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Cipla (Rupee bites, REDUCE): Cipla’s 2QFY11 topline at Rs16.2bn (+12% YoY) was in line with our estimate, but EBITDA at Rs3.5bn (-6% YoY) missed our estimates on significant contraction in margins. Fresh expenses from the newly commissioned Indore SEZ and an appreciating rupee were the main culprits for margin erosion. A pick-up in the domestic formulations business (up 21% YoY) was the key positive for the quarter. We lower our FY11-12 core earnings estimates by 5-7% to account for the lower margins, which we believe will stay. We retain REDUCE, with a price target of Rs328.
Ranbaxy (Unsustainable optimism, SELL): Ranbaxy reported 3QCY10 topline in line with our estimates, but 130bps lower margin led to EBITDA miss of 15%. While US and India did better than expected and other operating income came higher, poor performance across other segments muted the upside. Large other income (Rs3.3bn including forex gains of Rs2.6bn) and lower tax rate (12.5% vs 24%) led to net profit of Rs3.1bn beating our expectation by 300%; excluding other income, net profit is only Rs200m. Despite the potential for a near-term positive trigger – generic Aricept launch under exclusivity - we downgrade the stock to SELL from REDUCE, as we find optimism overdone and the valuations unjustifiable.
HDIL (In line results; concerns on cash-burn remain, ADD): HDIL’s revenues and PAT fell 17% QoQ and 9% QoQ, respectively in 2QFY11, in line with our estimates. TDR revenues fell to their lowest since 1QFY10, as weakness in volumes continued for the second consecutive quarter. Of the Rs50bn sales across its ongoing projects, HDIL has already received Rs10bn in customer advances, with the rest likely to accrue over the next 3-4 years. We remain concerned on continued sharp increase in HDIL’s working capital since entering the Mumbai Airport rehab project. Working capital has increased by Rs73bn over 1HFY08 to 1HFY11, funded by borrowings (Rs25bn) and equity issuances (Rs34bn). We retain ADD with a target price of Rs280/share.
Shree Cement (In-line 2QFY11 results; challenges persist, ADD):
- Shree Cement’s (SCL) net sales declined 20% YoY to Rs7.2bn and PAT declined 94% YoY to Rs180m in 2QFY11 (both in-line with our expectation). Volumes and realisation declined, as a heavy monsoon caused construction work to halt, and competition increased.
- Cement prices in the northern region have recovered in the past one month, as demand has improved on account of a post-monsoon pick-up in construction.
- However, power sale is likely to be lower than our earlier estimates, due to low offtake.
- We cut our FY11 EBITDA estimate by 10% to factor in lower power sales.
Dumb Commodities (In goods we trust): Now everybody knows that Robert Zoellick, President of the World Bank, is a gold bug and “the stupidest man alive”. That’s precisely a fate that Dumb Commodities is so scare of. To stay absolutely economically correct, we will indulge in gold-bashing in this issue: we explain China’s “goods standard” and why China is ideologically incapable of buying gold (but we standby our view on gold price, as our readers know it). Next, we discuss what’s the best trophy to award “the stupidest man alive”.
