Stock Recommendations:: Ranbaxy

Ranbaxy has entered a strong earnings trajectory with high visibility on FTF upsides till CY14 and improving outlook for base business. Ranbaxy’s focus on settling Para IV cases and more effective operational execution supported by business development moves has started to deliver. Steady growth in emerging markets (2/3rd of sales) and recovery in US generics will drive 18% CAGR in USD revenues and 320bp expansion in EBITDA margin over CY07-09 in base business. Ranbaxy is expected to generate ~USD2.5bn gross profit from the confirmed FTF opportunities over CY08-14. Given the strong earnings outlook and significant incremental positive news flow potential, we expect Ranbaxy to get rerated. Reiterate Outperformer with SOTP-based price target of Rs610 excluding NCE R&D business value. Ranbaxy is one of our top picks in the pharma space.

FTF value unlocking begins: Ranbaxy has among the best Para IV pipelines in the business with 18 potential FTF Para IVs. Based on visibility on eight of these FTFs, Ranbaxy will have 6-month exclusivity on at least one >$1bn sales molecule each year (barring 2013) from CY08-14 along with Nexium settlement revenues that will accrue over CY09-14. Ranbaxy is expected to generate ~$2.5bn of gross profit from this opportunity which, in turn, can create multiple new growth engines for the company.

Base business; gradual but steady progress: Driven by recovery in US generics market (20% growth in CY07, 17% CAGR over CY07-10E) and strong growth momentum in non-US/ EU markets (21% CAGR in CY07-10E). Ranbaxy’s early entry in newer markets of Canada, Japan, Nigeria, Mexico, etc is beginning to pay off. Multiple sales growth initiatives undertaken recently will accelerate the momentum.

Golden phase; stock to get rerated: We believe the market will begin to view FTF upsides as an integral component of Ranbaxy’s business model and reward the strong multi-year earnings growth visibility. Exclusivity earnings flow will also enable Ranbaxy to further strengthen its base business. Demerger of the NCE R&D business will also trigger value unlocking. Ranbaxy is one of our top picks in the space.

Stock Recommendations:: Larsen & Toubro, Mahindra & Mahindra (L&T, M&M)

Larsen & Toubro
Recommendation: Buy
Price target: Rs4,044
Current market price: Rs2,882

Performance beats expectations

Result highlights

• The Q4FY2008 results of Larsen and Toubro (L&T) are ahead of our expectations on both top line and profitability fronts.
• The stand-alone top line saw a strong growth of 35.5% to Rs8,466.9 crore, ahead of our expectations. The growth was primarily driven by the stellar performance of the engineering and construction (E&C) division, which grew by 38.2%.
• The operating profit margin (OPM) improved by 20 basis points year on year (yoy) and by 250 basis points sequentially to 13.2%. Looking at the segmentals, the E&C division reported an excellent margin growth as the earnings before interest and tax (EBIT) margin improved by 130 basis points yoy to 15%. Consequently, the overall operating profit grew by 38.1% to Rs1,118.1 crore.
• A higher other income and a stable depreciation charge led to a 25.5% growth in the adjusted profit. The reported profit rose by 38% to Rs966.8 crore after taking into account an exceptional item of Rs87.23 crore relating to the gain on the sale of a stake in a group company.
• L&T has also decided to issue bonus shares in the ratio of 1:1 subject to the approval of the shareholders.
• The management maintains its bullish outlook and stands by its earlier guidance of maintaining a 30-35% top line growth in the next couple of years. The demand scenario remains bullish and the company is hopeful of maintaining its margins going forward as well.
• We have realigned our consolidated earnings per share (EPS) for FY2009 and FY2010 to factor in the performance of the key subsidiaries and the company's (L&T) stake sale in the RMC business and in HPL Cogen. Our revised EPS for FY2009E and FY2010E stands at Rs110.5 and Rs150.1 per share respectively.
• L&T's sound execution track record and strong order book position as well as the excellent performance of its subsidiaries enforce our faith in the company. We value the core business of L&T at 25x FY2010E earnings, or Rs3,038 per share. We value the subsidiaries at Rs1,006 per share of L&T. At the current market price of Rs2,882, the stock is trading at 19.2x its FY2010E consolidated earnings. We recommend a Buy on the stock with our sum-of-the-parts based price target of Rs4,044.

Mahindra & Mahindra
Recommendation: Buy
Price target: Rs800
Current market price: Rs606

