Showing posts with label RBS. Show all posts
Showing posts with label RBS. Show all posts
28 August 2014
24 July 2013
India Recent data releases – difficult times continue ::RBS
India
Recent data releases – difficult times continue
We had three important data releases last Friday – June CPI, June trade data and
May industrial production. Put together and similar to recent trends, these releases
painted a sombre picture for the economy. Our key observations are:
y Trends in exports and manufacturing output suggest that risks of full-year FY14 GDP
(fiscal year ending March 2014) growth falling short of 5% are rising.
y The recent moderation in retail price inflation has stalled. Though most likely a oneoff blip, it only adds to the RBI’s reluctance to cut rates aggressively.
y The trade deficit corrected impressively. Though it may be too early to arrive at a
firm conclusion, official measures to stop the frenzy of gold purchases may finally be
starting to bear fruit.
Industrial activity in May displayed its recent perfunctory weakness declining 1.6% yoy.
The weakness was broadbased encompassing both the mining and manufacturing
sectors. Manufacturing contracted 2% yoy, pulled down by dismal performance in the
capital goods and consumer durable sectors.
Prospects of even a moderate recovery in manufacturing have been complicated by
sluggish global domestic demand – exports fell 4.6% yoy in June. Exports had
contracted 1.1% yoy in May. Put together, the manufacturing and trade data validated
our long-standing view that none of the major components of aggregate growth are
holding up – consumption, investment and exports are all weak. In fact, these data
releases are raising the odds that full-year FY14 may fall short of 5%.
Recent data releases – difficult times continue
We had three important data releases last Friday – June CPI, June trade data and
May industrial production. Put together and similar to recent trends, these releases
painted a sombre picture for the economy. Our key observations are:
y Trends in exports and manufacturing output suggest that risks of full-year FY14 GDP
(fiscal year ending March 2014) growth falling short of 5% are rising.
y The recent moderation in retail price inflation has stalled. Though most likely a oneoff blip, it only adds to the RBI’s reluctance to cut rates aggressively.
y The trade deficit corrected impressively. Though it may be too early to arrive at a
firm conclusion, official measures to stop the frenzy of gold purchases may finally be
starting to bear fruit.
Industrial activity in May displayed its recent perfunctory weakness declining 1.6% yoy.
The weakness was broadbased encompassing both the mining and manufacturing
sectors. Manufacturing contracted 2% yoy, pulled down by dismal performance in the
capital goods and consumer durable sectors.
Prospects of even a moderate recovery in manufacturing have been complicated by
sluggish global domestic demand – exports fell 4.6% yoy in June. Exports had
contracted 1.1% yoy in May. Put together, the manufacturing and trade data validated
our long-standing view that none of the major components of aggregate growth are
holding up – consumption, investment and exports are all weak. In fact, these data
releases are raising the odds that full-year FY14 may fall short of 5%.
15 November 2011
Idea Cellular – 2QFY12 results beat estimates ::RBS
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2QFY12 EBITDA came in 8% higher than our estimate. Cost pressures in 2Q were absorbed by
higher-than-expected revenue growth of 2% qoq. The 4.1% qoq increase in RPM was a positive
surprise. We expect EBITDA growth to rebound in 2HFY12 led by higher RPM, minute growth
and a decline in churn. Maintain Buy.
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2QFY12 EBITDA came in 8% higher than our estimate. Cost pressures in 2Q were absorbed by
higher-than-expected revenue growth of 2% qoq. The 4.1% qoq increase in RPM was a positive
surprise. We expect EBITDA growth to rebound in 2HFY12 led by higher RPM, minute growth
and a decline in churn. Maintain Buy.
Polaris Software Lab – 2Q12: guidance raise is a positive ::RBS
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2Q12 US$ revenues grew 10.6% qoq, beating our forecast easily. Salary costs subdued margins
(-67bp qoq), driving operating profits in line with forecast. FY12 guidance raise on US$ topline by
2.3% and EPS by 3.2-5.0% implies good near-term prospects. Poor cash flow conversion is an
area of concern.
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2Q12 US$ revenues grew 10.6% qoq, beating our forecast easily. Salary costs subdued margins
(-67bp qoq), driving operating profits in line with forecast. FY12 guidance raise on US$ topline by
2.3% and EPS by 3.2-5.0% implies good near-term prospects. Poor cash flow conversion is an
area of concern.
