this view is that US labor data disappoints, prompting a reversal in RBI policy, an early general election pushes the market higher in anticipation of a polarized outcome, or India undertakes a large-scale global capital issuance.

Glenmark Pharmaceuticals (GLEN.NS): 1Q Miss, Steady Growth + NCE Option = OW :Morgan Stanley Research

Glenmark Pharmaceuticals (GLEN.NS): 1Q Miss, Steady Growth + NCE Option = OW :Morgan Stanley Research

Earnings growth momentum (18% two-year CAGR), driven by geographic diversification (India, US, Brazil, Russia), presence in faster-growing therapies (dermatology, cardio, respiratory), focus on niche in the US, and NCE/ NBE optionality drive our OW rating. PT raised to Rs617.

Management outlook: GNP retained its FY14 guidance of: 1) total sales growth of 20% and US at 18%; 2) core EBIDTA to be about Rs12.25bn; 3) R&D spend at 8-9% of sales; 4) net working capital days of 105-115 days (vs 115 days in F1Q14); 5) tax rate of 18%; and 6) tangible asset addition of Rs2.5bn and intangibles of Rs0.5-1.0bn (in-licensing of products). GNP expects to outperform the industry growth rates in EMs (India, Russia, Brazil) in the near term, but it highlighted key challenges in these markets, including delayed product approvals, unbranded generics and increasing government involvement in product pricing.

NCE/ NBE update: Clinical data (proof of concept) expected over the next 6-9 months for the following compounds: GRC 17536, GBR 500, GRC 15300 and GBR 900 (chronic pain - early read-through).

F1Q14 below expectation: GNP reported total revenues of Rs12.4bn, up 19% yoy (down 7.3% qoq), driven by US, India and RoW markets. Operating margins expanded 410bps yoy (90bps qoq), to 20%. These factors together led to Rs1.3bn in net profits, up 65% yoy (MTM losses in F1Q13) and down 23% qoq (lower taxes in F4Q13) - vs our Rs1.4bn forecast. Net debt as of June-2013 was Rs24.5bn (up Rs3bn qoq - translation effect).

Cummins India Ltd. (CUMM.NS): Remain UW Given Earnings Risk and Rich Valuation :Morgan Stanley Research

Cummins India Ltd. (CUMM.NS): Remain UW Given Earnings Risk and Rich Valuation  :Morgan Stanley Research

Cummins has underperformed Sensex by 25% YTD. Yet given the current macroclimate, we believe, the underperformance will continue. We like strong parentage and balance sheet, but cite muted domestic and global macro leading to weak revenue / earnings trend and rich valuation as reasons. UW.

Current macroclimate poses earnings risk: Muted domestic capex including muted commercial real estate construction and export demand risk (parent Cummins Inc expects 3% decline in C13 power segment revenue), poses earnings risk. While we expect flat revenues in F14e and 16% growth in F15e (factors cost led price rise in domestic power genset business), we see growth risk given CIL's business' exposure to macro.

F1Q14 earnings were weaker than expected: CIL reported 17% YoY revenue decline, which coupled with 230bps margin contraction led to 28% YoY EBITDA decline. Earnings decline was lower at 8% YoY, aided by sharp rise in other income.Management reduced F14e revenue guidance from 8-9% to flat (their base case). While it expects to maintain margins at F1Q14 levels, we see downside risk, if growth disappoints.

We cut our F14e and F15e EBITDA by 14% and 17% on the back of lower revenue growth and margins. Our EPS cut is lower at 8% and 11% in F14e and F15e given higher other income estimate. Our price target cut is higher as we move to probability weighted (15% to bear case now) vs. base case earlier, given earnings risk in current macroclimate. Our revised target of Rs358 implies 10% downside. Key risks: Better than expected revenue growth in domestic / export business and better margins.

Goldman Sachs, Zee Entertainment : Strong beat on lower sports loss; core business stable

