Summary
of Contents
MARKET OUTLOOK
Booming economy keeps
sentiments upbeat
Key points
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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.
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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.
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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.
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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.
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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.
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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.
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