Power Grid – Analyst meet highlights :: RBS
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PWGR’s capitalisation till October,2011 at Rs 51 bn gives us confidence that it will achieve our
projection of Rs 80 bn for FY12 with ease. Data shared on leasing of transmission towers to
telecom operators, capex, future ordering scenario, etc., points to strong growth/earnings
momentum ahead. BUY.
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PWGR’s capitalisation till October,2011 at Rs 51 bn gives us confidence that it will achieve our
projection of Rs 80 bn for FY12 with ease. Data shared on leasing of transmission towers to
telecom operators, capex, future ordering scenario, etc., points to strong growth/earnings
momentum ahead. BUY.
14 November 2011
JSW Steel – Robust 2Q12 earnings ::RBS
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JSW Steel's 2Q12 EBITDA of Rs12.96bn (+31% yoy and -7% qoq) was 29% above our
estimates. Management has lowered FY12 volume guidance to 7.8mt vs our estimate of 6.9mt.
Operational performance remains robust despite several adversities. Maintain Buy.
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JSW Steel's 2Q12 EBITDA of Rs12.96bn (+31% yoy and -7% qoq) was 29% above our
estimates. Management has lowered FY12 volume guidance to 7.8mt vs our estimate of 6.9mt.
Operational performance remains robust despite several adversities. Maintain Buy.
Asian Paints – Not as bad as it looks ::RBS
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AP's 330bps q.o.q drop in EBITDA margins was due to 1) translation impact of Rs150m due to
rupee depreciation on outstandings 2) increased pre-festival season spends on media in Q2FY12
vs in Q3FY11. Demand remains robust, and management seemed optimistic to recover lost
margins. We remain bullish.
Robust sales growth continues.
AP recorded a sales growth of 25.5% in Q2FY12, slightly lower than 28.9% recorded in
Q1FY12. The company indicated that it did not take any price hikes in Q2FY12, but had taken
an 8.8% hike in Q1FY12.
The growth has been wide-spread across India, except weakness in the State of Andhra
Pradesh due to ongoing potilical unrest.
The company indicated that delayed monsoons did impact its exterior paints business in
September, but for the same the growth could have been much higher.
Company did not take up prices in Q2FY12, as the rupee depreciation impact happened
suddenly in end September, and the delayed rains were also impacting volumes in certain
segments.
In its international business, while the overall growth was at 9%, the largest region of AP i.e
Middle East recorded just a 2% growth.
EBITDA margins drop seems transitionary
AP's EBITDA margins declined y.o.y by 430bps y.o.y and 330bps q.o.q, which resulted in the
EBITDA being 12% lower than our expectations.
The management in the analyst meet indicated that 2 key factors 1) Rs150m was the impact
of the sudden rupee deprecation in translating the outstandings due to suppliers as on
30/9/2011. 2) There has been a 390bps spike in other expenditure q.o.q basis, which they
highlighted was due to increased media spends on advertisements ahead of the festival
season. This was done largely in Q3FY11 last year, as compared to entirely in Q2FY12 in the
current year. While, they did not quantify, the impact of this could have been significant as
well. After one adjusts for both these factors, the EBITDA margin decline would not have
been beyond 100bps as compared to 330bps which is reported.
Management indicated that they had not taken any price hikes in Q2FY12, but did indicated
that they would consider future hikes to recover lost margins. They indicated that while rupee
depreciation is a concern as 30% of its raw materials is directly imported, the stabilisation in
the prices of most commodities is a good sign.
We remain positive on stock, buy on dips
The inherent drivers of paint demand remain intact, and we believe the secular growth driven
by re-painting demand, and increasing frequency of painting by Indian households will
continue.
The disappoinment in results was largely due to margins pressure, which we believe was due
to delayed pricing action which management has consiously taken due to tactical business
reasons.
The company PAT was broadly in line with our expectations in Q2FY12, due to dividend
income received from its overseas subsidiary.
The company has achieved an EPS of Rs48.3 in 1HFY12, as compared to Rs105.68 which is
our full year forecasts. We remain confident of the company achieving these numbers given
scope for better growth in the festival season in 2HFY12, and expected pricing action to
recover margin drop in Q2FY12.
We maintain our Buy recommendation, and recommend increasing exposure in any
weakness in the stock.
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AP's 330bps q.o.q drop in EBITDA margins was due to 1) translation impact of Rs150m due to
rupee depreciation on outstandings 2) increased pre-festival season spends on media in Q2FY12
vs in Q3FY11. Demand remains robust, and management seemed optimistic to recover lost
margins. We remain bullish.
