12 January 2014
IPCA Labs- Outlook robust, valuation upsides strong – initiate with BUY :: Religare Research
We initiate coverage on IPCA with a BUY and a TP of Rs 880. We like IPCA
due to (a) sharp ramp-up in US sales (post Indore SEZ contributing from
1QFY15), (b) superior earnings growth (25% EPS CAGR vs. 20% for peers)
led by margin expansion & (c) attractive valuations (trades at 20% discount
to mid-sized peers). We expect re-rating led by earnings upgrades on faster
domestic growth (from H2) & improved biz. mix driving margin surprise. Our
TP (16x Dec’15E EPS, a 20% discount to sector) implies a 19% upside.
Formulations-led revenue growth: We forecast 18% sales CAGR over FY13-FY16E
led by both domestic (16% CAGR, 32% of sales) and export (23% CAGR, 44% of
sales) formulations. A ramp-up in US generics (aided by Indore SEZ contribution),
sustained anti-malarial tender wins and new launches in branded markets brighten
export growth prospects. Higher captive utilisation would limit growth in the lowermargin API biz (27% of sales) to 15%, thereby improving the overall revenue mix.
Domestic growth to rebound on improving productivity: Post one-time impact of
the new pricing policy, IPCA’s domestic growth to bounce-back (to 16% from11% in
1H) over FY13-FY16 on (a) higher thrust on chronic segmentslike cardiac, pain,
diabetes &(b) improving productivity of recently added field-force (25% of total).
Margin outlook firm: IPCA’s EBITDA margins should to improve to ~24% (22.2% in
FY13) on (a) rising contribution of high-margin US sales, (b) higher-than-expected
margin-accretive anti-malarial tender supplies (14% of sales), and (c) belowexpected impact of NLEM-listed products in the domestic market. We thus expect a
21% EBITDA CAGR over FY13-FY16E (faster than 18% sales growth in this period).
Earnings momentum to drive upsides: IPCA’s valuation discount of 20% to mid-cap
peers would narrow due to (a)rising growth visibility (25% EPS CAGR), (b)improving
RoEs (26% in FY16E vs. 23% now) and (c) lower gearing (0.2x in FY16E vs. 0.4x now).��
Investors, don’t play politics :: Business Line
Just a few years ago, it was fashionable for market experts to be unconcerned about politics. If you asked them about elections, the standard response would be — ‘Oh! It doesn’t matter. No matter which political party comes to power, there is no going back on reforms. Foreign investors will continue to allocate to India’.
But the experience with the present government over the last five years has been quite an eye-opener. With almost every reform measure, from the Insurance Bill to Foreign Direct Investment in aviation, mired in controversy for months together, it has become clear that reforms will not sail along smoothly without any affirmative action by the party in power.
In fact, with hyper-active sector regulators, an aggressive government auditor and activist Courts, the Indian economy has now reached a state where even business-as-usual requires active intervention from the Centre. And yes, foreign investors have not remained uniformly sanguine about the country.
The broker community, realising this, has developed an almost obsessive interest in politics ahead of the Lok Sabha elections. Since November, starting with the Goldman Sachs report that ‘modified’ the year’s Nifty target on the premise of a BJP win, most analysts seem to have put aside their scrutiny of companies or sectors.
Instead, they are focussing much of their analytical prowess on predicting election results and working out spreadsheets on the best-case and worst-case scenarios for the markets, in case each party comes to power.
Futile exercise
But this is a futile exercise and retail investors would do well to take these analyses with a pinch of salt. Given that even opinion polls and exit polls of the voters themselves have proved to be quite far off the mark in the past, how can an analyst ensconced at Nariman Point predict how the whole of India will vote in the Lok Sabha elections?
But this is a futile exercise and retail investors would do well to take these analyses with a pinch of salt. Given that even opinion polls and exit polls of the voters themselves have proved to be quite far off the mark in the past, how can an analyst ensconced at Nariman Point predict how the whole of India will vote in the Lok Sabha elections?
In fact, it is doubtful if the voter herself knows how she will cast her ballot, today. With many weeks to go before the polls, it is unfolding events which will help the Indian voter make up her mind. Meanwhile, who can say what twists and turns the fortunes of different parties will take? Market players need not be told how quickly emotions can sway the crowd; after all, the market mood can change from being extremely bullish to bearish in the blink of an eye.
