Ranbaxy Labs Sell Target Price: Rs331 ::Centrum

Ranbaxy Labs

Sell

Target Price: Rs331

CMP: Rs385

Downside: 14.0%

Disappointing results

Ranbaxy Labs’ (RLL) revenues for Q4CY12 were in line with our expectations but EBIDTA margin and net profit were way below. The company reported sales decline by 29%YoY, 2,020bps drop in EBIDTA margin and net loss of Rs1.27bn before EO items. Sales were affected by the absence of one time FTF sale of generic Lipitor in the US market. This, along with re-structuring, pulled down the EBIDTA margin by 2,030bps. RLL has provided Rs1.86bn for the voluntary recall expenses for generic Lipitor. We have revised our rating from Neutral to Sell with a revised target price of Rs331 (based on 20x CY13E EPS of Rs16.3+ FTF of Rs5.4).

m  Decline in US revenues: RLL reported 35%YoY decline in outside India revenues from Rs32.48bn to Rs21.23bn due to the absence of FTF opportunity of generic Lipitor in the US which generated revenues of ~$310mn(Rs16.7bn) in Q4CY11. Revenues in N. America declined by 61%YoY from $407mn to $160mn due to the absence of FTF opportunity of generic Lipitor. Revenues in India grew by 9%YoY from Rs5.04bn to Rs5.48bn in line with market growth.

m  Sharp drop in Margin: RLL’s EBIDTA margin declined by 2,020bps YoY from 23.2% to 3.0% due to the increase in material and personnel cost. The company’s material cost increased by 1,520bps from 27.4% to 42.6% of revenues due to the absence of FTF of generic Lipitor. RLL’s personnel cost grew by 770bps from 10.1% to 17.8% due to sharp decline in revenues. Other expenses declined by 260bps from 39.3% to 36.7% of revenues. RLL reported Rs282mn forex loss against Rs906mn from operations and Rs820mn against Rs578mn on loans. The company’s EBIDTA margin declined by 2,340bps over the last three quarters.

m  High voluntary recall charges:  RLL provided Rs1.86bn as voluntary recall charges for 41 lots of generic Lipitor in the US due to the presence of foreign particles. The company also provided Rs1.80bn as forex loss on $1.07bn derivative contracts resulting in total EO amount of Rs3.66bn.

m  Additional FTF opportunities:  RLL has filed for 5 additional FTF opportunities in 2012 with an aggregate market size of $4.3bn (Rs232bn). We expect these opportunities to drive future growth.

m  Valuations: We expect RLL’s margin to be under pressure in the coming quarters due to the loss of MS due to the voluntary recall of generic Lipitor in the US and slower growth in the domestic market.  Moreover, the resolution of import alert by US FDA for Dewas and Paonta Sahib facilities will be gradual.  We have revised our EPS estimates for CY12 and CY13 downwards by 27% and 43% respectively due to lower margins. At the CMP of Rs385, the stock trades at 17.7x CY13E EPS of Rs21.7 and 20.5x CY134E EPS of Rs18.8. We have revised RLL’s rating from Neutral to Sell with a revised target price of Rs331 (based on 20x CY13E base EPS of Rs16.3+ FTF of Rs5.4) with 14% decline over the CMP.

Thanks & Regards, 

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Bonding with the market ::: Business Line

Keeping in with the overall theme of the Budget — that of sustained development — the measures envisaged by the Finance Minister to further growth and development of the bond markets can be viewed as a step in the right direction.

The thrust on increasing and improving infrastructure investments through infrastructure debt funds and infrastructure tax free bonds would help increase supply of papers in the debt markets, which can, to some extent, attract potential investors.

The provision of IIFCL offering credit enhancement is hugely welcome and would provide succour to companies (especially those in the infrastructure space) that do not enjoy high credit rating, to enhance their credit ratings and thereby enable them to tap the bond markets to meet their funding needs.

This would also encourage the otherwise reluctant companies to seek the bond financing route, ultimately adding to the overall liquidity and depth of the market.

DEBT TRADING

The Budget has also provided the much-needed boost to the secondary markets, in terms of facilitating trading in debt instruments.

Stock exchanges would henceforth be allowed to have a dedicated debt segment on the exchange.

This move would go a long way in improving the ease of trading in these instruments, a major impediment that has been often identified as impacting liquidity in these markets. The other move involving bonds, that is, permitting FIIs to use corporate and government bonds as collaterals to meet margin requirements is essentially an attempt of the government to increase FII investment in the equity markets.

