10 January 2012

Automobiles: 3QFY12 results preview :: Kotak Securities

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Automobiles
India
3QFY12 results preview. We expect a strong quarter for auto companies driven by
strong revenue growth. We expect net profit to increase by 9% yoy and 21% qoq in
3QFY12E for the companies under our coverage universe. Hero Motocorp is likely to be
the best performer followed by Bajaj Auto, Tata Motors and Mahindra & Mahindra.
Maruti is likely to report a 61% yoy decline in net profits impacted by 28% yoy decline
in volumes and operating margin pressures.

Telecom: 3QFY12E preview – we expect a solid quarter for incumbents :: Kotak Securities

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Telecom
India
3QFY12E preview – we expect a solid quarter for incumbents. Return of volume
momentum and modest sequential RPM uptick should aid robust India wireless KPIs and
financials for the three listed Indian wireless names. Strong seasonality and currency
translation benefits are likely to drive particularly strong financial performance from
Bharti Africa. Forex losses will remain high given sharp Re depreciation. On balance,
3QFY12 should allay minutes growth/elasticity concerns in the Indian wireless market.
Regulatory environment remains an overhang. We remain positive on Bharti and Idea.

Macro & Markets - December chill sets in ::Edelweiss,

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Though incoming US macro data has been better than expected, hinting at a stronger Q4 GDP, it is too early to conclude that the US economy in 2012 will do distinctly better than 2011. Domestically, rapid decline in agri-inflation along with moderating core inflation will pave the way for monetary easing by RBI sooner than later. Meanwhile, Sensex recorded its first ever December decline in over a decade with defensive-cyclical divide clearly visible. The earnings profile continues to weaken with Q3FY12 coverage universe (ex-OMC) earnings expected to grow a paltry 2.1% YoY, the fourth consecutive quarter of sub-10% growth.

US economy: Finding its feet, but not yet on terra firma
Recent US economic data has been better than expected (non-farm payrolls, retail sales, ISM surveys etc.,) and definitely indicates stronger Q4 GDP growth compared to previous quarters. Yet, it may still be too early to conclude that the economy will make rapid strides in 2012. Households are still overleveraged, income growth remains subdued and duration of unemployment is at record high. Moreover, the external environment has deteriorated considerably. Indeed, leading indicators like ECRI are pointing towards weakness ahead.

Food for thought: Agri inflation plunges
Food inflation turned negative (-3.4% YoY) for week ending December 24 on account of fall in vegetable prices and high base effect. Meanwhile, non-food articles’ inflation also declined considerably reflecting high base effect and fall in cotton prices. Accordingly, primary articles’ inflation declined sharply and given its weight (20.12% in WPI) this will significantly impact monthly inflation number which we expect to be ~7.2-7.4% in December, down from ~9.1% in November.

Current account deficit: Widens on high gold, oil imports
Current Account Deficit (CAD) widened to 3.7% of GDP in Q2FY12 against ~3.5% of GDP in Q1FY12, due to rise in imports of oil and gold. On capital account, net inflows were just enough to fund the CAD with primary support from debt-related flows. Going ahead, REER depreciation, slower non-oil imports and stronger NRI remittances should help trim CAD, although capital flows outlook has also weakened in recent months.

December dip: Worst in a decade; earnings trajectory also slumps
Markets plunged in December, first in over 15 years, recording its second worst yearly returns ever. Defensive-cyclical divide was clearly visible amidst heightened risk aversion globally. The generally weak macro-outlook has contributed to the sharp downgrade in earnings trajectory with FY12 and FY13 earnings downgraded by 10-12% since April 2011.  Further, we expect earnings growth in Q3FY12 to remain tepid with 2.1% earnings growth YoY for Edelweiss coverage universe (ex-OMCs), the fourth consecutive quarter of slow growth.


