Summary
of Contents
STOCK UPDATE
Nicholas Piramal
India Cluster: Apple
Green Recommendation: Buy Price target: Rs325 Current
market price: Rs235
CRAMS to power revenues
Key points
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Several products of Nicholas Piramal
India Ltd (NPIL) are amongst the top brands across various
therapeutic segments. With its focus on building brands
rather than merely launching new products and initiatives to
expand and improve the productivity of its field force, NPIL
expects to outgrow the domestic market in the coming years.
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With six contract-manufacturing deals
under its belt, NPIL expects the custom manufacturing
business to be its growth driver in the coming years. The
company expects revenues of Rs60 crore in FY2007E and of
Rs140 crore in FY2008E from this business.
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Acquired in December 2005, Avecia
Pharmaceutical, UK has healthy gross margins but it is
making losses due to its high fixed costs. NPIL is currently
in the process of integrating Avecia into its operations and
is undertaking several initiatives to derive cost synergies
from Avecia. With these initiatives NPIL believes that
Avecia will break even by the end of FY2007 and start
contributing positively from FY2008.
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NPIL recently acquired one of Pfizer's
facilities at Morpeth, UK. The Morpeth facility is currently
being integrated with NPIL, following which NPIL plans to
scale up production at the unit to make use of the idle
capacity. The Morpeth unit current has EBIDTA margin of
around 15.5% and is currently earnings accretive for NPIL.
With a ramp-up in revenues, the management believes
Morpeth's margins would improve with the increased operating
leverage.
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With the Baddi facility going on stream,
the increased operating leverage derived from the higher
capacity utilisation at the Morpeth plant and the shift of
manufacturing of the inhalation anaesthetics to India, NPIl
expects its margins to improve significantly in the
future.
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To account for the delay in the ramp-up
of NPIL's contract-manufacturing business, the contribution
from the recently acquired the Morpeth facility and the
improved scenario in the domestic market, we are revising
our revenue and earnings estimates for FY2007 and FY2008.
Our revised earnings estimates stand at Rs10.7 per share for
FY2007 and Rs16 per share for FY2008. At the current market
price of Rs235, NPIL is discounting its FY2008 estimated
earnings by 14.7x. Considering the strong revenue flows and
enhanced profitability picture expected for the coming
years, we maintain our Buy recommendation on the stock, with
a price target of Rs325.
Aditya Birla
Nuvo Cluster: Apple
Green Recommendation: Buy Price target:
Rs1,280 Current market price: Rs1,100
A right(s) Idea
Key points
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Aditya Birla Nuvo (ABN) yesterday
announced the ratio and the price of its proposed rights
issue. The company plans to raise close to Rs780.0 crore
through the rights issue.
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It will issue two equity shares for every
17 equity shares held. The pricing of the ssue is
attractive as it is at a 28% discount to the stock's current
market price of Rs1,100.
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Over the last one month the stock has run
up by over 20% and breached our price target of Rs1,031.
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In view of the fact that ABN's leverage
after the rights issue will come down to more comfortable
levels and the continued stellar performance of the growth
business, we are revising our estimates and price target for
the stock.
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We continue to like ABN's strategy of
having twin motors of value creation: the value business and
the growth business. We believe that the cash flow from the
value business is being invested profitably in growth areas,
creating good value for the shareholders. We are revising
our price target to Rs1,280 due to the higher valuation that
we believe the telecom business ought to enjoy. In fact, the
telecom and insurance businesses together contribute 78% of
the old price target or roughly Rs1,018. This implies that
the investor is getting all the value businesses, the
business process outsourcing (BPO) and the garment business
for zilch.
HDFC
Bank Cluster:
Evergreen Recommendation: Buy Price target: Under
review Current market price: Rs1,105
Double advantage
Key points
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Leading banks caught in IPO scam:
In order to penalise errant banks caught in the initial
public offering (IPO) scam as well as to avoid such defaults
in future, the Reserve Bank of India (RBI) had decided
against granting fresh branch licences to the banks unless
it was convinced that the processes and checks were in
place.
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New branch licences a positive
development for HDFC Bank: The RBI has granted HDFC Bank
the permission to set up new branches and automated teller
machines (ATMs). The bank's current network comprises 535
branches and 1,323 ATMs as on September 30, 2006. Though the
exact number of new branches and ATM licences granted to the
bank are not yet known, we expect the same to be in the
range of 18-20% of its existing network.
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Branch licences remain crucial to
sustain margins: Although HDFC Bank didn't face any
significant pressure on its NIM due to the denial of new
branch licences by the apex bank, yet going forward the
absence of new branches and ATMs could have had a material
impact.
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Business mix and asset growth
maintained: HDFC Bank is predominantly a retail bank
with 70% of its business mix generated through retail
banking. Branch presence is crucial to execute retail
banking and hence banks need to open new branches in
potentially untapped areas to generate new business.
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Permission to open new demat accounts
a positive: HDFC Bank is a major player in the capital
market related business areas, be it loan against shares or
demat facility and advisory services. The bank has a very
high component of fee income in its total income and the
SEBI's recent permission to open new demat accounts would
help the bank to improve its fee income.
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Valuation: The RBI's permission to
set up new branches and SEBI's consent to open new demat
accounts are positive developments for the bank. Based on
the current market price of Rs1,105 the stock trades at
23.1x FY2008E earnings per share (EPS), 9.4x FY2008E
pre-provisioning profit (PPP) and 4.7x FY2008E book value.
Currently the price target for the bank is under review.
VIEWPOINT
Siemens
Results review Siemens
has announced its fourth quarter and full year results for the
financial year ended September 30, 2006. The company's
consolidated sales grew by a strong 65.8% to Rs6,032 crore
from Rs3,638 crore last year. The consolidated profits however
grew at a lower rate of 26.4% to Rs392 crore from Rs310 crore
last year. The profit growth was lower largely because of a
high raw material cost, the investments done in the year in
new ventures (such as transformers) and the subdued
performance of its subsidiaries, Siemens Information Systems
Ltd (SISL) and Siemens Public communication Networks Pvt Ltd
(SPCNL).
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