Price target revised to Rs800

Result highlights

• The Q4FY2008 results of Mahindra and Mahindra (M&M) are slightly below our expectations due to higher tax expenses incurred during the quarter.
• The stand-alone net sales grew by 14.6% year on year (yoy) to Rs3,148 crore in Q4FY2008. The operating profit margin (OPM) for the quarter declined by 50 basis points to 10.9% yoy. A lower other income, and higher interest cost and income tax resulted in a 16% decline in the pre-exceptional profit after tax (PAT) to Rs207 crore. The company realised a net extraordinary income of Rs14 crore on account of the profit arising from the merger of certain subsidiaries with it and the expenses on a voluntary retirement scheme. Thanks to this, the reported PAT declined by only 13.4% to Rs221 crore from Rs255 crore in Q4FY2007.
• On a stand-alone basis, the net sales for FY2008 grew by 14.7% to Rs11,503 crore. The operating profit rose by 8.3% to Rs1,336 crore. The adjusted PAT grew by 10.4% to Rs 938.2 crore whereas the reported PAT grew by 14.9% to Rs1,103.4 crore.
• On a consolidated basis, the net sales for FY2008 grew by 35.2% to Rs23,775 crore. The OPM declined from 15.5% in FY2007 to 13.9% in FY2008. Consequently, the operating profit grew by only 21.6% to Rs3,308 crore. The PAT after minority interest grew by 6% to Rs1,573 crore.
• The company has increased its capital expenditure (capex) outlay and plans to spend approximately Rs2,000 crore per year for the next three years. The funds would be utilised for setting up the new plant at Chakan, carrying out capacity expansions at the other plants, launching new products and carrying out research and development (R&D) activities.
• We expect FY2009 to be a year of challenges for the company as during this period its sales are likely to be affected by the caution being exercised by financiers in extending credit on account of the rising delinquencies in the automotive and tractor businesses. In addition, the margins are expected to be under pressure on account of the rising commodity prices. The management hopes to cope with these challenges with its continued focus on cost control, process efficiencies and product innovations that exceed customer expectations.
• We continue to value M&M on the sum-of-the-parts (SOTP) method and at the current market price of Rs606, the stock discounts its standalone FY2010 earnings by 15.8x. We maintain our Buy recommendation on the stock with a revised price target of Rs800.
  

Stock Recommendations:: Mold-Tek, Tata Motors

Mold-Tek Technologies
Recommendation: Buy
Price target: Rs169
Current market price: Rs71

Price target revised to Rs169

Result highlights

• Mold-Tek Technologies Ltd's (MTTL) Q4FY2008 results were in line with our expectations. The net sales increased by 15.3% year on year (yoy) to Rs26.0 crore. The KPO division contributed 15.5% to the overall revenue during the quarter. The gross revenue from the plastics division increased by 16.9% yoy to Rs23.2 crore, while the sales from the KPO division increased by 16.8% yoy to Rs4.3 crore.
• The operating profit margin (OPM) rose to 14.2% in the quarter from 13.5% during the same quarter last year on account of improved profitability of the plastics division. Consequently, the operating profit grew by 21.6% to Rs3.7 crore. The segmental profit before interest and tax (PBIT) for the plastics division increased by 60.9% to Rs1.0 crore with the margin expanding by 120 basis points to 4.4%. The PBIT for the KPO division increased by 15.1% to Rs1.9 crore.
• The interest costs increased by 37% to Rs63 lakh, while the depreciation increased by 55.8% to Rs81 lakh. Higher other income resulted in a 22.9% increase in the profit before tax (PBT) to Rs2.6 crore. There was no provision for tax during the quarter.
• During the quarter, the company suffered notional loss of Rs5.3 crore as on March 31, 2008 from the forex derivatives positions. Though the losses are measured on a marked-to-market basis, these losses overhung on the stock resulting in the steep correction.
• Major rework of earlier assignments during the quarter would shift the company's focus more on improving the quality of work resulting into lower growth than our earlier estimates. We are downgrading our earnings estimates from Rs18.7 to Rs14.7 for FY2009 and from Rs25.4 to Rs19.2 for FY2010. Currently the stock is trading at 4.8x FY2009E earnings. We maintain our Buy recommendation with revised price target of Rs169.

Tata Motors
Recommendation: Hold
Price target: Rs680
Current market price: Rs532

Price target revised to Rs680

Result highlights

• Tata Motors' sales for Q4FY2008 were in line with our expectations at Rs8,750 crore, which represents a 5.8% growth. The increase in costs adversely affected the margins on a year-on-year (y-o-y) basis, which are down by 300 basis points to 8.7%. The operating profit declined by 21% to Rs763 crore.
• A higher other income led to a 3% drop in the adjusted net profits to Rs560.3 crore.
• For FY2008, the net revenues grew by 4.6% to Rs28,730 crore led by a 3.6% realisation growth, while the reported profit after tax (PAT) grew by 6% to Rs2,028.9 crore. On a consolidated basis, the net sales grew by 10.2% to Rs35,651.5 crore and the adjusted net profit declined by 2% to Rs2,097.1 crore.
• In order to fund its Jaguar Land Rover (JLR) acquisition, the company is looking to raise Rs7,200 crore through three simultaneous but unlinked rights issues. In addition, it proposes to raise about $500/$600 million through an appropriate issue of securities in the foreign markets on terms to be decided at the time of issuance.
• The outlook for the commercial vehicle (CV) industry appears to be weak for FY2009 onwards in view of the tight financing situation and higher fuel prices. In the passenger vehicle (PV) segment, quite a few launches are slated, but most of them with be in the second half of FY2009, the full impact of which would get reflected in FY2010 only.
• We downgrade our PAT estimates for FY2009 by 2% and introduce estimates for FY2010. We have not factored in the equity dilution as well as the revenue impact of JLR acquisition in view of the incomplete details of JLR. At the current levels, the stock trades at 7.8x its FY2010E consolidated earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax, and amortisation (EBIDTA) of 3.8x. In view of the much higher than expected equity dilution to fund the JLR acquisition, muted business outlook, we maintain Hold on the stock with a revised price target of Rs680.
  

