11 May 2014

Pfizer - Event Update - Internal Corporate Restructuring - positive :Centrum

Rating: Buy; Target Price: Rs1,630; CMP: Rs1,283; Upside: 27%



Strong brands to drive growth



We maintain Buy rating with target price of Rs1,630 (earlier Rs1,670)
for Pfizer based on 18xFY16 EPS of Rs90.5. Though Pfizer’s Q4FY14
results were lower than our expectations, FY14 consolidated results
were in line with our expectations. The company reported 3% decline in
revenues due to NPPP effect and absence of Animal Health Care (AHC)
sales during the quarter. Pfizer reported strong margin improvement of
710bpsYoY due to overall reduction in costs. The reduction in equity
capital due to merger with Wyeth will improve EPS.  The merged company
will have    strong brands and better bargaining power. Key risks to
our assumptions are stiff competition from other domestic players and
lower growth of its major brands.

$ Revenue declines by 3%: Pfizer reported 3%YoY decline in revenues to
Rs2.75bn from Rs2.81bn due to slow growth in the pharma segment and
absence of AHC sales. The pharma segment grew by 6%YoY to Rs2.52bn
from Rs2.37bn in line with the industry growth of ~6%. The company’s
revenues were impacted by the price reduction of its major CVS brand
Amlogard (amlodipine besylate) which went under price control. The
expected annual hit would be ~Rs150mn.  We expect the company to
report higher revenue growth in FY15 due to price increase of its
products in April’14.

$ Strong margin improvement: Pfizer’s EBIDTA margin improved by
710bpsYoY to 26.6% from 19.5% due to overall reduction in costs. The
company’s material cost declined by 100bps to 32.3% from 33.3% due to
the change in product mix. Personnel expenses declined by 270bps to
14.0% from 16.7% due to the re-structuring of sales force. Other
expenses declined by 340bps to 27.3% from 30.6%. We expect improvement
in Pfizer’s margin from economies of scale and better bargaining power
due to the merger.

$ Net profit declines by 4%: Pfizer’s net profit for the quarter
declined by 4%YoY to Rs560mn from Rs582mn due to lower sales growth
and higher tax rate. Its tax rate went up to 35.6% from 30.9%. Pfizer
is a debt-free, cash rich company and paid interim dividend of Rs360
per share (3,600%) in December’13. The cash/share was Rs103 for Pfizer
and Rs69 for Wyeth as on 31st March’14.

$ Recommendation and key risks: At the CMP of Rs1283, Pfizer trades at
18.4x FY15E EPS of Rs71.8 and 17.9x FY16E EPS of Rs90.5 and 14.2x
FY17E EPS of Rs108.0.  We have revised our FY15 and FY16 estimates
downwards by 6% and 3% respectively. We maintain Buy rating on the
scrip with a target price of Rs1,630 based on 18x FY16 EPS of Rs90.5
with an upside of 27% from CMP. We expect the merged company to report
better performance due to its strong brands and higher bargaining
power. Key risks to our assumptions are stiff competition from other
domestic players and lower growth of its major brands.


J.P. Morgan - Kotak Mahindra Bank

Kotak Mahindra Bank (KMB IN)
4Q14: margins improve; growth slowdown on expected lines

Neutral
Price: Rs807.00
29 Apr 2014
Price Target: Rs700.00
PT End Date: 31 Mar 2015

Kotak Bank reported PAT of Rs6.6bn (down 2% y/y). The parent bank delivered in-line PAT of Rs4.07bn (down 7% y/y). Loan growth remained muted, on expected lines given the weak macro; however, Management is optimistic on loan growth from hereon and expects to grow in the high teens in FY15E. Asset quality improved during the quarter; management is positive on that front as well in the future. The stock is a good long-term core holding; however, we maintain our Neutral rating mainly on account of valuations at 3x P/BV and 22x P/E (FY15E).
Table 1: 4Q14 result table

4Q13
3Q14
4Q14
YoY
QoQ
Net interest income
13,205
13,992
14,841
12.4%
6.1%
Non interest income
14,418
14,303
17,499
21.4%
22.3%
Non interest expenses
17,733
18,785
22,547
27.1%
20.0%
Pre Prov profits
9,890
9,510
9,793
-1.0%
3.0%
Provisions
436
639
-6
-101.4%
-100.9%
PBT
9,454
8,871
9,799
3.6%
10.5%
Tax
2,714
2,873
3,036
11.9%
5.7%
PAT
6,740
5,998
6,763
0.3%
12.8%
Affiliates/Minorities
84
228
207
Nn
Nn
Attributable PAT
6,656
5,770
6,556
-1.5%
13.6%