Automobiles: Discretionary consumer spends slowing down :: Kotak Securities

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Automobiles
India
Discretionary consumer spends slowing down. December auto volumes reflected
weak consumer discretionary spends in both rural and urban markets. Two-wheelers,
MHCV, tractor and passenger car volumes were below our expectations while utility
vehicle and LCV volumes exceeded our expectations. We advise investors to remain
selective in the sector as macro economic outlook is not conducive for significant
increase in consumer discretionary spends.

LUPIN:: 3QFY12 preview :: Nomura research

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US: Growth rate to accelerate to some extent compared to earlier four quarters
In the US, we expect the y-y growth rate to accelerate to 21%. The prescription trend as
reported by IMS indicate volume growth in the range of 10-15% currently, compared with
>40% growth recorded earlier.
Key launches/approvals during the quarter include Femcon Fe, Keppra Oral Solution and
LoSeasonique (June 2011). The competition in Tramadol and Keppra XR are relatively
low; however, we expect contribution in the quarter to be limited.
The price decline in Lotrel has been a drag on the overall growth rate. For instance, in
2QFY12, management indicated that US generic business growth was at 14%, but
excluding the impact of price decline in Lotrel growth would have been at 30%. Lotrel
had started to see additional competition and price decline since 3QFY11. Therefore, we
believe the adverse base will start to ease to an extent from this quarter.
India growth to benefit from chronic segment and addition of Eli Lilly’s Insulin
franchise
We expect Lupin to record 23% growth in India. Excluding the INR270mn contribution
from Insulin sales during the quarter, we project growth at 16%. Overall net sales growth
is projected at 15%. Lupin is likely to consolidate I'Rom financials for ~15 days during the
quarter.
Marginal improvement in EBITDA margins q-q built in
Over the last seven quarters, EBITDA has been in the narrow range of INR2.9-3.1bn (ex
licensing income). We expect EBITDA to be marginally higher than this historical range
at INR 3.2bn. We project EBITDA margin at 17.2%, compared to 16.7% (ex-licensing
income) recorded in 2QFY12 and 17.2% in 3QFY11.

Automobiles - Auto Expo: Two wheelers, SUVs steal the show; sector update ::Edelweiss,

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We attended the Auto Expo, the largest automotive show in India, held in Delhi from January 5-6. Our key observations were: (1) lack of new launches in cars as has been the case in the past two editions; (2) car makers are targeting new segment compact SUV where Maruti has taken the lead; and (3) competitive intensity is set to increase in the two-wheeler space.

Cars: Lacked excitement
Nano was the star in 2008 whilst various new small cars from global car makers, eying entry into the Indian small car space, were exhibited in the 2010 edition of the Auto Expo. The current edition (eleventh) saw the debut of only Renault Pulse. The receding competitive intensity augurs well for Maruti Suzuki (MSIL).

Compact SUV: The new frontier
Through compact SUV, car makers are targeting compact car owners looking to upgrade to sedans. Thus, focus is on interior space, styling and mileage. MSIL has taken the lead with Ertiga, a seven seater 1.4 litre petrol and 1.3 litre diesel urban SUV. Renault unveiled 1.5 litre diesel engine powered SUV Duster. Also, Ford and MSIL showcased their concepts for future SUV products. Mahindra & Mahindra (M&M) is also working on Xylocompact. In our view, this should create a new segment and not cannibalize existing SUV sales given the different value proposition in terms of power and pricing.

Two wheelers: Competition set to heat up
Honda unveiled its new mass market offering Dream Yuga. It comes with 110cc engine and is likely to be priced at around INR46,000 (ex-showroom Delhi). It should compete with Hero Motocorp’s 100 cc bike Passion Pro which is similarly priced. The scooters segment is likely to see the maximum launches with Suzuki, Yamaha, Honda, Hero and Vespa showcasing their new offerings. 

Commercial vehicles: Bajaj and Daimler steal the show
Bajaj RE60 generated maximum interest in the commercial vehicles space where the company is looking to upgrade existing three-wheeler owners by relying on higher mileage and government support. Daimler also unveiled its products which it intends to launch in Q2FY13.

