Wockhardt Waluj UK import alert – no sales hit: Macquarie Research,

Event
 WPL said that it has received an import alert from the UK MHRA for its
manufacturing plant at Waluj. This means all products from this facility (both
the oral and injectable block) will be blocked from entry into the UK market
until the manufacturing issues are resolved.This is the same facility that was
hit by a US import alert in May-2013.
 Sales to the UK market from the Waluj plant in FY13 were around ~UK£6-
8m. Given the products are already available to be shipped from alternative
sites (which are UK MHRA compliant), WPL expects this UK MHRA import
alert on Waluj to have a negligible impact on its financials.
 We maintain our OP rating but cut our TP to Rs1,440 (from Rs1,680) as we
expect news-flow to weigh on valuation multiples in the near-term until the
regulatory issues at Waluj are resolved. We see near-term volatility existing
on the stock due to this import alert.
Impact
 Early resolution of US import alert critical: Before this UK MHRA import
alert, in May-13 the US FDA had put an import alert on the same Waluj
facility. WPL was guiding to the potential loss of US$100m in annual sales
(v/s our estimate of US$135m) due to the US import alert at the facility. Half of
the pending 46 ANDAs with the US FDA are from the Waluj facility (of which
12 were filed recently & hence near-term approval was not anticipated).
 Remedial measures being pursued by WPL (site transfer of high-value
products or segregating compliant Oral block into a separate facility), if
successful, could provide upside risk. We think the speed with which WPL can
resolve these regulatory issues is going to be critical (unlikely in FY14).
Earnings and target price revision
 No change to our earnings estimate as WPL has approvals to ship products
from alternative sites. However, we expect the news-flow to weigh on
valuation multiples near-term given the regulatory uncertainty and hence cut
our TP to Rs1,440 @12x FY14E P/E (v/s Rs1,680 @14x FY14E P/E).
Price catalyst
 12-month price target: Rs1,440.00 based on a PER methodology.
 Catalyst: Resolution of regulatory issues, niche launches
Action and recommendation
 We do acknowledge that the regulatory action is a negative surprise causing
near-term pressure. However, valuations are attractive, with WPL trading at
~7.5x FY14E PER, despite industry high return ratios (ROE and ROIC of
>40%), a strengthened balance sheet (D/E<.5x) and strong FCF generation
>US$150m in FY14. Maintain Outperform.

Amara Raja Batteries: Buy :Business Line

Larsen & Toubro: Buy :Business Line

Lupin: Buy :Business Line

Investor feedback on Indian Infrastructure sector:: Deutsche bank,

A lot of investors in the first two days of our marketing trip in Asia were bit
taken aback by the extent of slowdown suggested by the micro data points,
with impact now being seen in power, coal demand (after a prolonged slow
down in industrial products such as cement). While a few investors felt that
India has probably achieved the inflation target, the key related question was –
at what cost? The next worry for most seems to be, what would happen if
foreign investors were to start selling from hereon?
Other stock specific questions were
• Why is L&T not at INR 1200/ sh (vs INR 1428/sh)
• Do we think that utilities like Coal India / NTPC can even correct 5-
10% from here, given the demand slowdown? What are must buy
levels? and
• For investors with a longer horizon, the key debate was which
companies can weather the downturn?
What do Investors own in the Infrastructure sector?
Surprisingly very few hold Larsen & Toubro (Buy, INR 1428) our top infra pick
and are underweight the large caps in the sector, with ownership being either
in cement names or mid-caps such as Cummins India (Hold, INR 456) and for
some even the likes of Crompton (unrated) and Voltas (unrated). Amongst
Utilities it is either PowerGrid (Hold, INR 109) or NTPC (Buy, INR 142) with no
large holders in Coal India (Buy, INR 291) or BHEL (Buy, INR 187). For few
BHEL is still a short - but we find the tradeoff on cost of the position vs fair
value estimate is not that attractive. Despite L&T being low in ownership, the
stock remains on the radar for everyone with buying levels around INR 1200-
1250/sh as they feel a large company like L&T has a lot of levers to reduce
earnings cyclicality and the near term earnings weakness is well known.
What's our message?
At our end, we are cautious in our approach given the macro headwinds and
recommend investors buying into companies that (a) can weather downturn
through entry into new businesses/markets (b) have a strong balance sheet,
(c) can show an earnings CAGR above 12-15% under the scenario of GDP
growth continuing at low levels, (d) are trading at valuations cheaper to market
on a relative basis and/or offering a dividend yield of over 5%.
Our preferred picks are L&T, UltraTech, Coal India, NTPC, Shree Cement and
Thermax.