Robust sales growth continues.
AP recorded a sales growth of 25.5% in Q2FY12, slightly lower than 28.9% recorded in
Q1FY12. The company indicated that it did not take any price hikes in Q2FY12, but had taken
an 8.8% hike in Q1FY12.
The growth has been wide-spread across India, except weakness in the State of Andhra
Pradesh due to ongoing potilical unrest.
The company indicated that delayed monsoons did impact its exterior paints business in
September, but for the same the growth could have been much higher.
Company did not take up prices in Q2FY12, as the rupee depreciation impact happened
suddenly in end September, and the delayed rains were also impacting volumes in certain
segments.
In its international business, while the overall growth was at 9%, the largest region of AP i.e
Middle East recorded just a 2% growth.
EBITDA margins drop seems transitionary
AP's EBITDA margins declined y.o.y by 430bps y.o.y and 330bps q.o.q, which resulted in the
EBITDA being 12% lower than our expectations.
The management in the analyst meet indicated that 2 key factors 1) Rs150m was the impact
of the sudden rupee deprecation in translating the outstandings due to suppliers as on
30/9/2011. 2) There has been a 390bps spike in other expenditure q.o.q basis, which they
highlighted was due to increased media spends on advertisements ahead of the festival
season. This was done largely in Q3FY11 last year, as compared to entirely in Q2FY12 in the
current year. While, they did not quantify, the impact of this could have been significant as
well. After one adjusts for both these factors, the EBITDA margin decline would not have
been beyond 100bps as compared to 330bps which is reported.
Management indicated that they had not taken any price hikes in Q2FY12, but did indicated
that they would consider future hikes to recover lost margins. They indicated that while rupee
depreciation is a concern as 30% of its raw materials is directly imported, the stabilisation in
the prices of most commodities is a good sign.
We remain positive on stock, buy on dips
The inherent drivers of paint demand remain intact, and we believe the secular growth driven
by re-painting demand, and increasing frequency of painting by Indian households will
continue.
The disappoinment in results was largely due to margins pressure, which we believe was due
to delayed pricing action which management has consiously taken due to tactical business
reasons.
The company PAT was broadly in line with our expectations in Q2FY12, due to dividend
income received from its overseas subsidiary.
The company has achieved an EPS of Rs48.3 in 1HFY12, as compared to Rs105.68 which is
our full year forecasts. We remain confident of the company achieving these numbers given
scope for better growth in the festival season in 2HFY12, and expected pricing action to
recover margin drop in Q2FY12.
We maintain our Buy recommendation, and recommend increasing exposure in any
weakness in the stock.
Hexaware Technologies – Another big leap ::RBS
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USD revenue growth of 5.3% qoq in 3Q11 (on base of cqoq growth of 8% in last four quarters)
and 345bp EBITDA margin improvement qoq (1,022bp yoy) support our view that Hexaware is an
emerging alternative for Fortune 1000 clients. A healthy cash position and dividend yield of 4%+
offer downside protection.
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USD revenue growth of 5.3% qoq in 3Q11 (on base of cqoq growth of 8% in last four quarters)
and 345bp EBITDA margin improvement qoq (1,022bp yoy) support our view that Hexaware is an
emerging alternative for Fortune 1000 clients. A healthy cash position and dividend yield of 4%+
offer downside protection.
ITC – Strong growth to sustain :: RBS
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Underlying volume growth remains healthy at 7-8% for 2QFY12. Despite the cigarette price hikes
to counter the VAT hikes in key states, weighted average price hike was below inflation, and
hence unlikely to impact volume momentum in our view. Other FMCG business shows improving
trend. Maintain Buy.
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Underlying volume growth remains healthy at 7-8% for 2QFY12. Despite the cigarette price hikes
to counter the VAT hikes in key states, weighted average price hike was below inflation, and
hence unlikely to impact volume momentum in our view. Other FMCG business shows improving
trend. Maintain Buy.
Cairn India – Brushing aside near-term negatives :: RBS
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2QFY12 results were in-line, but management disclosure of infrastructure constraints have led us
to cut our FY12-14 production estimates by 3%-11%. Notwithstanding the negative suprise, we
remain positive on the exploration prospects in Rajasthan. We roll forward and raise TP to Rs325.
Maintain Buy.