To conclude: Auto expo indicates that competitive intensity is increasing across product categories, which is good for consumers, though, not necessarily for investors. Two wheelers are likely to see maximum launches whilst cars the least. Hence, pricing discipline hitherto observed in two wheelers may come under pressure. The passenger vehicle market is likely to expand with the new compact SUV segment.


RANBAXY :: 3QFY12 preview :: Nomura research

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Expect exclusive Lipitor launch to drive growth
We expect Ranbaxy to deliver 58% revenue growth y-y; this includes expected revenues
from the exclusive Lipitor launch in US. Lipitor’s US launch is a significantly large
variable and in our estimates, we are factoring in revenues of USD200mn from Lipitor
and authorized generic of Caduet.
Building in some growth revival in domestic business
Growth in the domestic market has been below our expectations in single digits, in the
recent past. A slowdown in anti-infectives has been one key reason for the slowdown, in
our view. However, we have seen a moderate recovery in growth for anti infectives and
gastro intestinal segments in 3QFY12. Thus, we are factoring in marginal acceleration to
10% y-y growth in 4QCY11.
Lipitor gains and INR depreciation help boost EBITDA estimates
We are factoring in ~75% gross margin for Lipitor (assuming profit sharing with Teva)
and 30% gross margin for Caduet. We estimate these two products to contribute INR
7.35bn to EBITDA. Excluding this, the EBITDA estimates stands at INR 2.40bn, higher
than ~INR 1.5bn (ex higher other income) recorded in the previous quarter. We believe
at the core EBITDA level Ranbaxy will gain from INR depreciation against export
currencies.
Forex losses and provisioning of DoJ penalty could suppress earnings for the
quarter
We factor in INR4bn loss on account of MTM losses on forex derivative and INR 2.5bn
on forex loans. The losses are in line with the quantum recorded in 3QCY11. Further, we
have provisioned a charge of USD500mn during the current quarter into our estimates.
Alternatively, Ranbaxy may provide for the same as contingent liability. Excluding these
losses, we estimate that the company will record a profit of INR7.63bn for the quarter.

Media - Jagran set to UP tempo; sector update:: Edelweiss,

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With assembly elections set to be held in five states—Uttar Pradesh (UP), Uttarakhand, Punjab, Goa and Manipur—in Q4FY12, we expect political parties’ election related ad expenses to enhance ad revenues of some print media companies especially Jagran Prakashan (JPL). Unlike Bihar elections which had a single strong contender, the latest UP elections are expected to be keenly contested due to a four-horse race, which will pump up ad expenses. Given the current slowdown in the ad environment, elections in the five states will give some respite to print companies present in these states. We expect JPL to add ~INR150-180mn additional revenue because of the elections. We remain positive on JPL due to its significant presence in Uttar Pradesh and Uttarakhand.

Political parties partial to propaganda in print media
Print media remains the primary spending medium for political parties, followed by television and radio. Congress, BJP, BSP and SP are known to focus on print media for election advertising. For regional elections, print and radio have been extensively used earlier, whereas TV is more of a national medium. Typically, parties are charged more than twice the normal advertising rate. Though, government ad expenditure is not allowed post declaration of poll dates, the positive impact of ad revenues from political parties will lessen the negative impact of lack of government expenditure. However, we believe given the softness in the ad environment, print companies will look forward to the additional revenue and will be willing to accept ads at competitive prices.

Keenly contested elections to spur publicity expenses
Unlike the Bihar elections, which had a single strong contender, the latest UP elections are expected to be keenly contested due to a four-horse race, which will pump up publicity expenses of political parties. Out of the five states going to polls, UP will see the maximum ad expenses due to its huge territory and political significance. The 2007 elections in Punjab, Manipur, UP, Uttarakhand and Goa had resulted in ad spends of ~INR1,154mn by political parties. With inflation and expectations of a keenly contested election, we anticipate ad spends to cross INR2,000mn this time around. However, due to the ongoing economic slowdown, political parties will aim to squeeze ad rates, which may provide a downside risk to our estimates.

