Stock Idea - Ranbaxy Laboratories

Recommendation: Buy

CMP = Rs 482

Price target: Rs 625

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 180-days 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, valuation of Ranbaxy's Nexium deal with Astra Zeneca comes to Rs 70 per share. 
• 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 Rs 482, Ranbaxy is trading at 22.5x its base CY2008E and 19.7x its base CY2009E earnings (excluding exclusivity opportunities).
• I maintain Buy recommendation on the stock with a revised price target of Rs 625.

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Q4FY2008 earnings preview - Special Report

Key points:

• The earnings of the Sensex companies are likely to grow by 22.2% year on year (yoy) and 2.4% quarter on quarter (qoq) in Q4FY2008.
• Excluding ONGC and DLF, the earnings are expected to grow by 16.2% yoy and 3.6% qoq. The estimated earnings growth is expected to be relatively much slower than the growth witnessed in the previous few quarters and indicates moderation in the overall growth momentum.
• The report card of banking and capital goods companies will undergo extensive scrutiny following the series of negative developments recently.
  The expected 22.2% yoy growth would mainly be achieved on the back of the high growth in the oil & gas sector (76.2% yoy) and the telecom sector (34.9% yoy) while the automobile sector is expected to act as a drag on the Sensex' earnings.
• The Q4FY2008 performance gains all the more important against the backdrop of a deterioration in the macro environment, ie soaring headline inflation, a dip in the industrial production during January 2008, lower automobile sales and losses from foreign exchange (forex) derivatives.
• Some of the sectors have been facing tough challenges: Cement (high fuel cost), fast moving consumer goods (FMCG; higher raw material cost) and capital goods (capacity constraints).
• The Reserve Bank of India (RBI) and the finance minister have taken cognisance of the fears of a slowdown. However, the macro situation does not offer easy solution for stimulating growth because inflation (7.4% as on March 29th) is already well above the RBI's target rate of 5%.
• On the positive side, the Union Budget has spelled out multiple measures to stimulate consumption and investments. For instance, the loan waiver scheme and tax slab restructuring are likely to give a major boost to consumption, though in the medium to longer term.
• Overall, the scenario looks healthy, though I anticipate further moderation in earnings growth. I would suggest my readers to stay invested.

Stock Idea - Unity Infraprojects

Recommendation: Buy

CMP = Rs 581

Price target: Rs 970

Key points:

• Unity Infraprojects (Unity) has bagged two new orders worth Rs 222 crore. The first order totaling Rs 133.6 crore is for the construction of a mall and a hotel, whereas the second order worth Rs 88.3 crore is for the construction of five towers with basement and a podium.
• With these two orders, the company has bagged orders worth around Rs 450 crore in Q4FY2008. This implies its current order book stands at Rs 2,425 crore at the end of March 2008, which is a growth of 21.4% year on year (yoy).
• The prospects for Unity are very bright and I recommend Buy call on this scrip with a price target of Rs 970 over next 6 months.

Stock Idea - Madras Cements

Recommendation: Buy

CMP = Rs 3,202

Price target: Rs 4,800

Key points:

• Madras Cements has completed the process of buy back. As a result of the buy back the earnings per share (EPS) of the company will increase by 1.5%. Firm cement prices in south India will be the key driver for the company's earnings in Q4FY2008.
• The company had a capacity of 6 million tonne at the end of FY2007, which increased to 7 million tonne at the end of FY2008 and is expected to further increase to 10 million tonne by the end of FY2009. Capacity additions will drive the volumes growth of the company.
• At the current market price of Rs 3,202, the share trades at 8.7X and 6.7X its FY2008 and FY2009 earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisaion (EBIDTA) of 5.5X and 5X for FY2008 and FY2009 respectively.
• I maintain a strong Buy recommendation on the stock with a price target of Rs 4,800.

Stock Idea - Ashok Leyland

Recommendation: Hold

CMP = Rs 35

Price target: Rs 43

Key points:

• Ashok Leyland's total vehicle sales during March 2008 grew by 26.7% to 10,698 units from 8,444 units in the same month a year ago. The sales in the domestic market grew by 20%, whereas exports were up by 128% for the month. The surge in sales can be attributed to the year-end push in domestic sales and pending export orders. For FY2008 sales are at 83,309 vehicles, in line with our estimate of 83,200 units. For the same period, export sales have grown by 21% to 7,286 units whereas the domestic sales have declined by only 1.3% to 76,045 units leading to gain in the market share. 
• Ashok Leyland had announced a price hike of 2.5% in end February 2008 to offset the input price increase. Also, the management decided to pass on the benefit of a reduction in the excise duty on buses from 16% to 12% and of the cut in the cenvat on trucks from 16% to 14%. So, the effective price increase has been only to the extent of 1%.
• Ashok Leyland has recently concluded an external commercial borrowing program of US$200 million. This is the largest ever loan taken by the company in a single transaction till date. The loan will partly fund the requirements of the company to meet its expansion plans and overseas investments. 
• Ashok Leyland has a huge capital expenditure (capex) plan of ~Rs 2,000 crore for the next two to three years. It has planned capex to expand its existing capacity and to set up a new manufacturing facility at Uttarkhand. Further additional investment will be required for its light commercial vehicle joint venture with Nissan. 
• The stock price has corrected substantially, thereby providing decent upside to earlier price estimates of Rs 43. However, it would be reviewed again after the announcement of Q4FY2008 results, clarity on the investment in the joint venture with Nissan and impact of the higher raw material prices.
• Currently I recommend Hold call on this stock.

Stock Idea - Orchid Chemicals & Pharmaceuticals

Recommendation: Buy
CMP = Rs 207
Price target: Rs 375
Key points:

• According to a few media reports, Solrex Pharmaceuticals has acquired an 8.06% stake in Orchid Chemicals (Orchid) from the open market. The stake has been acquired at an average price of Rs 165-170 per share. As per media speculation, Solrex Pharmaceuticals belongs to the Ranbaxy group. If the media speculation is to be believed and the Ranbaxy group manages to take over Orchid at a cheap price of Rs 165-170 per share, it would come as a huge benefit for the group. The company will gain from acquiring a fundamentally strong business with a complementary product portfolio and that too at extremely cheap valuations.
• Pursuant to the ~40% plunge in the share price of Orchid on March 17, 2008 due to relentless selling by the troubled Bear Stearns and the subsequent margin call trigger for the promoters, the promoter holding in Orchid had reduced from 24% to 17%. The low promoter holding coupled with the sharp fall in the share price made Orchid an attractive takeover target.
• Tfair value of Orchid works out to Rs 375 per share, which means that the Ranbaxy group's purchase price would work out to a 120% discount to the fair value of the company and a 93% discount to the 52-week high price of Rs 328. In fact, the acquisition price would be at par with Orchid's estimated FY2008 book value of Rs 167.6 per share.
• Orchid's business model is fundamentally strong with a strong presence in the USA and expansion plans underway in Europe. However, the stock has been plagued by several concerns including a relatively low promoter holding and an over-leveraged balance sheet. I feel that the potential takeover of Orchid by the Ranbaxy group or even the holding of a minority stake by the Ranbaxy group in Orchid will ensure long-term growth for Orchid, as the latter would be in stronger and more credible hands.
• At the current market price of Rs 207, Orchid is discounting its FY2008E earnings by 11.9x and its FY2009E earnings by 8.8x. The valuations at these levels seem absolutely compelling when viewed in context of the strong growth potential that awaits the company.
• I retain strong positive stance on the stock and maintain Buy recommendation with a price target of Rs 375.

Stock Idea - ICI India

Recommendation: Hold

CMP = Rs 643

Price target: Rs 622

Key points:

• The board of directors of ICI India has approved divestment of its adhesives business for a total consideration of Rs 260 crore to an Indian affiliate of Henkel group, subject to adjustments for actual working capital and cash balances. This is in line with AKZO Nobel's (which has acquired 100% stake in ICI Plc, the parent company of ICI India) decision to divest ICI's global adhesives and electronic materials business to Henkel AG.
• While ICI's global business is transferred to Henkel AG at a valuation of 2.1X its sales, the Indian adhesive business has fetched 2.3X its expected sales for FY2008. The deal will include transfer of portion of Thane manufacturing facility and about 120 employees currently working with the business and the company's shareholding in its subsidiary Polyinks to Henkel.
• I remain positive on ICI India primarily on account of good prospects for paint industry going forward, synergies that would arise on concerted efforts of Akzo Nobel in growing ICI India's business and a huge pile of cash that opens up opportunities for organic and inorganic growth.
• Valuing the core business at 20X FY2009E EPS of Rs 17.8 (excluding other income) and adding the cash per share of Rs 266, I arrive at a fair value of Rs 622 for the stock.
• At the current market price of Rs 643, the stock trades at 21X its FY2009E EPS of Rs 30.9. I recommend a Hold call on this stock.