Bharat Heavy Electricals - At a cyclical inflexion point ::Standard Chartered Research,

 We upgrade BHEL to OP from UP, with a PT of INR 230,
valuing it at 1.5x FY15E PBR and implying 12x FY15E PE.
Though earnings could decline over FY13-15E, order book
visibility is more important at current depressed valuations.
 The SEB restructuring plan and acceptance by key states
are likely to support orders in the next 12-18 months.
 Chinese competition is likely to ease, as the INR has
depreciated 30% against the CNY in the past 20 months.
 While the CCI has had mixed results overall, it is positive at
the margin, with specific wins in oil & gas, state-sector
power projects and mining, in our view.
 Given a re-allocation of resources, we transfer coverage of
BHEL to Satish Kumar.

What PE funds bring to developers :: Business Line

The real estate sector is very capital-intensive and developers have to manage large cash flow mismatches. The long development cycle — starting from acquiring land, planning, getting approvals to start construction to final sale and hand-over — takes three to five years or more, based on the locality.

The cash-strapped developers, who are typically saddled with a large debt burden, are usually on the look-out for new funding sources.

FUND SOURCES

The cheapest source of funds is from banks and institutions such as HDFC and ICICI which offer construction financing at around 15 per cent. NBFC funding ranges anywhere between 18 and 21 per cent, according to Shreekant P Shastry, VP, Strategy and Business Development, Ozone Group. Developers also take private funding with an average interest rate of around 24 per cent.

NEED FOR PE

While the bank rates are lower, they only lend at the construction stage, after all the approvals are obtained.

However, there is a delay of one to two years between purchasing land and getting all the approvals necessary to start building.

This is where PE funds come in, to take care of initial cost of project development, says Bharat Dhuppar, CMO, Omkar Realtors and Developers.

The typical time it takes to close a deal is around three to six months and the typical cost is around 20 per cent. PE funds have lately been expecting 18 to 21 per cent internal rate of return (IRR) and most are in the form of structured debt.

Funds also offer debt funding for project completion to builders in distress. These have a return expectation of 25 to 30 per cent, depending on the risk perceived.

OTHER BENEFITS

The PE funding may also help the builders in other ways. “They bring a sense of financial discipline which is useful,” says Ravindra Pai, MD, Century Real Estate, which raised close to Rs 450 crore equity and Rs 380 crore debt finance from PE funds in the last three years.

Buyers too are comforted to know that the project they are buying is funded by a PE firm, although many do not typically ask about the sources of funding.

Funds provide credibility due to their in-depth due diligence process prior to investment. “PE partnership developments, bring in transparency in terms of licenses, marketability of titles, legal compliance norms, strict adherence to the local, municipal rules, and that in turn, ensures timely completion of the project,” says Shrinivas Rao, CEO-Asia Pacific, Vestian Global.

Some of the PE funds have access to buyers from additional geographies or target group that the builder does not have access to. For instance, Ozone group, which has received entity level and SPV level investments from UIREF (Urban Infrastructure Real Estate fund) and HIREF (HDFC fund) stated that funds provided leads for corporate sales.

“We have been also active in providing management support where needed to improve governance and disclosure levels as well as project monitoring and reporting standards,” says Nitin Goel, Partner, Real Estate Investments at Milestone Capital.