Jagran Prakashan to be prime beneficiary amongst listed players
As per IRSQ32011, Jagran Prakashan maintains the numero uno status in UP, the state which will see the maximum ad spends by political parties. In comparison, Uttarakhand and Punjab are likely to be much smaller markets. The paper is second in terms of Average Issue Readership (AIR) in Uttarakhand and fifth in Punjab. We expect it to add ~INR150-180mn revenues (net of negative impact of lack of government expenditure) from UP elections. In the previous UP elections in 2007, Jagran Prakashan had pocketed net revenue of ~INR70mn.


JUBILANT LIFESCIENCES:: 3QFY12 preview :: Nomura research

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Currency depreciation, Cadista, Neutraceuticals and API to drive growth
On the positive side, we believe JOL's performance in the quarter will be assisted by
currency depreciation and some pickup in neutraceuticals and API sales (sartans).
However, we expect some sequential moderation in Cadista performance and Lipitor
formulation contract for Japan. We understand JOL has extended the contract that will
restart the Japan Lipitor generic contract again from 4QFY12. In 2QFY12, the generics
business performance was largely driven by Cadista, which benefited from higher prices
in specific products like Methylprednisolone. Methylprednisolone tablet sales for Cadista
increased by USD18mn q-q in 2QFY12. Our interaction with the management suggests
that for the generic segment there could be some slowdown sequentially, but y-y growth
is likely to remain robust. We factor in 25% y-y growth in revenues.
Building in some moderations in margins q-q
In 2QFY12, JOL reported its highest-ever EBITDA, largely driven by strong performance
at Cadista, in our view. Cadista EBITDA improved by almost USD15mn in 2QFY12 q-q,
in our view. As we factor in some sequential drop in Cadista performance, we project
EBITDA margin at 20.6% compared to 22.7% in 2QFY12, but is significantly higher than
15% recorded in the year ago period. We have factored in INR650mn in forex losses, in
line with what was reported in the previous quarter. However, the reported losses could
be lower if company decides to implement the new rule 46A, which allows companies to
amortise losses over March 2020. As per the company in September 2011, foreign debt
was ~USD540mn (including FCCB), or 85% of the outstanding gross debt.

GLENMARK:: 3QFY12 preview :: Nomura research

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Expect some moderation in growth in domestic market on large base
We expect Glenmark to report 17% y-y growth in domestic formulation sales. This is
slower than ~20% growth recorded in the past two quarters. Our projection is in line with
management guidance of a slowdown in 2HFY12. The slowdown is expected on back of
very high base of 29.7% growth recorded in 3QFY11. However, AIOCD AWACS data
suggests strong growth of 22.2% and 28.6%, respectively, in October and November
2011.
US growth likely to remain strong on back of new launches, currency depreciation
We expect GNP to continue to record strong sales growth in the US on the back of new
launches. Some of the key launches in the recent past include Malarone, Levocetirizine,
Felodipine and oral contraceptives (OCs). Malarone is launched under exclusivity and
there are no authorized generics at this stage. There is unlikely to be any additional
competition in the foreseeable future, in our view. Glenmark has already gained 78%
market share in this product and a full quarter impact will be realised in the current
quarter. We are factoring in 67% growth rate in the US.
We keep EBITDA margin ex licensing income at 2QFY12 levels
Malarone contribution and currency depreciation should assist expansion of core
EBITDA margins (ex licensing income). However, this may be negated by higher costs,
particularly an increase in R&D expenditure. We note that the management has slightly
reduced core EBITDA margin guidance to 21-22% for FY12 from 22-23% earlier. For
3QFY12, we project core EBITDA margin at 20.7% compared to 20.5% in 2QFY12.
During the quarter, we estimate that Glenmark will book USD5mn in licensing fees
related to the successful completion of Phase I trials for GRC 15300. We also factor in
INR850mn in forex loss on forex loans, similar to what was reported in the previous
quarter.
We note that y-y numbers are not comparable as 3QFY11 financials were in Indian
GAAP and 3QFY12 financials are projected as per IFRS.