Stock Recommendations:: Opto Circuits India, Deepak Fertilisers & Petrochemicals Corporation

Opto Circuits India
Recommendation: Buy
Price target: Rs460
Current market price: Rs316

Results in line with estimates

Result highlights

• Opto Circuits (Opto) has reported a top line growth of 43.1% to Rs120.5 crore for Q4FY2008 and of 86.1% to Rs468.1 crore for FY2008. The revenues are ahead of our estimates and were driven by a doubling of the invasive business and an increasing demand for the non-invasive products (sensors and patient monitors) from the regulated markets.
• Opto's operating profit margin (OPM) shrank by 670 basis points to 29.2% in Q4FY2008 and by 350 basis points to 29.3% in FY2008, largely due to an increase in the promotional spend on the distribution of free samples. Consequently, the operating profit grew by 16.2% to Rs35.1 crore in Q4FY2008 and by 66.2% to Rs137.2 crore in FY2008.
• Buoyed by a significant jump in the other income (on account of higher foreign exchange [forex] gains), Opto's net profit jumped by 43.5% to Rs34.8 crore in Q4FY2008 and by 80.7% to Rs132.4 crore in FY2008. The net profit reported by the company was in line with our estimate.
• Opto has successfully closed the acquisition of US-based Criticare Systems (Criticare) for $70 million. We estimate the Criticare acquisition would generate incremental earnings of Rs1.0 per share in FY2009 and of Rs2.7 per share in FY2010.
• In keeping with its trend of rewarding its shareholders, Opto's management has announced a 50% dividend and also decided to award seven bonus shares for every ten shares held by the existing shareholders.
• In order to incorporate the acquisition of Criticare, we are revising our revenue estimate upwards by 30.7% for FY2009 and by 19.7% for FY2010. Our profit estimate has also been upgraded by 5.3% for FY2009 and by 1.8% for FY2010. We believe Opto's revenues will grow at a compounded annual growth rate (CAGR) of 57% to Rs1,158.9 crore in FY2010 on the back of a 30% compounded annual growth in the non-invasive business and a 67% compounded annual growth in the base invasive business of stents. We expect Criticare to grow at a 20% CAGR to $62 million in FY2010. The net profit will grow at a CAGR of 48% to Rs290.6 crore in FY2010.
• At the current market price of Rs316, Opto is trading at attractive valuations of 15.0x FY2009E fully diluted earnings and 10.4x FY2010E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs460.

Deepak Fertilisers & Petrochemicals Corporation
Recommendation: Buy
Price target: Rs169
Current market price: Rs100

Benefits delayed

Result highlights

• The net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) increased by 56.8% year on year (yoy) to Rs330 crore. The chemical division and the fertiliser division contributed 72% and 27% respectively to the net sales. The revenues from the chemical division increased by 48.2% yoy to Rs241.5 crore on the back of a strong contribution from isopropyl alcohol (IPA), while the sales from the fertiliser division increased by 72.3% yoy to Rs90.6 crore due to an increase in the trading volume.
• The operating profit during the quarter grew by 38.7% yoy to Rs56.8 crore with the operating profit margin (OPM) declining by 230 basis points to 17.2%. The segmental profit before interest and tax (PBIT) for the chemical division increased by 41.8% to Rs62.4 crore with the margin declining from 27% to 25.8%. The loss in the fertiliser division reduced to Rs0.3 crore from Rs1.4 crore.
• The interest expenses were higher by 11.6% yoy on account of the increased outstanding debt issued for new projects and capacity expansions. The depreciation charge also increased by 5.7% yoy during the quarter.
• The adjusted profit after tax (PAT) increased by 13.1% yoy to Rs31.3 crore with the margin reducing by 370 basis points to 9.5%. The effective tax rate increased during the quarter as the company had carry forward losses last year.
• Commencement of additional ammonia storage tank (15,000MT) at Jawaharlal Nehru Port Trust and new nitric acid capacity (45,000TPA) at Taloja has got delayed by over nine months till March 2009.
• The company is still in the process of negotiating long-term gas supply contract. An improved supply of natural gas to Taloja plant would help in replacing naphtha by natural gas for steam generation. Spot liquid natural gas at around $12-14 per million British thermal units (MMBTU) would cost almost half the price of naphtha ($22 per MMBTU).
• Setting up of the ammonium nitrate plant at Paradeep (Orissa) has got delayed due to impending approvals. Civil and construction work is complete and the orders for various equipment have been placed.
• The company's JV with the global major Yara International is still under due diligence and is expected to get over in the next two months.
• The company's specialty mall Ishanya, for interiors and exteriors, commenced operations during the quarter, ahead of the festive season. The company has already leased out nearly 80% of the 550,000 square feet leasable area at an average rental price of Rs46 per square foot.
• At the current market price of Rs100, the stock is trading at 7.6x its FY2009E earnings and 5.7x its FY2010E earnings. We maintain our Buy recommendation on the stock with a price target of Rs169.