For the PE fund, successful real estate projects generally provide over 20 per cent IRR over a 5-to-7 year period. To achieve this, PE funds and developers work together right from project inception till final exit.

Sun Pharmaceutical Industries Hikma’s Raised Guidance = Doxycycline Upside – Staying OW :: Morgan Stanley Research

Sun Pharmaceutical
Industries
Hikma’s Raised Guidance =
Doxycycline Upside –
Staying OW
Quick Comment: Hikma Pharmaceuticals PLC (Hikma)
has again increased its guidance for 2013 for its
generics division, due to doxycycline upside (refer
Exhibit 1 for guidance trend). It has now guided for
revenues of US$200 mln and operating profits margin of
above 30% for the generics division. To refresh, this is
the second upward revision to its Mar’13 guidance ($104
mln sales; flat margins), which was raised in May’13
($150 mln sales, low teen margins). The new guidance
implies incremental sales of US$100 mln with 60%
operating margins for 2013, driven by doxycycline.
Background: Due to doxycycline drug shortage in the
US, there was a sharp rise in prices in Feb’13. The
US$20 mln per month category peaked to US$125 mln
in March 2013, has now marginally tapered off to about
US$106 mln in May 2013 (as some players have
restored part of their supplies). Refer Exhibit 4.
Sun’s angle: URL/Mutual (acquired by Sun in Dec’12)
is a beneficiary of doxycycline hyclate shortage since it
has 18% market share. Refer Exhibit 3. Based on URL’s
current market share and Hikma’s (22% market share)
guidance, Sun could gross about US$80 mln pa in
revenues with high margins (5% of F14 EPS). We have
assumed 6 months contribution from doxy in our model.
If the pricing continues to hold longer, there is upside
risk to our numbers. Note though that once supplies are
restored in the market, doxy prices could compress.
We reiterate our OW rating on Sun: The company has
solid fundamentals as underlined by multiple growth
levers – domestic business, US (non Taro pipeline),
value unlocking in URL/DUSA and SPARC pipeline.
Please see our latest report – Sun Pharmaceutical
Industries – Asia Insight: Best Getting Better, dated May
12, 2013 for details.

Stock Strategy: Consider going short in BHEL :Business Line

INR and RBI –History repeating itself? Barclays Capital,

INR and RBI –History repeating itself?
The Reserve Bank of India (RBI) delivered a surprise 200bp hike in the Marginal
Standing Facility (MSF) earlier this week, along with capping banks’ repo borrowing to
INR750bn and the announcement of the absorption of market liquidity through the
open market sale of government securities. The RBI’s moves were targeted to push
short-term interest rates sharply higher, thereby, making forex speculation costlier. A
similar strategy was adopted by the RBI in January 1998, immediately after the South
East Asian currency crisis in November 1997, to combat heightened forex market
volatility. We spot a few key comparisons between the RBI’s current moves vis-à-vis
those in early 1998.
Tightening in 1998 –Adeparture from the RBI’s stated easing bias
First, the RBI had been easing in the recent months despite their cautious rhetoric (75bp
repo rate cuts from January to April2013). The current hike can, thus, be seen as a departure
from the course of RBI action, albeit possibly on a temporary basis/in the near term.
Similarly, during late 1997, the central bank had clearly started monetary policy easing to
revitalise growth following a phase of high inflation, heavy monetary tightening and a slump
in growth during the mid-1990s. In fact, in October 1997, the RBI had explicitly guided for
the lowering of the cash reserve ratio (CRR) cumulatively in stages, to 8% from 10%, on
eight specified dates between October 1997 and March 1998. Thus, on both occasions,
while the domestic macroeconomic considerations prompted the RBI to remain growth
supportive, the meaningful deterioration in the macroeconomic backdrop got triggered
from external developments (the Asian crisis in late 1997 and the current possibility of QE
tapering), whichled to a quick switch in policy priorities of the central bank.
Tightening in 1998 was multi-layered, fast and furious
Second, the quantum of hikes in policy interest rates and/or in reserve requirement
(CRR) had been stark on both occasions. Similar to the hike in the MSF rate earlier this
week, the bank rate was hiked by 200bp on 16 January 1998 (to 11% from 9%).
Additionally, CRR was hiked by 50bp to 10.5% and the repo rate was raised by 200bp to
9% at the same time. Currently also, the measures relating to restricting banks’ repo
borrowing quantum and the announcement of the sale of government securities
through open market operations (OMO) highlight the focus on tightening liquidity by
the RBIto make hikes in policy interest rates more effective.
Third, bank rate –which was the key policy interest rate in the late-1990s –was hiked in
January 1998. Hiking the key policy interest rate was not the first step from the central
bank. Prior to that, the RBI had hiked the repo rate (which was an additional policy
interest rate during that time) sharply from 4.5% to 7% in three stages within a span of
less than 10 days (3-11 December 1997). It was, in fact, hiked again by another 200bp
to 9% on 16 January 1998. In the current phase, the RBI has so far not hiked the repo
rate – which is the key policy interest rate in the RBI’s current monetary policy
framework. It is important to note that we do not expect any hike in the repo rate in the
current round. Such a move would not necessarily enhance the probability of effectively
curbing pressures on the INR, in our view, since it could further dent FII flows into India