CIPLA:: 3QFY12 preview :: Nomura research

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3QFY12F domestic formulation growth at 13% y-y
We project domestic sales growth of 13% y-y for 3QFY12. As per AIOCD AWACS data,
there are some signs of revival in domestic sales growth for Cipla as October-November
2011 sales growth was largely in line with the broader market at ~14%. A pickup in the
anti infective and gastro-intestinal segments is positive for Cipla, in our view. Cipla’s
presence in the hospital segment and unbranded generics (18-20% of sales) has been
volatile in the past and presents some uncertainties to growth estimates, in our view.
Expect Cipla to be a big beneficiary of INR depreciation
The export growth for Cipla is likely to be very robust during the quarter. This is on
account of 1) significant currency depreciation and 2) a low base in 3QFY11. The
average INR/USD rate in 3QFY12 has been 51.13, its highest ever and compares to
45.78 recorded in the previous quarter. Assuming similar export volumes as in the
previous quarter and the ramp up in Indore SEZ to continue, we forecast 30% (y-y)
export growth.
INR depreciation is positive for margins
We believe Cipla will be a beneficiary of INR depreciation against export currencies
primarily as its costs are largely in INR terms. For cash flow hedging, we understand that
the company takes hedging contracts month to month and doesn't have long-term
hedges. We have assumed other operating income at levels similar to 2QFY12, building
in similar quantum of forex gains.

Wendt (India) - Buy :: Business Line

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Abrasives and precision component maker Wendt India displays characteristics not typical of small-sized companies. The company is almost free of debt, cash-rich and pays high dividends consistently.
Above all, it expanded its earnings 23 per cent compounded annually over what can be considered as among the most turbulent three years for capital goods companies. Sound technology obtained from its German parent, dominant position in the growing domestic super abrasive market and the few organised players in India in this segment strengthen the prospects of this niche player.
Investors can consider limited exposure to the stock of Wendt India. At the current market price of Rs 1,400, the stock trades at 10 times its expected consolidated per share earnings for FY-13. While there are no strict comparisons, it is at a discount to larger peers such as Grindwell Norton. The stock does not enjoy high trading volumes and can best be transacted in small quantities.
While we are sanguine about the company's long-term prospects, any attractive open offer from its parent or a move to delist the company may call for a review, based on the offer price.

DOMINANT POSITION

Wendt India makes super abrasives. While conventional abrasives can also be used for grinding or polishing work, super abrasives, made from industrial and synthetic diamonds with cubic boron nitride , derive extreme hardness. This provides them longer life and ‘super' performance.
Industries such as automobile, construction, aerospace, fabrication and other engineering segments have been slowly shifting from conventional abrasives to super abrasives to achieve precision in their cutting tools and other components. This has been the main driver of business for Wendt India.
The company enjoys sole vendor status with many clients and, thus, high pricing power. Grindwell Norton has a smaller presence in the super abrasives segments.
Bosch, Hero Motors and SKF India are some of Wendt India's large clients. Super abrasives account close to 65 per cent of the company's revenues. With a 25 per cent segment profit margin, this business can be expected to drive revenues, thanks to the scarcity premium that super abrasives enjoy locally. Competitive pressures can be expected to be minimal unless domestic companies resort to technology tie-ups.
To ensure that the company does not become too dependent on the super abrasives business, Wendt India has renewed its focus on one other segment, grinding machines and precision components. These components are used in almost all manufacturing units. Once again, given the high technology involved, much of these are imported, if the user is particular on quality.