Day Trading Strategies, Intraday Trading Strategies Rules

Day Trading / Intraday Trading, Rules Strategies

1. Don't Fight The Trend
Go long a stock only when it is strong (up) on the day. Same for shorts (only short down stocks).

2. Don't Overtrade
Enter a maximum of three trades on any given day. Be selective.

3. Consistent Trade Sizes
Each trade should only consist of buying between 100 to 300 shares. Never more.

4. Buy Near Support Levels
Never chase a stock way above its support levels. Wait for a pullback.

5. Manage Losses
Never take a loss of over 10% on any trade. Enter only trades where the stop, if triggered, will result in a loss of less than $10%

6. The 30 Minute Rule
Never enter a trade in the first 30 minutes of trading.

7. Overnight Rule
Any overnight holding can only consist of 100 shares. Only one holding. Again, be selective.

Trading is all about profits and losses.... But, successful trading is about making your losses small and profits big.....

Stock Recommendations: Wipro, TCS, Satyam, Axis Bank

Trade Recommendation:: Wipro
Price target: Rs525
Current market trading price: Rs453

Price target revised to Rs525

Result highlights

• Wipro’s global information technology (IT) service business grew by 5.4% quarter on quarter (qoq) and by 24.8% year on year (yoy) to Rs3,789.9 crore (under US GAAP) for Q4FY2008. In dollar terms, the revenues grew by 5.4 % qoq to US$959.4 million during the quarter (ahead of the company’s guidance of US$955 million). The revenue growth was driven by a 5.5% sequential growth in the volume. The volume growth was marginally mitigated by a ten-basis-point decline in the blended realisation during the quarter. Revenues from the Infocrossing acquisition also grew by 2.8% qoq to US$61.7 million during the quarter.
• The global IT service division’s operating profit margin (OPM) declined by 20 basis points to 20.5% in Q4FY2008. This was despite the fact that the company had hiked the onsite wages during the quarter (by 3-4% with effect from January 2008), which had an adverse impact of 100 basis points. However, the impact was mitigated by the improvement in the utilisation rate (up 67.2% from 66.7% in Q4FY2007), improved profitability in the business process outsourcing (BPO) service division (driven by higher realisations) and a significant improvement in the margin of the recently acquired Infocrossing (up 450 basis points qoq to 9.0%).
• Wipro’s consolidated revenues grew by 6.9% qoq to Rs5,595.4 crore and net income grew by 6% qoq to Rs875.4 crore during the quarter. The growth rate in the net income was lower than the operating profit growth rate primarily due to other expenses of Rs2.2 crore in Q4FY2008 due to foreign exchange (forex) losses of Rs35 crore. The company’s other income had stood at Rs45.5 crore in Q3FY2008.
• For Q1FY2009, the company has guided revenues of US$988 million for the global IT service division and of US$1060 million for the combined IT service business (global plus India and Asia-Pacific). This implies a sequential growth of 2.9% for the global IT service business and of 2.8% for the consolidated IT service business. The management expects to maintain the margin of the global IT service business in FY2009. It is also positive on the continued uptick in the pricing during the year.
• We have revised our FY2009 earnings estimate upward by 2.7% and also introduced the FY2010 estimate in this note. At the current market price, the stock is trading at 16.6x FY2009 earnings estimate and 15.1x FY2010 earnings estimate. We maintain our Buy recommendation on Wipro with a revised price target of Rs525.

Trade Recommendation:: Axis Bank
Price target: Rs1,150
Current market price: Rs881

Results above expectations

Result highlights

• Axis Bank reported a blockbuster set of numbers for Q4FY2008, beating our and consensus estimates by a significant margin. The PAT (profit after tax) for the quarter came in at Rs361.4 crore indicating a growth of 70.6% yoy (year on year) and 17.8% qoq (quarter on quarter).
• Reported NII (net interest income) was up 88.7% yoy to Rs828.4 crore on the back of a 50.2% y-o-y (year-on-year) increase in the interest earned, while the growth in the interest expense was contained at 31.5% yoy.
• Non-interest income continued to be a major contributor to the bottom line with a 84.8% growth at Rs556.5 crore. The robust growth was supported by a jump in treasury gains and continued strong traction in fee income growth.
• Operating expenses were up 93% yoy to Rs662.1 crore, primarily driven by higher staff expenses (up 107% yoy), while other operating expenses were up 88% yoy.
• Reported provisions registered a 102% y-o-y (year-on-year) increase at Rs164.2 crore, driven by prudent provisions related to potential losses from forex (foreign exchange) derivative transactions.
• PAT was up 70.6% yoy and 17.8% qoq to Rs 361.4 crore, beating our expectation of a Rs304 crore PAT and a consensus estimate of a Rs307.2 crore PAT.
• Asset quality improved further as %GNPA (gross non-performing assets as % of advances) and %NNPA (net non-performing assets as % of advances) improved during the quarter. Capital adequacy remained healthy at 13.73% compared to 11.57% a year ago.
• Axis Bank clarified on the forex derivative issue stating that except for the two customers that have filed lawsuit, the bank is not experiencing troubles in recovering the dues. The bank has provided Rs72 crore for potential default losses from the two aggrieved customers.
• At the current market price of Rs881, Axis Bank trades at 22.2x 2009E EPS (earnings per share), 10.5x 2009E PPP (pre-provisioning profit) and 3.1x 2009E price-adjusted book value. We maintain our Buy recommendation with price target of Rs1,150.

