Summary
of Contents
SHAREKHAN SPECIAL
Q4FY2007 Pharma earnings preview
Key points
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We remain
positive on the Indian pharmaceutical sector on account of the
continued domestic growth, steady contributions from exports and
synergies arising out of integration of acquisitions. Further, the
increased focus on drug discovery and collaborative research with
the global players enhances the medium-term earnings visibility
for the sector.
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In line with
the business trend, the growth of the domestic market moderated to
around 9% in Q4FY2007 from over 15% in the previous couple of
quarters. But the ramp-up in the formulation export segment
continues to be robust and the successful integration of
acquisitions (viz Ranbaxy Laboratories' Terapia, Wockhardt's
Pinewood and Nicholas Piramal's Morpeth) would drive the revenue
growth for the sector. Further, Dr Reddy's Laboratories' 180-day
exclusivity for Ondansetron would also boost the overall industry
growth. We expect the pharmaceutical companies under our coverage
to report a revenue growth of 20.3% in Q4FY2007.
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With a greater
number of players entering the generic space in the USA and the
European Union, pricing pressures are likely to continue. But
thanks to the cost-cutting efforts, improvement in the product mix
and larger thrust on branded formulation business by the local
players, stable margins are likely to be ensured. The
pharmaceutical companies under our coverage are expected to report
a 420-basis-point expansion in the operating profit margin (OPM),
leading to a 30% growth in their net profit in Q4FY2007.
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Research and
development (R&D) was the highlight of the fourth quarter as
Indian pharma space witnessed impressive developments on the
R&D front. Sun Pharmaceuticals de-merged its R&D unit into
a separate entity called Sun Pharma Advance Research Company and
unveiled its new chemical entity (NCE)/novel drug delivery system
(NDDS) pipeline (comprising four NCEs and four NDDS). Alongside,
Ranbaxy Laboratories has expanded its collaborative research
partnership with GlaxoSmithKline Plc (GSK), as per which the
Indian company would identify the new chemical leads and take them
up to Phase-II proof of concept study. The Ranbaxy
Laboratories-GSK alliance would focus on therapies like
anti-infectives, metabolic disorders, respiratory and oncology. As
per the deal, Ranbaxy Laboratories could receive over $100 million
in potential milestone payments for a single product. We expect
further positive news flow on the innovative R&D front from
Lupin, Dr Reddy's Laboratories and Glenmark Pharmaceuticals in the
coming quarters, which would act as a strong growth trigger in the
medium to long term.
Q4FY2007
Banking earnings preview
We expect the interest income on advances in the
last quarter to show a strong growth on the back of above 28%
year-on-year (y-o-y) credit growth and the full impact of the hike
in the prime lending rates (PLRs) effected by the banks in the fag
end of December 2006 or early January as well as in mid-February
2007.
However, the cost of funds may have an upward
bias, thereby putting some pressure on the margins of the banks with
lower current and savings deposit account (CASA) balances as the
deposit costs, especially the bulk deposit rates, have moved up
sharply. However, the one-time cash reserve ratio (CRR) income that
banks are expected to get in this quarter with retrospective effect
should help them to tide over the increased deposit costs.
STOCK UPDATE
Tata Consultancy Services
Cluster:
Evergreen Recommendation: Buy Price target:
Rs1,508 Current market price: Rs1,285
Q4FY2007—fist cut
analysis
Result
highlight
-
Tata
Consultancy Services (TCS) has reported a growth of 5.9% quarter
on quarter (qoq) and 38.2% year on year (yoy) in its consolidated
revenues to Rs5,146.4 crore. The sequential revenue growth was
largely driven by a 6.42% growth in the volumes and a 1.33%
improvement in the billing rates and productivity. On the other
hand, the appreciation of the rupee adversely impacted the revenue
growth by 1.87% sequentially.
-
The earnings
before interest and tax (EBIT) margins declined by 47 basis points
to 25.6% sequentially, largely due to the adverse impact of the
appreciation in the rupee.
-
The other
income stood at Rs89.8 crore and included one-time extraordinary
income of Rs66.3 crore from the sale of stake in Sitel. Excluding
the one-time income (adjusted for tax), the consolidated earnings
have grown at a disappointing rate of 1.1% qoq to Rs1,116.8 crore,
which is much lower than the consensus estimates of around Rs1,185
crore.
-
In terms of
the outlook, the company reiterated that the demand environment
continues to be robust and it expects to maintain the margins in
FY2008 (at the level of 24.9% reported in FY2007). The company
doesn't give any specific growth guidance. However, it has
indicated that the gross employee addition would be higher than
32,500 reported in FY2007.
-
The key
operational highlights for Q4 are: addition of 43 clients; healthy
growth of 9.3% qoq in the Top 10 clients; closing of two large
deals worth over $50 million each and one deal worth $35 million;
attrition rate at a comfortable level of 10.6% and a slowdown in
banking, financial services and insurance (BFSI) and manufacturing
industry verticals.
-
Given the
lower-than-expected performance and the steep appreciation in the
rupee, we would review our FY2008 estimates and introduce the
FY2009 estimates in the detailed report. We maintain our Buy call
on the stock with a price target of
Rs1,508.
MUTUAL GAINS
Sharekhan's top equity fund picks
We have identified the best equity-oriented schemes available
in the market today based on the following 3 parameters: the past
performance as indicated by the returns, the Sharpe ratio and Fama
(net selectivity).
The past
performance is measured by the returns generated by the scheme.
Sharpe indicates risk-adjusted returns, giving the returns earned in
excess of the risk-free rate for each unit of the risk taken. The
Sharpe ratio is also indicative of the consistency of the returns as
it takes into account the volatility in the returns as measured by
the standard deviation.
FAMA measures the
returns generated through selectivity, ie the returns generated
because of the fund manager's ability to pick the right stocks. A
higher value of net selectivity is always preferred as it reflects
the stock picking ability of the fund manager.
MUTUAL
FUNDS: WHAT'S IN—WHAT'S OUT
Fund Analysis: April 2007
An analysis has
been undertaken on equity and mid-cap funds' portfolios, indicating
the favourite picks of fund managers for the month of March 2007.
Equity funds comprise of all diversified, index, sector and tax
planning funds, whereas mid-cap funds include a universe of 18 funds
such as Reliance Growth, Franklin India Prima Fund, HDFC Capital
Builder, Birla Mid-cap Fund etc.
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