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2QFY12 results were in-line, but management disclosure of infrastructure constraints have led us
to cut our FY12-14 production estimates by 3%-11%. Notwithstanding the negative suprise, we
remain positive on the exploration prospects in Rajasthan. We roll forward and raise TP to Rs325.
Maintain Buy.
GAIL (India) – 2QFY12: in line with expectations :: RBS
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2QFY12 net profit of Rs10.9bn (+18% yoy) was in line with our estimates. With FY12 end gas
transmission capacity expected to be 220mmscmd, gas sourcing is likely to remain key longerterm
concern, given lack of clarity on growth in domestic gas supplies.
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2QFY12 net profit of Rs10.9bn (+18% yoy) was in line with our estimates. With FY12 end gas
transmission capacity expected to be 220mmscmd, gas sourcing is likely to remain key longerterm
concern, given lack of clarity on growth in domestic gas supplies.
13 November 2011
Sterlite Industries – 2Q12 Earnings miss expectations :: RBS
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Sterlite's cons. 2Q12 ebitda of Rs24.8bn (+68%yoy and -10%qoq) was 13% below our estimates.
Crucial decisions with respect to starting new capacities add to uncertainty over profitability as
cost dynamics have undergone a drastic change in recent weeks. Maintain BUY
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Sterlite's cons. 2Q12 ebitda of Rs24.8bn (+68%yoy and -10%qoq) was 13% below our estimates.
Crucial decisions with respect to starting new capacities add to uncertainty over profitability as
cost dynamics have undergone a drastic change in recent weeks. Maintain BUY
Grasim Industries – VSF business stabilises ::RBS
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Recovery in VSF sales volumes and stabilisation in VSF prices were the key highlights of 2Q12.
EBITDA in VSF business was ahead by 28%. At its current valuation of 4.9x EV/EBITDA, the
stock offers best risk reward. Maintain Buy.
Strong VSF performance led to greater than expected EBITDA growth
Consolidated net sales grew 27% yoy to Rs56.5bn in 2Q12, mainly due to strong growth in
the VSF and Cement businesses. Standalone net sales also grew at a robust 29% yoy to
Rs12bn in 2Q12 led by 27% growth in VSF and 60% growth in the Chemical business.
Consolidated EBITDA at Rs9bn (5.5% ahead of our expectation of Rs8.5bn) in 2Q12 grew
25% yoy. EBITDA margin contracted substantially 1085bps qoq to 16% in 2Q12 from 27% in
1Q12, primarily affected by 756bps qoq rise in raw material cost to sales (25.7% in 2Q12) and
236bps rise in other expenses to sales (16.5% in 2Q12).
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Recovery in VSF sales volumes and stabilisation in VSF prices were the key highlights of 2Q12.
EBITDA in VSF business was ahead by 28%. At its current valuation of 4.9x EV/EBITDA, the
stock offers best risk reward. Maintain Buy.
Strong VSF performance led to greater than expected EBITDA growth
Consolidated net sales grew 27% yoy to Rs56.5bn in 2Q12, mainly due to strong growth in
the VSF and Cement businesses. Standalone net sales also grew at a robust 29% yoy to
Rs12bn in 2Q12 led by 27% growth in VSF and 60% growth in the Chemical business.
Consolidated EBITDA at Rs9bn (5.5% ahead of our expectation of Rs8.5bn) in 2Q12 grew
25% yoy. EBITDA margin contracted substantially 1085bps qoq to 16% in 2Q12 from 27% in
1Q12, primarily affected by 756bps qoq rise in raw material cost to sales (25.7% in 2Q12) and
236bps rise in other expenses to sales (16.5% in 2Q12).
Hindustan Construction – Loss in seasonally weak quarter ::RBS
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In a seasonally weak 2Q, HCC recorded a large loss (Rs363m) with sales down 7% yoy. We
believe this is a short term trough and that the company will gradually recover amid macro
headwinds for the Infrastructure sector. A court decision on Lavasa in November could be a
positive trigger for the stock. Buy
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In a seasonally weak 2Q, HCC recorded a large loss (Rs363m) with sales down 7% yoy. We
believe this is a short term trough and that the company will gradually recover amid macro
headwinds for the Infrastructure sector. A court decision on Lavasa in November could be a
positive trigger for the stock. Buy
Axis Bank – Surprises positively ::RBS
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Axis Bank surprised positively on core earnings in 2QFY12, but higher delinquency and provision
on equity investments pulled down net profit. We expect margins to take a breather in 2H, but
business growth should ensure healthy core earnings, which will likely offset elevated credit
costs. Buy.