FII are seen to have to good appetite for government securities and this can be leveraged for increasing their activity in the country’s equity markets.

FII PARTICIPATION

Although the Finance Minister has announced measures that would help the bond markets as a whole, the Budget however did not cater to some of the much-anticipated expectations of the market. Increase in the limit of FII participation in debt was once such.

Despite the Finance Minister acknowledging the need and importance of foreign investments in Indian markets, the Budget stopped short of announcing the much-anticipated increase in the limits for FII participation in debt.

The markets were also seeking a reduction in the withholding tax in FII investment in corporate debt, the high rates of which make investments in these instruments unviable for FIIs, which too did not come by.

In terms of the Government’s market borrowing programme for the FY14 fiscal and its impact on the bond market, the same may not exert significant pressure on the markets as the increase in net borrowing of around Rs 17,000 crore would not have much of an impact on liquidity of G-Secs.

However, if major slippages occur on this front or if these is excessive growth in credit with a revival in the economy, overall liquidity in the market would be pressured.

(The author is MD & CEO, CARE Ratings. The views are personal.)

Fund Talk - Review your portfolio every year, rebalance ::: Business Line

If your targeted corpus is reached ahead of time, book profits and move the proceeds to safer debt avenues.

I am 31 and have been investing around Rs 3,000 each in L&T Equity and HDFC Top 200 every month since February 2012. Please let me know if I should continue investing in these funds or if I should change my portfolio.

PradeepYou have made a reasonable choice of funds for your portfolio. HDFC Top 200 is a large-cap oriented fund with a proven track record of delivering returns across market cycles. L&T Equity too has a seven-year track record, though not as strong. But this fund has done reasonably well with its large-cap focus.

You can continue investing in these two funds. But if you want a scheme that has a large-cap focus and has delivered stronger returns, you can choose Franklin India Bluechip or UTI Opportunities.

***I had invested in HDFC LT Advantage Fund in 2001 for the purpose of saving taxes. The fund has delivered good returns till now. Is it advisable to continue holding it or should I switch over to some other fund? Please advise.

SreeramIt is nice to note that you have remained invested in HDFC LT Advantage for the past 12 years. The scheme has generated compounded annual returns of over 25 per cent over this period, clearly showing the benefits of remaining invested in the markets over the long-term.

Since tax-saving funds have a lock-in period of three years, you can consider exiting the fund or sweeping profits. You will, however, receive tax benefits for only one year for a lumpsum you invested in 2001.

If you wish to invest in another tax saving fund in the future, you can consider Canara Robeco Equity Tax Saver or Franklin India Tax Shield.

***I am 54 years old and am a self-employed professional. Please suggest a suitable MF portfolio for 10 years. I can invest Rs 20,000 every month.

Dilip BagariaYou have started out pretty late on investing. At 54, there may be limited scope for taking risky bets, nor sufficient time to recover from any loss arising out of market-related investments. Since you are self-employed, your income is also likely to fluctuate.

But better late than never! You can still build a conservative portfolio with lower returns expectation. Having a 10-year investment horizon would help generate reasonable returns.

Invest Rs 5,000 each in Quantum Long Term Equity, ICICI Pru Focussed Bluechip and UTI Opportunities. These are predominantly large-cap stock-oriented schemes and have sound track record. The balance Rs 5,000 can be invested in HDFC Balanced. Alternately, if you want still lower risks, replace ICICI Pru Focussed Bluechip with Birla Sun Life 95 fund, a balanced scheme with a proven record.

We hope you have made investments in other avenues such as debt (FDs, RDs, PPF etc), gold and real-estate.

Review your portfolio every year to take corrective action and rebalance if necessary. If your return expectations or targeted corpus levels are reached ahead of time, book profits and move the proceeds to safer debt avenues.

LIC Housing Finance Ltd.:: IndiaNivesh

Healthy loan book growth, NIMs expansion = positive FY14E
outlook
Investment Rationale
Loan growth to remain healthy
Over last 3-4 years, LIC Housing has consistently outperformed the industry on loan
book growth front. LIC Housing reported 32% CAGR loan growth during FY 09-12.
Owing to challenging macro environment, loan book growth slightly slowed-down
(23.8% y-o-y loan book growth rate seen at Q3FY13-end). This slow-down is mainly
on a/c of ~20.0% decline in y-o-y loans made to Builders segment (to Rs 28.1 bn).

