Sharekhan Investor's Eye dated December 08, 2006

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Sunil

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Dec 8, 2006, 9:21:48 PM12/8/06
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Investor's Eye
[December 08, 2006] Please see the attachment for details
Summary of Contents

MARKET OUTLOOK

Booming economy keeps sentiments upbeat

Key points

  • We feel the government's improved performance so far in this fiscal has been partially overlooked by the market and the same could act as a catalyst for a rally in the stock market during the run-up to the Union Budget 2008.
  • In our last Market Outlook report dated October 06, 2006, we had stated that we expected an upgrade in the Sensex' earnings estimates going forward and we have witnessed an 11.4% earnings upgrade for FY2007E, in line with our expectations of a 10-15% earnings revision.
  • The domestic scenario remains upbeat: On a year-on-year (y-o-y) basis, the gross domestic product (GDP) has grown by 9.1% and the Index of Industrial Production (IIP) has risen by 10.9% in H1FY2007 with a strong growth of 12.1% in the manufacturing sector.
  • In Q3FY2007, no major surprises are expected on the earnings front. However since the Diwali festival fell in October in FY2007 and in November in FY2006, some purchases could have already got reflected in the higher Q2FY2007 numbers, especially for the automobile sector. Hence the y-o-y growth in the profits could be slightly muted for Q3FY2007 compared with that in Q2FY2007. 
  • US housing data continues to be weak; however the third quarter GDP numbers were better than expected. The huge inventory build-up is the main concern, which is feared to limit growth in the last quarter. The market is expecting the US Federal Reserve (Fed) to start cutting rates from March 2007 onwards. 
  • Normally, December is the year-ending month for most foreign investors, who prefer to allocate fresh funds from January onwards. However there has been a change in this pattern since FY2004 and we expect the foreign institutional investors (FIIs) to actively participate in the stock market during the run-up to the next year's budget. A study of the trend of FII activity in the Indian stock market over the past two fiscals reveals that 51% of the net investments for FY2005 and 50% of that for FY2006 were made between November and February. 
  • We continue to prefer domestic demand-driven stories like automobiles, banking, capital goods and cement.

STOCK UPDATE

Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs670
Current market price: Rs545

Price target revised to Rs670

Key points 

  • A strong thrust on the chronic therapy segments, a doubling of its field force and aggressive new product launches have enabled Lupin's domestic formulation business to grow at higher than industry growth rates. We estimate Lupin's domestic business to grow at a compounded annual growth rate (CAGR) of 22.5% over FY2006-08E, on the back of 15-20 new launches per year and an increase in the productivity of the field force.
  • We believe the US generics business will be the major growth driver for Lupin. Sizeable new product opportunities coupled with the sustained growth in existing products provide a strong visibility to Lupin's earnings from the US generics market. We have estimated revenues of $70 million in FY2007E and $130 million in FY2008E from the US generics business. Further, any Para IV wins will provide an upside to our estimates.
  • Lupin has recently started formulation exports to the European countries. Having already made 11 dossier filings in FY2006, the company plans to file 10-12 dossiers every year. We estimate Europe to add $3 million and $10 million in FY2007E and FY2008E respectively to Lupin's top line.
  • Lupin's anti-T business is primarily geared towards the domestic and semi-regulated markets. Being a leader in the anti-TB space, Lupin is extremely well positioned to capitalise on the resurgence of TB due to the increased incidence of AIDS worldwide (including in the advanced markets like the USA). Even though we have not factored in any upside from the TB opportunity in the regulated markets, we are positive on Lupin's prospects in this area.
  • The changing business mix, more focused towards advanced market formulations, coupled with the commissioning of the new finished dosages facility in the excise and tax-free state of Jammu is likely to cause Lupin's operating margins to improve. We believe that the margins will expand by 180 basis points over FY2006-08E.
  • Lupin has a robust pipeline of 4 new chemical entity (NCE) molecules, one of which has just completed Phase II trials and will shortly enter Phase III trials, two of which are in Phase II clinical trials and one in Phase I trials. Lupin's lead NCE, an anti-migraine molecule has received approval from the Drug Controller General of India (DCGI) for Phase III trials in India. The management has indicated that it may announce an out-liencing deal for the molecule. Any development in this regard will provide an upside to our estimates.
  • With the sustained growth in the domestic market, huge opportunities arising out of the increased incidence of HIV-related TB worldwide, strong visibility in US earnings from sizeable product opportunities and the ramp-up of the business in Europe and the other markets, we expect Lupin to deliver a strong performance over the next few years. To factor in the above, we have revised our revenue and earnings estimates for Lupin. We expect Lupin's net sales to grow at a CAGR of 25% over FY2006-08E and earnings to expand at a CAGR of 33.9% over the same period.
  • At the current market price of Rs545, Lupin is quoting at 14.7x its FY2008E earnings estimate, on a fully diluted basis. Keeping in mind the strong business fundamentals and growth potential of the company, we reiterate our Buy recommendation on Lupin, with a revised price target of Rs670. At our revised target price, the stock will discount its FY2008E earnings by 18x.   

 


ORG Informatics
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs190
Current market price: Rs173

$10mn raised through GDR issue
ORG Informatics has successfully raised $10 million through a global depository receipt (GDR) issue in the overseas markets. The issue has been priced at around Rs155 per share and would result in dilution of the equity base by 28.6 lakh shares. The company has also done a preferential issue of 6 lakh warrants to investors at an average price of Rs170 recently. Consequently, the fully diluted equity base would expand to Rs17.2 crore, up from Rs13.7 crore.

Regards,
The Sharekhan Research Team
myac...@sharekhan.com  

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