Kotak Insti India Daily 19th July: Results - Axis Bank, DB Corp, Mindtree; Results, Change in Reco - TCS, Bajaj Finserv; Updates

Results

Axis Bank: Mixed performance continues

l No change in key metrics; asset quality stress rising steadily l Strong capital, healthy liability profile driving our rating despite headwinds in business l Headwinds remain: Loan impairment and pressure on revenue growth

DB Corp: The stars align

l 1QFY14 results analysis: Whatever happens when all the stars are aligned l Growing in strength: BUY with 12-month forward FV of Rs300 (Rs280 previously)

Mindtree: Good headline, internals could have been better

l Good headline numbers, excellent pick-up in revenue growth l Internals could have been better; cash generation disappoints l Consistent growth in IT services is impressive; we expect it to continue. Maintain ADD

Results, Change in Reco

TCS: Lack of alternatives, solid execution; upgrade to ADD

l Delivers yet again; cash flow generation not as good l Good environment or bad, TCS delivers l Rupee to the rescue, lack of alternatives could push up P/E multiple; upgrade to ADD

Bajaj Finserv: NBFC posts strong performance; upgrade to BUY

l Valuations attractive, upgrade to BUY l General insurance: Higher earnings despite lower underwriting profits l Stable earnings in life insurance, low conservation ratio is a concern

Company alerts

Larsen & Toubro: Cautious takeaways from AR2013

l EBITDA margin propped by provision reversals; FX loss buffer exists but may not benefit in FY2014 l Contracting customer advances raise execution concern; higher debtors further put Wcap. pressure l Management sees a few bright spots in dull macro; focus on cash and current yield l Subs: Weak toll collections, both for old and new projects; large loss taken in forging, shipbuilding l Broadly maintain estimates; retain ADD on reasonable valuations

Godrej Consumer Products: AR analysis: Costly growth or platform for the long-haul?

l Domestic business steady, IBD revenue growth led by acquisitions l Margins paint a different picture, significant spike in advertising and sales promotion l Balance sheetRoE deterioration continues, FCF negative yet again l We retain our REDUCE rating; choppy IBD margins, rich valuations are cause for concern

JSW Energy: Annual Report analysis: Commissioning complete, focus on operations

l Sharp improvement in operational performance yields three-fold jump in net income l Capex commitments largely behind us, working capital increases by Rs11 bn l We retain our ADD rating though highlight JSW Energy's vulnerability to Rupee depreciation

Sector alerts

Telecom: RCOM slashes 3G data pricing by 50%

l The event - RCOM announces 50% cut in 3G data pricing l The nub - cut on expected lines, directionally, even as the extent is a bit of a surprise l The impact - modest immediate negative if incumbents follow; we don't see RCOM gain much