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Axis Bank surprised positively on core earnings in 2QFY12, but higher delinquency and provision
on equity investments pulled down net profit. We expect margins to take a breather in 2H, but
business growth should ensure healthy core earnings, which will likely offset elevated credit
costs. Buy.
Union Bank of India – Asset quality disappoints :: RBS
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Union Bank's 2QFY12 asset quality disappointed even though operating earnings were largely in
line with our expectations. In 1HFY12, net NPLs increased by Rs11.6bn versus PAT of Rs8.2bn.
Guidance for asset quality has been revised downward. Downgrade to Hold with new TP of
Rs230.
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Union Bank's 2QFY12 asset quality disappointed even though operating earnings were largely in
line with our expectations. In 1HFY12, net NPLs increased by Rs11.6bn versus PAT of Rs8.2bn.
Guidance for asset quality has been revised downward. Downgrade to Hold with new TP of
Rs230.
12 November 2011
Power Grid – Capitalisation gaining momentum ::RBS
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PWGR’s 2QFY12 adjusted profit at Rs7.8bn (up 31% yoy) was higher than our estimate of
Rs7.3bn, primarily on higher other income. In the quarter, PWGR capitalised ~Rs32bn worth of
assets, taking 1HFY12 capatilisation at ~Rs40bn, in line to achieve our estimate of Rs80bn for
FY12. Buy.
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PWGR’s 2QFY12 adjusted profit at Rs7.8bn (up 31% yoy) was higher than our estimate of
Rs7.3bn, primarily on higher other income. In the quarter, PWGR capitalised ~Rs32bn worth of
assets, taking 1HFY12 capatilisation at ~Rs40bn, in line to achieve our estimate of Rs80bn for
FY12. Buy.
United Phosphorus – On track with strong tailwind ::RBS
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UPL's 2Q revenue rose 41% and EBITDA 40% yoy, in line with our forecasts. Net income
was impacted by FX losses. We believe UPL will benefit from a strong tailwind in the global
crop protection business, while its valuation is factoring in too much risk. We adjust our
forecasts and target price but remain at Buy.
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UPL's 2Q revenue rose 41% and EBITDA 40% yoy, in line with our forecasts. Net income
was impacted by FX losses. We believe UPL will benefit from a strong tailwind in the global
crop protection business, while its valuation is factoring in too much risk. We adjust our
forecasts and target price but remain at Buy.
09 November 2011
Rallis India – 2Q impacted by fixed costs on Dahej ::RBS
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Rallis 2Q revenues grew 19%yoy to Rs4.36b and EBITDA grew 14%yoy to Rs1b, but higher
interest and depreciation charge (on Dahej start up) impacted net income with PAT up only
5%yoy to Rs619m. Debtors have jumped 80%yoy, which is surprising, and will likely be clarified
in analysts meet.
2Q operating performance good, but bottomline not so good
2Q revenue grew by 19%yoy to Rs4365m on standalone basis, implying strong revenue
growth in market and in company portfolio. Subsidiary Metahelix had little revenues this
quarter due to seasonal factors, and thus consolidated rev was also up 19%yoy
Standalone gross margin declined from 43% to 40%, possibly due to impact of rupee
depreciation on input costs. EBITDA margins declined 90bps to 23.1%, mitigated by lower
rise in other expenses.
Net interest costs are up from Rs(12)m in 2QFY11 to Rs26m in 2QFY12 due to higher
working capital debt and Dahej commissioning.
Depreciation up 75%yoy again due to full quarter impact of Dahej plant operations.
Metahelix had little revenue but all costs due to off season in seeds. So, consolidated net
income flat at Rs585m while standalone net income up 5%yoy to Rs619m.
Surprisingly debtors up 85%yoy
Consolidated debtors have jumped from Rs1.08b in 2QFY11 and Rs1.06b in FY11end to
Rs1.98b in 2QFY12. Rallis typically has been very tight on this metric and hence, it is a
negative unless there is some one off reason for the jump. We will clarify this in analyst meet
on Thursday.
Higher debtors has also increased debt levels by 50% vs FY11 end.
Key factors to watch
Dahej ramp up. How long will it take to cover up for fixed cost increase
Any change in company policy on debtors, working capital
We retain Buy and PT of Rs210.