Trade Recommendation:: Satyam Computer Services
Trade Recommendation: Price target: Rs505
Current market trading price: Rs459

Healthy guidance for FY2009

Result highlights

• The consolidate revenues of Satyam Computer Services (Satyam) grew by 10.0% quarter on quarter (qoq) and by 35.8% year on year (yoy) to Rs2,416 crore in Q4FY2008. In dollar terms, the revenues grew by 9.0% qoq to US$613.3 million during the quarter driven by an impressive volume growth of 8.8% sequentially.
• The operating profit margin (OPM) improved by 133 basis points qoq to 22.8% during the quarter primarily due to a better utilisation rate (an improvement of 189 basis points in the offshore utilisation rate to 85.6% and that of 53 basis points in the onshore utilisation rate to 97.3%) and an increase in the billing rates (a 0.63% sequential growth in the onsite billing rate and a 0.51% sequential growth in the offshore billing rate). Consequently, Satyam's operating profit grew by 16.8% qoq to Rs550.6 crore.
• The net income grew by 7.6% qoq to Rs466.8 crore, below our expectation of Rs485.9 crore. The net income was lower primarily due to a lower than expected other income of Rs23 crore following foreign exchange (forex) losses of Rs46 crore in Q4FY2008. For the same quarter the company has reported earnings per share (EPS) of Rs7, which is below its guidance of Rs7.23 announced in the previous quarter.
• For FY2009 the company has guided to a revenue growth of 23.9% to 25.9% in rupee terms; the same is on the higher end of the street expectation. The earnings are expected to grow at 17-19% during the same period, in line with the market expectation. The earnings are expected to grow at a lower rate compared with the top line primarily due to a 50-basis-point decline in the OPM and a 2% equity dilution.
• In Q1FY2009, the revenues and EPS are guided to grow to Rs2,500-2,512.5 crore and Rs7.64-7.68 respectively, implying a sequential growth of 3.5-4.0% in the top line and of 9.7-10.2% in the EPS. The Q1FY2009 guidance given by Satyam is better than that provided by its peers in the last week.
• To fine-tune our earnings estimates and to factor in the revised exchange rate assumption of Rs39.5 for FY2009, we have revised downward our earnings estimate for FY2009 by 0.2%. We have also introduced our earnings estimate for FY2010 in this note and expect the earnings to grow by 7.7% in the next fiscal. At the current market price, the stock is trading at 15.3x FY2009 earnings estimate and 13.8x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with a price target of Rs505.

Trade Recommendation: Tata Consultancy Services
Price target: Under review
Current market price: Rs992

Q4FY2008 results: First-cut analysis

Result highlights

• TCS (Tata Consultancy Services) has reported a growth of 2.9% qoq (quarter on quarter) and 18.4% yoy (year on year) in its consolidated revenues to Rs6,094.7 crore during Q4FY2008. The sequential revenue growth was contributed by volume growth of 4.8% and rupee depreciation of 1.1%. However the revenues during the quarter were adversely impacted by a 1.6% decline in blended realisation and a change in the revenue mix (1.4% due to higher offshore proportion).
• The OPM (operating profit margin) declined by 118 basis points to 25.5% sequentially. The OPM was dented by lower blended realisation (1.6% q-o-q [quarter-on-quarter] decline) and increase in overhead cost as percentage of sales (up 70 basis points to 21.1% of the sales). On the other hand, the favourable offshore-onsite mix partially cushioned the pressure on OPM.
• The other income declined sharply by 25.4% qoq to Rs78.1 crore. Consequently, the net income fell by 5.6% qoq to Rs1,255.9 crore, which was below our expectation of Rs1,377.7 crore. The performance was largely dented by a slowdown in the business from two of its top clients (from the banking and financial services domain).
• The company closed six large deals during the quarter, with two of the deals amounting to over $250 million each. The deal pipeline is also healthy and the management expects the growth to improve in the coming quarter. TCS has set a target of 30,000-35,000 gross addition of employees in FY2009.
• We would review FY2009 earnings and introduce FY2010 estimates in a detailed note. At the current market price, the stock trades at 14.8x FY2009 earnings and we maintain a Buy call on the stock.