Cost/Income
64.2%
66.4%
69.7%
5.52%
3.33%
Prov/PBT
4.4%
6.7%
-0.1%
-4.47%
-6.77%
Tax rate
28.7%
32.4%
31.0%
2.28%
-1.41%
NIM
4.7%
4.9%
5.0%
0.27%
0.07%
Source: J.P. Morgan estimates, Company data. Standalone P/Loss result table and subsidiaries break up at the end of the note.
· Loan growth. Loan growth remained muted at 8% y/y; mainly because of a conscious decision to contract the CV/CE book (down 30% y/y and 9% q/q). Loan growth excluding the CV/CE and auto segment was at 16% y/y. Management expects strong loan growth of high teens in FY15E mainly from the consumer banking business and the Agri segment, which has been the focus area for the bank. CV/CE segment book is also likely to grow in the near term.
· Asset quality. Asset quality improved during the quarter, with improvement in Gross & Net NPL both in absolute and % terms. Management is positive on the asset quality front and expects it to further improve in the medium term. Management is now more sanguine on the CV/CE segment and does not expect any negative surprise in the near term.
· Margins. Margins improved by ~10bp and stood at 5% in 4Q14; mainly because of lower funding cost, which was down ~11bp. Management expects margins to remain stable in the medium term; with further improvement in funding costs. SA balance growth was strong at 11% q/q, whereas CA balances grew 22% q/q. This led to overall improvement in CASA which stood at 31.9% (up 213bp q/q). Retail term deposit growth was also strong at 35% y/y.
· Subsidiaries. Kotak Prime reported muted loan growth (up 2% y/y) given the weak macro. However, asset quality improved q/q with Net NPLs of 0.3%.The operating environment improved for the capital market related business with the broking business witnessing higher volume growth during the quarter. Management is aggressive on buying stressed asset portfolios, given the higher opportunities in the market. It expects the ARC and the alternate asset business to witness higher activity in FY15E.
Figure 1: Lower funding costs led to improvement in margins
Source: Company data.
Figure 2: Savings balance witnessed robust growth
Source: Company data.
Figure 3: Loan growth was muted; however expected to improve in FY15E
Source: Company data.
Table 2: 3Q14 standalone results

4Q13
3Q14
4Q14
YoY
QoQ
NII
9,034
9,127
9,665
7.0%
5.9%
Other income
3,639
2,997
3,405
-6.4%
13.6%
Total Revenues
12,672
12,125
13,070
3.1%
7.8%
Employee expense
2,883
2,773
3,157
9.5%
13.8%
Other expense
3,256
3,504
3,843
18.0%
9.7%
Operating expense
6,139
6,277
6,999
14.0%
11.5%
PPOP
6,534
5,847
6,071
-7.1%
3.8%
Provisions
374
697
-62
-116.5%
-108.9%
PBT
6,160
5,150
6,133
-0.4%
19.1%
Tax
1,798
1,750
2,061
14.7%
17.8%
PAT
4,362
3,400
4,072
-6.7%
19.8%






Standalone Loan book
484,690
531,490
530,280
9.4%
-0.2%
Standalone margins
4.69%
4.87%
4.98%
0.29%
0.11%
NIM
4.70%
4.90%
4.97%
0.27%
0.07%
CASA
29.2%
29.7%
31.9%
2.64%
2.13%
Source: J.P. Morgan estimates, Company data.
Table 3: Consolidated loan book break up

4Q13
3Q14
4Q14
YoY
QoQ
CV loans
78,050
60,050
54,410
-30.3%
-9.4%
Car loans
127,500
130,220
132,230
3.7%
1.5%
Personal loans
30,540
31,890
34,390
12.6%
7.8%
Home loans
103,290
114,540
120,990
17.1%
5.6%
Corp/SME
197,520
246,720
227,070
15.0%
-8.0%
Others
125,680
126,990
147,840
17.6%
16.4%
Total Loan book
662,580
710,410
716,930
8.2%
0.9%
Source: Company data.
Table 4: Subsidiaries break up

4Q13
3Q14
4Q14
YoY
QoQ
Kotak Mahindra Bank





PAT
4,360
3,400
4,070
-6.7%
19.7%
Kotak Mahindra Prime (KMP)





Profit before royalty & taxes
1,581
1,900
1,920
21.4%
1.1%
PAT
1,051
1,230
1,260
19.9%
2.4%
KMCC





PAT
40
70
50
25.0%
-28.6%
Kotak Securities





Total income
1,461
1,680
1,600
9.5%
-4.8%
PAT
381
460
440
15.5%
-4.3%
Kotak Asset Management





Total income
20
470
420
-
-10.6%
PAT (AMC and Trustee Co.)
20
120
40
100.0%
-66.7%
Kotak Insurance





Gross premium income
5,951
5,990
10,060
69.0%
67.9%
Profit
531
600
650
22.4%
8.3%
International subsidiaries





PAT
-10
90
60
-700.0%
-33.3%
Source: Company data.

 

Investment Thesis

1. Kotak Bank is a good long-term core holding, in our view. Management quality is high, distribution is growing strongly (the recent RBI liberalization helps), and it is steadily diversifying its product portfolio.
2. We expect the asset quality for the bank to be much better than that of its peers given that: 1) the bank has de-risked its book in stress sectors like CV/CE much ahead of its peers; and 2) it has no exposure to stressed sectors such as infra/power.
3. The bank is focused on improving the liability franchise instead of focusing on growth, which we believe is the right strategy and will pay high dividends in the longer term.
4. Kotak is the most expensive bank in India today. It trades at a significant premium to HDFCB on P/E – this isn’t visible on P/BV, but Kotak’s ROE is much lower because of its high capital ratios.

Valuation

Our Mar-15 PT for Kotak of Rs700 is based on a 2-stage Gordon growth model implying 2.5x Mar15E book. Our valuation factors in a cost of equity of ~16%, normalized ROE of ~24%, and terminal growth of 5%.

Risks to Rating and Price Target

Key downside risks to our Neutral recommendation are: 1) a slowdown in retail credit due to weak sentiment which could have an impact on the growth prospects for the bank and therefore profitability; and 2) asset quality shocks from specific events in segments such as CV/CE and SME space, thereby increasing credit costs for the bank. A key upside risk is higher-than-expected growth due to improvement in macro environment resulting in strong revenue growth.