PRICE-CONSCIOUS APPROACH

Besides the usual consumers from sectors such as auto, steel and so on, the above segment has been making inroads in gaining customers in railways, infrastructure, and oil and gas.
This segment enjoyed profit margins of 32 per cent for the half-year ended September 2011. However, the margin is lower than the 37 per cent enjoyed a year ago. The company appears to be adopting a more price-conscious approach, unlike quite a few foreign-parent backed firms that are stiff on the pricing front. This strategy may help the segment remain competitive in the ASEAN markets, which Wendt India focuses on.
Wendt India imports over 50 per cent of its raw materials and is, therefore, exposed to currency fluctuations, especially during periods of rupee depreciation. However, this is partly hedged by its export revenue which account for a fifth of sales.
The company expanded consolidated sales by 16 per cent annually to Rs 92 crore in FY-11, while net profits grew 23 per cent to Rs 17 crore. It has been consistently paying high dividends and currently has a dividend yield of 2.4 per cent, higher than the blue-chip Nifty companies. Its promoter's parent — Winterthur — was recently bought by 3M Corp of the US. A recent open offer attempt by 3M was contested by Wendt's other promoter, Carborundum Universal, which has stated that it has the right of first refusal. The matter is with the Company Law Board and the offer postponed indefinitely.

10- Jan: Morning News (click on link to read article) ::IFCI research,

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Morning News (click on link to read article)
Economic Times

Business Standard

 Business Line
Mint

Financial Express

Financial Chronicle

   (Click on link to view article)

Thanks and Regards
IFIN: IFCI Financial Services Limited

10 Jan: Watch Nifty ØIFCI research

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Watch Nifty
Ø  Nifty continues to consolidate in a very narrow range making an intraday high/low of 4758.70/4695.45 to close at 4742.80. 
Ø  On the daily chart the near term consolidating trend depicts a range of 4680 to 4790 with a negative bias. In the short term, the present trading band is expected to stay good unless breakout on either side takes place. Only if nifty sustain above the resistance levels of 4840 on the upside short term buying can be expected. Above 4840 levels of 4875/4910 can be seen. On the downside, if nifty breached the support level of 4680/4670, levels of 4645/4610 can be expected.

Have strict stop losses

SUN PHARMA:: 3QFY12 preview :: Nomura research

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Ex contract manufacturing, we expect domestic formulation growth at 20%
We expect Sun Pharma to sustain growth ahead of the industry average in the domestic
market. As per AIOCD AWACS data, Sun recorded 25-29% y-y growth in October-
November 2011, substantially higher than the broader market growth rate of 14-15% in
this period. Note that the company had discontinued its contract manufacturing business
during 1QFY12, which was earlier reported under domestic formulation. Excluding the
contract manufacturing business, which contributed INR140mn in 3QFY11, we project
net sales growth of 20% y-y for 3QFY12. Including the loss in contract manufacturing
revenues, we estimate domestic formulation growth of 17%.
Taro sales likely to remain robust on higher pricing opportunity; we build in some
decline q-q
In the US, some of the recent approvals for SUNP include Diltiazem and Tramadol. We
expect sequential growth of USD9mn in the non-Taro business on back of growth in
older products and new launches. As per the IMS data released so far, SUNP gained
20% market share in Uroxatral in November 2011, which was launched under shared
exclusivity. Taro recorded strong USD27mn sequential increase in sales in 2QFY12. The
increase was largely driven by price increases. As per management, the increase is not
likely to sustain over the long term. We have factored in some moderation in Taro's
estimate, as we factor in revenue of USD125m vs USD138m in the previous quarter.
Margins to remain robust on favourable inventory valuation on currency
movement and higher other income
We expect overall revenue growth at 24% y-y in 3QFY12. Excluding Taro, sales are
likely to grow at 21% y-y. SUNP’s gross margin has been volatile in the past. The
company revalues foreign inventory on period-ending exchange rates, and that has an
impact on the gross margin, in our view. The depreciation of INR inflates inventory value
in INR terms and to that extent positively impacts gross margins. Given the similar level
of depreciation in INR against the USD, in 2Q and 3QFY12, we build in material cost at
20.5% of sales, at same level as in the previous quarter. We note that this accounting is
very different from what is presented by most other companies, who value inventory at
historical costs. We project EBITDA growth at 76%, significantly ahead of the revenue
growth rate at 24.1%. We project other income at lower than in 2QFY12 as we don't
build in forex gains recorded by Taro in the previous quarter. Our tax rate estimate is 9%
in 3QFY12.