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Rallis 2Q revenues grew 19%yoy to Rs4.36b and EBITDA grew 14%yoy to Rs1b, but higher
interest and depreciation charge (on Dahej start up) impacted net income with PAT up only
5%yoy to Rs619m. Debtors have jumped 80%yoy, which is surprising, and will likely be clarified
in analysts meet.
2Q operating performance good, but bottomline not so good
2Q revenue grew by 19%yoy to Rs4365m on standalone basis, implying strong revenue
growth in market and in company portfolio. Subsidiary Metahelix had little revenues this
quarter due to seasonal factors, and thus consolidated rev was also up 19%yoy
Standalone gross margin declined from 43% to 40%, possibly due to impact of rupee
depreciation on input costs. EBITDA margins declined 90bps to 23.1%, mitigated by lower
rise in other expenses.
Net interest costs are up from Rs(12)m in 2QFY11 to Rs26m in 2QFY12 due to higher
working capital debt and Dahej commissioning.
Depreciation up 75%yoy again due to full quarter impact of Dahej plant operations.
Metahelix had little revenue but all costs due to off season in seeds. So, consolidated net
income flat at Rs585m while standalone net income up 5%yoy to Rs619m.
Surprisingly debtors up 85%yoy
Consolidated debtors have jumped from Rs1.08b in 2QFY11 and Rs1.06b in FY11end to
Rs1.98b in 2QFY12. Rallis typically has been very tight on this metric and hence, it is a
negative unless there is some one off reason for the jump. We will clarify this in analyst meet
on Thursday.
Higher debtors has also increased debt levels by 50% vs FY11 end.
Key factors to watch
Dahej ramp up. How long will it take to cover up for fixed cost increase
Any change in company policy on debtors, working capital
We retain Buy and PT of Rs210.
08 November 2011
Sun Pharmaceutical – Sun offers to buyout Taro ::RBS
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Sun's offer to buyout remaining stake in Taro at US$ 24.5/share valuing Taro at US$1bn (valued
at 7.25x EV/EBITDA and 10x PE) is a positive in our view. Sun holds 66.3% stake in Taro at a
total investment of US$ 260m. We expect more value-accretive deals as Sun holds US$1bn in
cash and cash equivalents.
Sun offers to buyout remaining 33.7% stake in Taro - a positive
Sun Pharma has proposed to acquire all outstanding shares of Taro Pharma (Sun's
subsidiary) for a per share consideration of US$24.50 in cash representing a 26% premium
over the 17 October 2011 closing price of US$19.45 (post the offer, Taro's stock closed 23%
higher at US$24/share). This offer, however, is subject to the approval of Taro Board and
such other authorities as may be required and subject to completion of necessary
compliances/formalities as may be required.
Sun currently holds a 66.3% equity stake (with 77% voting rights) in Taro with a total
investment of US$260m till date (the company bought a 9.4% stake from Brandes
Investments Partners on 19 February 2008 for US$38m (valued at US$10.24/share) and a
12% stake from Templeton Asset Management on 1 November 2010 for US$82m (valued at
US$16/ share).
With Taro reporting US$106m of PAT in the last four quarters, Sun's offer values Taro at
US$1bn (at 7.25x EV/EBITDA and 10x PE).
While the offer seems lucrative for Sun, there are some hurdles
However, this has been objected by Grand Slam Master Fund, LTD (Grand Slam) which has
expressed its dissatisfaction with the offer by Sun Pharma as Taro has traded in the public
markets at a discount to its peers despite having strong free cash flows, great operating
margins and double digit revenue growth. This was caused by the Board's failure to have
Taro's shares trade on a nationally recognized exchange despite qualifying to do so. In no
way does the offer at a 23.80% premium to current share price fairly value the shares.
The fund believes a fair offer would be at a minimum of US$48.5 per share (which would be
valued at ~15x EV/EBITDA and ~20x PE) based on the deals happened in the past ranging
from 15x EBITDA on the low end to 24x on the upper end of the range.
Thus the fund believes that Sun's offer is at a healthy discount to the EV/EBITDA of Taro's
competitors despite the fact that Taro is growing more quickly and has higher margins than
these companies.
We expect more value-accretive deals
Sun made eight acquisitions in 1996-2001, but has made fewer since. The company raised
US$350m in 2004 to fuel further growth and made a few small acquisitions. However, we
believe, it could make no large acquisitions because of expensive valuations.