Trade Recommendation: Ranbaxy Laboratories, Infosys, Zee News, HCL

Trade Recommendation:: Ranbaxy Laboratories
Trade Recommendation: Buy
Price target: Rs625
Current market trading price: Rs482

Ranbaxy settles on Nexium; price target revised to Rs625

Key points

• Ranbaxy Laboratories (Ranbaxy) has entered into an out-of-court settlement relating to the launch of generic Nexium, Astra Zeneca's blockbuster drug for gastroesophageal reflux disease.
• Under the terms of the settlement, Ranbaxy can launch generic Nexium in the USA on May 27, 2014 with a 180-day exclusivity. This is ahead of the drug's patent expiry in 2018. Further, Ranbaxy will also supply a significant portion of Astra Zeneca's requirement for Nexium in the USA from May 2010 onwards and supply esomeprazole magnesium (the active pharmaceutical ingredient for Nexium) from May 2009 onwards.
• In a separate agreement, Ranbaxy has also been designated as the authorised generic player for two older Astra Zeneca products--the heart drug Plendil, or felodipine, and the 40mg version of ulcer pill Prilosec, or omeprazole. Ranbaxy will be compensated for its distribution services on standard commercial terms.
• Nexium clocked revenues of $5.2 billion in 2007 and is Astra Zeneca's biggest product. Using the discounted cash flow (DCF) approach, we value Ranbaxy's Nexium deal with Astra Zeneca at Rs70 per share.
• We are upgrading our price target for Ranbaxy to reflect the value of the Nexium opportunity. We continue to maintain our earnings estimate at the previous levels for the base business. Hence we arrive at a revised price target of Rs625 (20x CY2009E earnings of base business plus Rs135 for exclusivity opportunities).
• Clarity on the launch of generic Lipitor both in the USA as well as in the other world markets, along with news flow on further Para IV first-to-file (FTF) opportunities, would act as trigger for the stock. At the current market price of Rs482, Ranbaxy is trading at 22.5x its base CY2008E and 19.7x its base CY2009E earnings (excluding exclusivity opportunities). We maintain our Buy recommendation on the stock with a revised sum-of-the-parts price target of Rs625.

Trade Recommendation:: Infosys Technologies
Trade Recommendation: Buy
Price target: Rs1,940
Current market trading price: Rs1,510

Result highlights

• Infosys Technologies (Infosys) reported a revenue growth of 6.3% quarter on quarter (qoq) and 20.4% year on year (yoy) to Rs4,542 crore during the fourth quarter. The sequential growth in the revenues was contributed by a volume growth of 4.9% in its consolidated information Technology (IT) service business, an increase of 0.2% in its blended realisation and a depreciation of 0.9% in the rupee.
• The operating profit margin (OPM) decreased by 10 basis points qoq to 32.5% in Q4FY2008. The operating profit grew by 6.2% qoq to Rs1,478 crore.
• The other income component declined to Rs139 crore in Q4FY2008 from Rs158 crore during the corresponding period last year primarily due to a foreign exchange (forex) fluctuation loss of Rs45 crore during Q4FY2008 as compared to a relatively lower loss of Rs14 crore in Q3FY2008. The company also recorded a tax reversal of Rs20 crore during the quarter compared to Rs51 crore in Q3FY2008. This led to a 1.5% quarter-on-quarter (q-o-q) increase in the net income to Rs1,249 crore. After adjusting for these tax reversals, the company's earnings grew by 4.2% sequentially to Rs1,229 crore.
• The company announced a final dividend of Rs7.25 per share and a special dividend of Rs20 per share. The company also intends to increase its dividend payout ratio from 20% to 30% of the net profit.
• In terms of guidance for FY2009, the revenues are guided to grow by 19% to 21% and the earnings are guided to grow 16.7% to 18.7% in dollar terms (Rs92.3-93.9 per share in rupee terms). This is in line with our expectation and higher than street expectations. However, the guidance for Q1FY2009 is quite muted. In rupee terms, the revenues are guided to remain flat sequentially (with a growth of less than 1%), whereas the earnings are expected to decline sequentially to Rs20.7 per share (down from 3.5% sequentially).
• In terms of demand environment, the management indicated that 76% of its clients expect their IT budget to decline or remain flat. Moreover, the company is also witnessing some deal cancellation in the retail vertical. On the positive side, there has not been any cancellation of projects in the Banking Financial Services & Insurance (BFSI) vertical.
• We have revised our earning estimates for FY2009 downward by 2.6% on account of lower other income, as the company plans to increase its dividend payout ratio. We have also introduced FY2010 estimates and expect the company's earning to grow by 4.8% to Rs99.8 per share. The lower earning growth rate will be primarily due to an increase in the effective tax rate from 15% in FY2009 to 22% in FY2010 due to withdrawal of Software Technology Park of India (STPI) benefits. At the current market price, the stock is trading at 15.9x FY2009 earning estimates and 15.1x FY2010 earning estimates. We maintain Buy recommendation on the stock with revised price target of Rs1,940.