GSK Pharma, :: 3QFY12 preview :: Nomura research

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Expect growth to accelerate in 4QCY11 on very low growth recorded in the
previous quarter
We note that the December quarter is seasonally the weakest quarter for the company.
We pencil in 11.5% y-y growth in net sales for Glaxo in 4QCY11. This follows a very
weak 4.4% growth y-y recorded in 3QCY11, the lowest in the past 14 quarters. A
moderate pick-up in anti-infective sales and other acute therapies would aid growth, in
our view. It appears that the anti-infective segment had a late take-off this year. This may
have caused the depression of growth in previous quarter, and thus could be expected to
accelerate growth in current quarter. As per AIOCD AWACS data, in the months of
October and November 2011 the company recorded growth of 11.9% and 22.8%,
respectively.
We build in a 119bps decline in EBITDA margins y-y
The EBITDA margin has been under pressure through the year. For the nine months
ended September 2011, EBITDA margins were down 393bps y-y. We project a 90bps
decline in EBITDA margins y-y and a 70bps improvement q-q following significant drop in
3QCY11. We expect rising volumes to help boost margins sequentially. However, we
note that historically 4Q margins have been lower than 3Q.
We have not projected the actuarial gains explicitly. Given the rise in yields, we expect
some gains to be booked on that count.

52-WEEK FLOP: A2Z MAINTENANCE & ENGG. :: Business Line

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The stock of A2Z Maintenance & Engineering Services crashed 72 per cent in the last one year. This engineering procurement and construction services company, which operates in the power distribution space, has seen its stock slide since its listing in December 2010. High asking price during the IPO and presence in multiple unrelated businesses dragged the stock price post listing.
A2Z started off as a facility management services provider and then moved in to installing power distribution lines and sub-stations.
With the power distribution space in the country languishing, thanks to slower power generation, this sector has been de-rated by the market. A2Z too, appears to have been given a similar treatment. At the current market price, it trades at 7.6 times its consolidated trailing earnings, down from about 30-31 times at the time of its IPO. Its order book, at Rs 1,397 crore in the power space, is 1.1 times its consolidated FY-11 sales.
A2Z allocated majority of the IPO proceeds for its biomass plants totalling 60 MW. The company has, since its IPO, signed power purchase agreements for these projects. But the projects have been facing delays. Sales for the quarter ended September 2011 stood Rs 204 crore and net profits at Rs 8.4 crore.

FORTIS HEALTHCARE:: 3QFY12 preview :: Nomura research

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We expect Fortis to report revenue and EBITDA growth of 3% and 4.6% q-q,
respectively. We pencil in a revenue growth of 6% q-q for Super Religare laboratories
(SRL). We expect a marginal improvement of 20bps in EBITDA margins q-q as newer
capacities launched last quarter begin to ramp up.
We believe that the key catalyst for the stock is improved visibility on the international
acquisition and the profitability of the business going forward. Fortis had mentioned that
it will be raising debt to finance the acquisition, which would raise the debt equity ratio to
1.5x from the current levels of less than 1x. In the current environment assuming such
high debt could be challenging, in our view. Management has also guided that the
debt/equity ratio would be restored at 1x by March 2012 by various measures, including
the dilution of its stake in SRL. We would watch out for any further comments on this
front.