Sun acquired a controlling stake in Taro in September 2010 after three years of litigation. In
June 2011, it has acquired the 24.5% of Caraco that it did not previously own for US$46.8m
(or US$5.25/share), and now owns 100% of Caraco.
We believe Sun is now well positioned to make value-accretive deals, despite the ongoing
global slowdown, as the company has US$1bn in cash and cash equivalents.
Structurally well positioned; maintain Buy
Sun looks structurally well positioned for growth, as 83% of its revenues are from the US
(benefiting from a robust ANDA pipeline, improvement in Taro and a depreciating INR) and
India (above industry growth). Moreover, with US$1bn in cash, Sun looks well poised to
achieve value-accretive deals.
We value Sun’s core business at Rs518 (20.9x FY13F, at a 10% premium to the sector) and
one-offs at Rs7 (after a 20% execution discount) resulting in an SOTP-based TP of Rs525.
maintain Buy.
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Sun's offer to buyout remaining stake in Taro at US$ 24.5/share valuing Taro at US$1bn (valued
at 7.25x EV/EBITDA and 10x PE) is a positive in our view. Sun holds 66.3% stake in Taro at a
total investment of US$ 260m. We expect more value-accretive deals as Sun holds US$1bn in
cash and cash equivalents.
Sun offers to buyout remaining 33.7% stake in Taro - a positive
Sun Pharma has proposed to acquire all outstanding shares of Taro Pharma (Sun's
subsidiary) for a per share consideration of US$24.50 in cash representing a 26% premium
over the 17 October 2011 closing price of US$19.45 (post the offer, Taro's stock closed 23%
higher at US$24/share). This offer, however, is subject to the approval of Taro Board and
such other authorities as may be required and subject to completion of necessary
compliances/formalities as may be required.
Sun currently holds a 66.3% equity stake (with 77% voting rights) in Taro with a total
investment of US$260m till date (the company bought a 9.4% stake from Brandes
Investments Partners on 19 February 2008 for US$38m (valued at US$10.24/share) and a
12% stake from Templeton Asset Management on 1 November 2010 for US$82m (valued at
US$16/ share).
With Taro reporting US$106m of PAT in the last four quarters, Sun's offer values Taro at
US$1bn (at 7.25x EV/EBITDA and 10x PE).
While the offer seems lucrative for Sun, there are some hurdles
However, this has been objected by Grand Slam Master Fund, LTD (Grand Slam) which has
expressed its dissatisfaction with the offer by Sun Pharma as Taro has traded in the public
markets at a discount to its peers despite having strong free cash flows, great operating
margins and double digit revenue growth. This was caused by the Board's failure to have
Taro's shares trade on a nationally recognized exchange despite qualifying to do so. In no
way does the offer at a 23.80% premium to current share price fairly value the shares.
The fund believes a fair offer would be at a minimum of US$48.5 per share (which would be
valued at ~15x EV/EBITDA and ~20x PE) based on the deals happened in the past ranging
from 15x EBITDA on the low end to 24x on the upper end of the range.
Thus the fund believes that Sun's offer is at a healthy discount to the EV/EBITDA of Taro's
competitors despite the fact that Taro is growing more quickly and has higher margins than
these companies.
We expect more value-accretive deals
Sun made eight acquisitions in 1996-2001, but has made fewer since. The company raised
US$350m in 2004 to fuel further growth and made a few small acquisitions. However, we
believe, it could make no large acquisitions because of expensive valuations.
Sun acquired a controlling stake in Taro in September 2010 after three years of litigation. In
June 2011, it has acquired the 24.5% of Caraco that it did not previously own for US$46.8m
(or US$5.25/share), and now owns 100% of Caraco.
We believe Sun is now well positioned to make value-accretive deals, despite the ongoing
global slowdown, as the company has US$1bn in cash and cash equivalents.
Structurally well positioned; maintain Buy
Sun looks structurally well positioned for growth, as 83% of its revenues are from the US
(benefiting from a robust ANDA pipeline, improvement in Taro and a depreciating INR) and
India (above industry growth). Moreover, with US$1bn in cash, Sun looks well poised to
achieve value-accretive deals.
We value Sun’s core business at Rs518 (20.9x FY13F, at a 10% premium to the sector) and
one-offs at Rs7 (after a 20% execution discount) resulting in an SOTP-based TP of Rs525.
maintain Buy.
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