Trade Recommendation:: Zee News
Recommendation: Buy
Price target: Rs79
Current market price: Rs57

Q4FY2008 results: First-cut analysis

Result highlights

• Zee News has delivered a blow-out performance for Q4FY2008. Beating our and consensus estimates the revenue from its operations grew by a robust 59.1% year on year (yoy) to Rs113.1 crore in the quarter. The net profit after minority interest zoomed multifold to Rs15.3 crore during the same period.
• The advertising revenues soared by 84% yoy to Rs86 crore while the subscription revenues that had grown by a meagre 7.6% in M9FY2008 grew by 49.7% yoy and 36.3% quarter on quarter (qoq) to Rs22 crore. A break-up of its channels into the existing and new businesses shows that the revenues from the existing businesses grew by a handsome 53% yoy whereas the new businesses recorded a 153% growth in their revenues.
• The operating profit margin for the quarter stood at 23.7% against -1.3% for Q4FY2007. Thus the operating profit grew to Rs26.8 crore against an operating loss of Rs0.9 crore in Q4FY2007. The improvement in the margins of the existing businesses continued and stood at 37.2% for the quarter. The operating loss for the new businesses declined from Rs15.3 crore in Q4FY2007 to Rs10.1 crore.
• Zee Marathi and Zee Bangla, which are number one channels in their respective genres, increased their gross rating points (GRPs) by 35.7% and 18.5% respectively over Q4FY2007 whereas Zee Telugu and Zee Kannada, which form a part of the new businesses, increased their GRPs by 74.3% and 123.4% respectively. We believe that with the continuous gain in viewership the new businesses would break even in FY2009.
• The company will launch Zee Tamil by the end of July 2008 against which it has charged Rs1.39 crore as expenses in the quarter. The south Indian regional entertainment diaspora is highly competitive. However, considering the Zee group's established track record in entertainment and the size of this market, we remain positive on Zee News' prospects in these markets. We believe that its entertainment channels in the southern regional languages remain the key drivers of its growth in the longer term.
• At the current market price of Rs57.2 the stock trades at 18.6x its FY2010E earnings per share of Rs3.1 and at FY2010E market cap/sales of 2.6x. We maintain our Buy recommendation on the stock with our price target of Rs79.

Trade Recommendation:: HCL Technologies
Trade Recommendation: Buy
Price target: Under review
Current market trading price: Rs246

Q3FY2008 results: First-cut analysis

Result highlights

• HCL Technologies has reported a revenue growth of 7.1% quarter on quarter (qoq) and 23.3% year on year (yoy) to Rs 1,944.8 crore for the third quarter ended March 2008. In dollar terms, it has reported a sequential growth of 5.2% in its consolidated revenues to $484.9 million. The sequential growth in the revenues was driven by a volume growth of 6.6% (a 5.3% growth in software services, a 8.5% growth in IMS and 4.5% growth in BPO services), which was partially mitigated by the adverse impact of offshore shift (0.3%) and lower material billing in the IMS business (1.1%) during the quarter.
• The operating profit margin (OPM) improved by 88 basis points to 22.3% on a sequential basis. The margin improvement was aided by higher realisations (7 basis points), hedging gains (22 basis points), revenue mix (26 basis points) and efficiency gains (48 basis points). This positive affect was however partially offset by higher infrastructure expenses of around 10 basis points.
• In terms of segments, the earnings before interest, tax, depreciation, and amortisation (EBITDA) margins of all the three business lines improved on a sequential basis. The IMS and software services businesses reported margin improvement of 113 basis points and 93 basis points sequentially. The BPO services reported a 16 basis-point sequential improvement in its margins.
• However, the foreign exchange (forex) losses of Rs27.1 crore as compared to forex gains of Rs5.8 crore in Q2FY2008 resulted in a relatively lower earning growth of 2.9% quarter on quarter (qoq) to Rs342.5 crore. This is largely in line with our estimates.
• In terms of operational highlights, the company has signed deal worth $500 million during the quarter. However, it has maintained its full year revenue growth guidance of around 35% implying a relatively muted sequential growth in Q4FY2008. This is largely due to a slowdown in business from two of its top 10 clients as fallout of the scenario in the USA. Moreover, the company added just 1,848 employees in Q3FY2008 and has scaled down the recruitment target to 9,000 employees in FY2008 (down from 12,000 employees earlier).
• At the current market price, the stock trades at 13.3x FY2008 and 10.3x FY2009 estimated earnings. We maintain our Buy recommendation on the stock, but would revise the earning estimates and price target in the detailed update.

Stock Recommendation:: Reliance Industries

RIL stock price has corrected by over 22% from its peak resulting in drop in expectation value. With atleast 9 discoveries under appraisal (two more discoveries over the last three weeks), highly competitive off-gas based petrochem complex on the anvil, we believe, risk-reward has turned favourable and presents a well diversified growth opportunity. We are upgrading the stock from Neutral to Outperform, with a base case target price of Rs3025/share, an upside of ~19% from current levels. RIL is now our top pick in the oil and gas / Petrochem space.