CADILA HEALTHCARE:: 3QFY12 preview :: Nomura research

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Expect some revival in domestic formulation growth
We pencil in growth of 10.9% y-y in domestic formulation sales (excluding the portfolio
allocated to the Bayer JV) vs. 6.6% y-y growth reported in 2QFY12. We believe that the
impact of the channel fill done at the end of FY11 has subsided during the quarter.
Recent AIOCD data suggests some pickup in growth for Oct-Nov 2011 as the growth in
acute segments for Cadila overtook growth in chronic segments.
Building in consumer product, animal health business growth at 12-13%
We expect consumer products and animal health business to record 12-13% growth y-y
during the quarter. We believe the consumer business of Zydus Wellness is under
pressure owing to: a) slower growth in the Sugar free category, which is currently
growing at 6-7%; b) increased competition from MNCs in the face wash segment; and c)
an increase in Neutralite prices has impacted volume growth.
US growth likely to remain robust despite no new launches
We believe the sequential increase in US sales will be driven by full quarter impact of
Nesher acquisition. Nesher contributed for two months in the previous quarter, as per
company. In addition, there are some volume gains on older products. There are no new
launches in the US during the quarter. The US sales growth is projected at 38% y-y in
our estimates.
MTM losses could drag down profit growth
We expect Cadila to report 15.9% y-y growth in revenues and -38.6% growth in net
profit. We expect EBITDA to grow 7.1% y-y. The expected margin pressure can be
largely attributed to rising overhead costs and lower profits from JVs, including the
Hospira JV that markets Taxotere in the US. We have factored in forex losses of
INR900mn, similar to what was recorded in the previous quarter. However, the
introduction of Rule 46A, which allows companies to amortise losses over March 2020,
could help reduce the losses on forex loans. The company had outstanding forex loans
of ~USD160mn as of September 2011.

DR. REDDY’S:: 3QFY12 preview :: Nomura research

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US business to record strong growth on Zyprexa launch
We believe the US remains the most dominating growth theme for Dr Reddy's. As per
IMS, Dr Reddy’s recorded y-y Rx growth in the high teens over October and November
2011. Zyprexa and Zyprexa ODT were the key launches for Dr Reddy’s during the
quarter. Dr Reddy’s launched Zyprexa in partnership with Teva. The IMS data suggests
Teva has captured 40-45% market share during the weeks following the launch in late
October 2011. In Zyprexa ODT, Dr Reddy’s currently has ~32% market share (week
ending 9 December 2011, according to IMS data). We are factoring in INR1.63bn in
sales from Zyprexa and Zyprexa ODT for the quarter, assuming three months of sales. In
addition, there likely was a sequential ramp-up in the Bristol facility during the quarter.
We don’t expect any material ramp-up in Arixtra during the quarter. We note that DRRD
has also gained significant market share in generic Levaquin and had 30-35% market
share in the months of Oct and Nov 2011. Overall, we are factoring in base business (ex
Zyprexa) ramp-up of USD8mn q-q. Overall, we project the North America business to
record 75% y-y growth.
Expect some revival in domestic market growth rate on lower base
We estimate domestic market growth at 12% y-y during the quarter. The company has
lost out on growth in the recent past on reallocation of sales force to rural areas, resulting
in lower focus on metros. We understand the issue is currently being addressed. We
believe lower sales growth in 2HFY11 presents a favourable base effect. In 1HFY11, y-y
growth was 20.8% compared to 9.7% for 2HFY11.
Russia growth expected lower on tight liquidity conditions
Tightening liquidity conditions have adversely impacted sales in the Russia/CIS region
during the quarter, in our view. The company has consciously reduced billings to
maintain receivable quality. We factor in revenue growth of 16% in Russia compared to
>20% recorded in the recent past.
Zyprexa exclusivity to improve margins
We expect gross profit margin to expand to 56.2% from 53.8% q-q, primarily due to
Zyprexa launch. Ex Zyprexa, our estimates build in margins at levels similar as last
quarter. We do expect some sequential increase in R&D costs. We have also factored in
INR 160mn in forex gains, in line with the quantum of gains reported in the previous
quarter.