United Phosphorus Poised for a re‐rating!:: Prabhudas Lilladher,

! Concerns overdone, CMP factors in all negatives: United Phosphorus (UPL)
continues to trade at ~50% discount to peers due to investor concerns related to
piling up of debt, further deterioration in working capital, margin dilutive
acquisitions and decline in return ratios. However, we believe, concerns are
overdone and CMP factors in all negatives. We would like to highlight that
despite decline in return ratios from their peak, current RoE/RoA at 16.4%/6.1%
are significantly higher than the global generic players, Nufarm & Makhteshim‐
Agan (MAI).
! Working capital unlikely to deteriorate further: Despite increasing contribution
from Brazil which has longer credit cycles, we do not expect working capital to
deteriorate further. On the contrary, we have modelled for working capital
improvement of three days over the next two years to 143/142 in FY14E/FY15E.
We believe there is room for improvement in inventory/receivables across
multiple geographies as unfavourable weather conditions this year have
resulted in piling up of inventory and longer credit days. However, rebound in
these markets over the next two years would result in marginal improvement of
working capital.
! Earnings growth, combined with improvement in return ratios, to trigger re‐
rating: UPL’s higher exposure to emerging markets positions it well to deliver
sustainable revenue growth over the medium term. EBITDA margins are likely to
improve by 60bps over the next two years, driven by a turnaround in DVA
(expect DVA to contribute 20-30 bps of improvement), significant cost savings
initiatives and shift in product mix. We expect UPL to register 12.5%/14.1%
CAGR in Revenue/PAT over FY12-15E. RoE/ROCEs are likely to improve ~150bps
to 17.8%/12.6% from FY13E-FY15E. With sustainable earnings growth and
improvement in return ratios, stock is likely to get re-rated. We value UPL at 9x
FY14 earnings and recommend ‘BUY’ with target of Rs 170 (43% upside to CMP).

Eveready Industries India Ltd: SPA

We met the management of Eveready Industries to understand the company's strategy going forward. Despite having
good brands like "Eveready" & "Powercell", the company has been struggling to achieve desired level of growth. Eveready
primarily deals in batteries, flashlights & lighting products with batteries contributing to ~60% of the revenue. Recently it
has launched a portable mobile charger. Excerpts of our discussion are as follows-

Aurobindo Pharma Ltd.:: IndiaNivesh

Aurobindo Pharma Ltd (APL) is an integrated pharmaceuticals company with major
focus on exports. Predominantly being the API supplier, company has increased
its revenue contribution from formulation business by more than 60% in the last
5-6 years. Apart from majorly focused in USA formulation & API business, company
has healthy presence in Europe & African markets also. In Africa, APL is focused in
ARV formulations.
Investment Rationale
Expect healthy revenue growth from US market given ramp up in
existing products & new launches:
We expect Aurobindo’s US business to report healthy revenue growth of ~28%CAGR
over FY12-15E given strong pipeline of the company i.e ~171 ANDAs are awaiting
approvals out of cumulative 262 filings. Key positives going forward would be
company’s filings & approvals in complex products including injectables from
AuroMedicis, where company has launched ~5 products including Ampicillin,
Ampicillin + Sulbactam & Piperacillin + Tazobactom. Company expect this business
to ramp up post USFDA approval of unit IV, where company has filed 21 ANDAs &
has received 2 ANDAs approvals. Management expects injectable business to
contribute ~ $10-12 million in FY13E & ~$30 million in FY14E. Another 25-30 ANDA
filings from unit IV & Myriad facility’s ANDAs approvals in 2015-16 would propel
the growth going forwards.
Additionally, AuroLife (US based Subsidiary) has launched schedule III controlled
Substance i.e Hydrocodone Bitartrate+ Acetaminophen in US market in Q2FY13.
The company expects to launch 3-4 more controlled release launches in near term.
Aurolife has filed 18 ANDAs with USFDA & likely to file another 4-5 products. Annual
approval of 20-25 ANDAs & recent launches like Pioglitazone, Escitalopram,
Modafinil, Clopidogril, Seroquel & Montelukast would improve company’s base
business going forward.

SGX Nifty 5,828.00 -17.50; markets to open DOWN

SGX Nifty 5,828.00 -17.50; markets to open DOWN
India time 8:25 AM Singapore exchange