Caution pays
Once you admit that the election results do matter to India Inc, the best course of action for you to take would be to simply wait out the next few months. This is hardly the time to add aggressively to your equity portfolio, in the fear that you will miss out on the post-election rally. Yes, if the market favourite BJP sweeps the polls and kick-starts reforms at lightning speed, the ongoing market rally may continue and you may miss the bus. But even if you accept the view that a majority BJP government is the one-stop solution to all of India Inc’s woes, the results of the Delhi assembly elections have shown that such a happy ending cannot be predicted with any degree of certainty.
Once you admit that the election results do matter to India Inc, the best course of action for you to take would be to simply wait out the next few months. This is hardly the time to add aggressively to your equity portfolio, in the fear that you will miss out on the post-election rally. Yes, if the market favourite BJP sweeps the polls and kick-starts reforms at lightning speed, the ongoing market rally may continue and you may miss the bus. But even if you accept the view that a majority BJP government is the one-stop solution to all of India Inc’s woes, the results of the Delhi assembly elections have shown that such a happy ending cannot be predicted with any degree of certainty.
If anything, the Delhi assembly elections have opened up a host of alternative scenarios on the Lok Sabha that punters weren’t factoring in. What if the BJP wins, but does not secure an absolute majority? It may be forced to take support from one or more regional parties, as neither the AAP nor the Congress may make for acceptable bedfellows.
History suggests that a fractured mandate with a shaky coalition government at the Centre does not go down well with the FIIs.
More possibilities
What if the Aam Aadmi Party (AAP) manages to capitalise on its recent surge in popularity and wins, in place of BJP, you may ask? The markets may have been quite sanguine about this outcome earlier. But this was before the AAP formed the government at Delhi.
What if the Aam Aadmi Party (AAP) manages to capitalise on its recent surge in popularity and wins, in place of BJP, you may ask? The markets may have been quite sanguine about this outcome earlier. But this was before the AAP formed the government at Delhi.
It is now slowly sinking in that the AAP’s pro-people agenda doesn’t exactly work in favour of India Inc. With its call for lower prices and plainly sceptical attitude towards private sector firms and their business practices, an activist AAP at the helm may actually have the captains of India Inc yearning for the good old ‘paralysis-ridden’ days of the Congress. Now, if the AAP doesn’t deliver in Delhi and fails to secure a clean majority in the polls, it may yet end up reducing the vote share for BJP by splitting the anti-Congress vote. Should this transpire, the Congress may well end up with the largest vote share in the Lok Sabha. This, again, may not go down well with the markets which blame the Congress for the current slump.
While playing all these guessing games may amuse traders who are in the market for short-term gains, it is likely to do no good to long-term investors. Who is keen to see wild swings in their capital value after they plonk their money on equities? Best, therefore, for such investors to watch the entire drama from the sidelines. You can read all the analyses on possible poll outcomes and what they mean for the market, out of academic interest. But think twice before acting on them.
Mercator Lines :: Centrum Technical Recommendations
IMPORTANT RESISTANCE LEVEL : 22.5
TARGET : 31/42
VIEW CHANGES BELOW : 16
TIMEFRAME : 4 months / 18 months
Mercator Lines had recently broken out above 16 on the weekly charts which is where its 55 week moving average was
trading at. The Scrip is trading in a clear uptrend with a trading and investment point of view as its moving average setup
that was previously in a bearish setup has also now started indicating signs of revival with the 21 week EMA crossing over
55 EMA. Any move down in this scrip now can be bought into with an investment point of view and a fresh uptrend in the
scrip may be triggered once the scrip moves beyond 22.5 which is where a trading resistance is present.
TARGET : 31/42
VIEW CHANGES BELOW : 16
TIMEFRAME : 4 months / 18 months
Mercator Lines had recently broken out above 16 on the weekly charts which is where its 55 week moving average was
trading at. The Scrip is trading in a clear uptrend with a trading and investment point of view as its moving average setup
that was previously in a bearish setup has also now started indicating signs of revival with the 21 week EMA crossing over
55 EMA. Any move down in this scrip now can be bought into with an investment point of view and a fresh uptrend in the
scrip may be triggered once the scrip moves beyond 22.5 which is where a trading resistance is present.
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