Zee Entertainment Enterprises (ZEE.BO) Rs244.20

Strong beat on lower sports loss; core business stable News
Zee’s 1QFY14 EBITDA/PAT beat GSe by 15%/18% and Bloomberg
consensus by 13%/18% respectively. Revenues were largely in-line. PAT
beat was mainly due to lower than expected sports losses, that reduced
77% qoq, 55% yoy and were 73% below our estimates.
Results highlights: 1) Advertisement revenues grew 11% qoq (+19% yoy)
and were 12% above our estimates; Zee TV’s relative viewership share
remained largely stable at 18% (vs. 19% in 4QFY13). 2) Subscription
revenues, while up 17% yoy, were down 7% qoq (-7% vs. GSe), due to the
lumpy nature of content agreement finalization, in our view; 3) Core
EBITDA margin (adjusted for sports losses) improved 210 bps qoq and
came in at 35.1% higher than GSe of 33.6% mainly due to lower cost of
sales; 4) Even D&A was down 24% qoq (of low base).
Analysis
1) Zee’s healthy ad-revenue growth and stable share despite weakening
macro outlook and IPL series as revenues indicates a strong viewership
franchise and benefits of new content, in our view. 2) We now see potential
shrinking of consensus sports losses (modeling around Rs 870 mn, same
as last year) given materially lower sports losses in 1Q. This would likely
drive consensus upgrades for Zee, in our view; 3) International
subscription revenue growth disappointed with 6%/8% yoy/qoq decline
despite some INR depreciation benefits.
Implications
We maintain Neutral on Zee and put our estimates and target price under
review pending the conference call tomorrow (2:00 pm India time). We
continue to believe, among broadcasters, Zee remains a proxy for
digitization and expect increase in subscription revenue as revenues from
digitization start trickling-in in the coming quarters

Goldman Sachs, Larsen & Toubro : Macro catching up; still prefer the bellwether

Larsen & Toubro (LART.BO)
Buy Equity Research
Below expectations: Macro catching up; still prefer the bellwether
What surprised us
L&T reported 1Q14 stand-alone results with sales of c.Rs126bn (+5% yoy)
9%/7% below GS/Bloomberg consensus estimates. EBITDA margin of 8.5%
declined c.60bps yoy (120bps adjusted for forex) led by higher employee
expenses and unfavorable job mix in hydrocarbons. PAT of Rs7.6bn (-12%
yoy) also missed GS/consensus estimates by 17%/18% due to lower other
income. Order inflows at Rs252bn, however, exhibited strong growth
(+28% yoy), resulting in a strong order backlog of Rs1.65tn (+6% yoy). The
company kept its revenue growth guidance (+15-16%) and inflow (+20%)
unchanged, with a much improved 2H execution of current book.
What to do with the stock
With a persistently slow macro, tough credit, and a prolonged approval
cycle, execution pressure is visible in the results. Higher proportion of
overseas revenue at 26% and negative operating leverage due to
underutilization of resources has impacted margins. Given we expect such
conditions to continue in the short term, we take comfort from (1) L&T’s
order book coverage of 2.4X FY14E revenue, providing visibility on growth
(we estimate FY13-15E CAGR of 16%; (2) L&T’s strong balance sheet to
help provide stability to earnings vs. other more levered infrastructure
peers; and (3) benign raw material prices to support margins, especially in
overseas contracts. We adjust down our FY14-16E EPS by 6% on lower
growth from the Power segment and lower margins. Our 12-month SOTPbased target price thus falls to Rs1056 (from Rs1120), implying 17%
upside. The stock is trading at 15.2X and 2.1X 12m forward P/E and P/B, at
a 24% and 45% discount to its 7-year historical multiples. We view this as
attractive and maintain Buy. Key downside risks: Aggressive bidding,
longer-than-expected delay in order inflow pick-up, higher interest rates.

Godrej Consumer Products Limited (GOCP.NS): 1QF14: Strong Revenues; Earnings miss on higher A&P :Morgan Stanley Research

Godrej Consumer Products Limited (GOCP.NS): 1QF14: Strong Revenues; Earnings miss on higher A&P :Morgan Stanley Research

Quick Comment: GCPL reported Q1 revenue, operating profit and adjusted PAT growth of 24%, 11% and 5%, respectively, compared with our expectations of 20%, 17% and 19%. The highlight of the result is 430 bps gross margin expansion in the domestic business, driven largely by product mix improvement and lower palm derivative prices. Yet operating margins were down 50 bps on higher advertising and sales promotion (+480 bps).

Key Positives: 1) Strong domestic revenue growth of 19%, driven by hair color (32%), household insecticides (24%) and soaps (13%). 2) Consolidated gross margins expanded by 220 bps, led primarily by product mix improvement in the domestic business. 3) Strong local currency performance in the international business with LatAm (+31%), Africa (+58%) and Indonesia (+21%).

Key Negatives: GCPL reported consolidated operating profits 5% below estimates, led by higher staff costs (up 110bps) and advertisement expenses (up 270bps). According to management, Africa business margins (-570 bps) were affected by 1) store rationalization in Kinky and 2) depreciation of SAR against USD. In Indonesia, contract manufacturing of divested foods business at break-even margins and lag in price hikes to pass on ~58% increase in workers' wages affected margins (-260 bps).

Why EW: On the one hand, the recent launch of the hair color business has been very successful. This is a high-margin category that allows GCPL to reinvest part of the gross margin flexibility in driving volume growth in the domestic business. On the other hand, valuations are not favorable even for the strong growth franchisee that GCPL is. We remain particularly concerned about elevated earnings expectations amidst relatively low return ratios in the international business and higher volatility thereon.