Key arguments:

1. Potential risk to refining margin is overstated. Margins remain robust.

We maintain that refining margins are headed down. However, we believe, the risk to refining margins is being overdone. Refining margins remain robust, with March month Singapore complex averaging US$8.5/bbl (our long term Singapore GRM average is USD 6/bbl and USD12.75/bbl for RIL). Though, this is seasonal (peaking in the month of May) and is not sustainable, we believe, a crash to below US$5/bbl on a sustained basis is highly unlikely. While weak global economic growth and its impact on OECD oil demand remains a concern, with a relatively weak demand elasticity and support from developing countries, global demand, is reasonably well placed. A relatively weak supply pipeline and upgradation to higher fuel norms across major consuming countries are set to provide downside support. Squeezed EPC resource base and escalating capex costs are delaying refinery commissioning over the next three years, especially in the Middle-East. While, scheduled capacity commissioning correspond to steady demand growth, we believe, slippages by few months, which are very common, would push it down further, keeping demand-supply fairly balanced, even if demand were to be impacted to global GDP growth.

In the case of RIL, gasification of coke and value addition to refinery off-gases (scheduled for FY11-12) along with ability to produce Euro IV & V fuels, are set to support the margins. We believe, RIL’s refining business deserves a valuation premium to global multiples on account this.

2. E&P related positive newsflow to be the key driver of stock performance

Appraisal of significant discoveries in Cauvery, KG and Mahanadi basins in India along with Yemen discoveries are likely to provide a steady flow of positive news, driving stock performance. Pronouncements by Niko and Hardy oil, minority stake holders in some of these blocks indicate very large reserve potential in the discoveries, comparable to KG-D6. GCA’s (Gaffney, Cline & Associates) report (Competent Person’s report) to Hardy oil indicate potential reserves running into several TCF in D9, while D3 is supposed to be more favourably sited with respect to existing discoveries in KG basin. Pronouncements by Niko too indicate large potential in D4. Atleast nine discoveries are under appraisal in KG-D6, Cauvery, KG D5 etc are likely to add to SOTP value. Further, a large CBM resource base and a mix of highly prospective acreage in prolific basins provide a good base for future upsides from E&P. With scheduled arrival of new rigs for deepsea drilling over the next 12-18 months, new discoveries are likely We have valued the reserves based on P/CF multiple, across three scenarios, base-bull-bear cases.

3. a. Petrochem – polyester could surprise

Petrochem downcycle from 1QCY09 is already in the price as it is the consensus view. No major suprises are likely, as we have already built in decline in margin in all through FY09. We believe, polyester margin recovery would cushion the impact of ethylene-propylene cycle downtrend over the next couple of years and could surprise the market. Buoyant cotton prices further provides scope for polyester price upside. Polyester delta over PTA and MEG is close to its cash cost and could only improve from here.

b. Gas based facilities – superior profitability, deserves valuation premium

With IPCL in its fold, RIL is best placed to leverage high petrochem product prices (primarily a function of high crude prices, though higher margins too contributed). Domestic gas prices have not risen much, leading to vastly superior margins for gas based petrochem producers in the country compared to naphtha based producers globally. Gas based cracker margins are about 30-50% higher than naphtha based ones. With crude prices unlikely to fall below US$60/bbl and gas prices unlikely to move up sharply, we believe, Indian gas based crackers would remain more profitable than naphtha based ones for some time to come. Hence, we believe, they have to be valued at a premium. Domestic C2 prices continue to be linked to natural gas prices, though C3 is linked to international propane price. Some debottlenecking is in the pipeline in IPCL’s gas cracker as well as PVC, which is set to add to value.

c. Off-gas based petrochem plant – vastly superior economics

Off-gas based petrochem plant (scheduled for FY11-12 commissioning) offers vastly superior economics vis-à-vis naphtha as well as domestic gas. The relative feedstock cost advantage is ~0.4x vis-à-vis 0.6x for gas based plant, with 1x being the benchmark based on naphtha based plant. These numbers correspond to a crude price range of about US$70-80/bbl and hence would be even more favourable at current crude prices. We believe this plant too would be also command valuation premium over global averages.

4. Large cashflow – set to fuel growth

With very large cashflows ranging between Rs250-300b from FY10 (not adjusted for capex in the pipeline), we believe, growth is likely to be accelerated. (RIL has traditionally been growth focused and has generated superior return ratios) Potential investment in a new refinery at Jamnagar, most likely under RPL could be a large value creator for RIL on account of the favourable tax benefits under the first RPL refinery. Investment opportunities in E&P, SEZ, City gas projects along with overseas inorganic growth opportunities exist. New investment avenues like semiconductor are opening up and appear highly attractive, especially with the Government providing favourable terms.

5. Robust earnings growth – E&P and RPL key contributors

We forecast standalone net profit growth of 15.4% (excluding RPL stake sale) and 24.6% over the next two years, on the back of gas business earnings, even as petrochem and refining earnings decline. Consolidated profit growth is expected to be stronger at 31% and 36% yoy respectively, driven by RPL refinery commissioning. 4QFY08 is likely to be another strong quarter, with 23.6% yoy growth in net profits, driven by a record high refining margin, thanks to record high diesel spread over crude. Our base case target price implies a P/E of 17.4x FY10E.