Weekly Wrap
Investment ideas August 27, 2010
1
US markets to drive growth
FY09 revenues saw an increase of 40% yoy and a further increase
of 18% in FY10. In FY10, the company filed 13 drug applications in
North America, of which 12 Abbreviated New Drug Applications
(ANDAs) were in the US and one in Canada. The US generic pipeline
now comprises 73 ANDAs pending with the USFDA, including 11
tentative approvals. Its generic business is set to benefit from market
share gain in generic Prilosec OTC and new product launches.
Management has guided on 8-10 product launches in the US (FY11).
Its low competition generic product ‘Fondaparinux’, if approved, could
provide further revenue visibility.
Russian business adding momentum
Revenue growth of 25% in Russia outperformed Russian market
growth of 8% in FY10. Growth was driven by strong contributions
from the OTC segment as well as prescription sales. Key brands
such as Nise, Cetrine, Keterol, Omez and Ciprolet played a major
role. At present, it accounts for 1.4% market share in value terms
(Pharmexpert MAT, March ‘10).
Strongly placed in Indian formulations business
Indian formulation business saw a revenue growth of 20% in FY10
to Rs10.2bn. This was mainly on account of volume growth of ~16%,
new product led growth of ~6% and price de growth of 2%. New
product launches constituted ~5% of the total revenue. Its top 10
brands accounted revenues of Rs3.8bn (38% of India’s formulation
revenue). It had launched 11 new products in Q1FY11 and expects
to continue with the momentum. Going ahead, management expects
to witness a CAGR of ~18% in the next two years driven by new
product launches and addition of field force.
Outlook and Valuation
FY10 saw improvement in profitability and cashflows and was
evident in the form of strong operational cash flows of Rs14.8bn
(FY10) against Rs3.5bn (FY09) mainly led by strong profitability
and reduction in working capital. Management expects to earn a
ROCE 18-22%, in line with the goal of reaching 25% by 2012-13. It
expects to maintain double digit growth in India and Russia. US
generics continue to be a key market. In the US markets, it has
been aggressive in Para IV filings in FY10. Going ahead, it is all set
to tap the opportunity and benefit from the large number of drugs
going off patent in US over the next 2-3 years. It currently trades at
20.3x FY 11E earnings. Our price target of Rs1,803 is 20x FY12E
earnings.
Financials
Source: Company, India Infoline Research
Y/e 31 Mar (Rs m) FY09 FY10 FY11E FY12E
Revenues 69,441 70,277 76,117 90,319
EBITDA Margins (%) 23.4 20.8 22.8 24.3
Reported PAT (5,168) 1,068 11,161 14,948
EPS (Rs) (30.5) 6.3 65.6 87.7
P/E (x) (43.5) 210.9 20.2 15.15
P/BV (x) 5.4 5.4 4.5 3.5
EV/EBITDA (x) 14.9 16 13.3 10.2
ROE (%) (12.3) 2.6 22.0 23.2
BUY
Allied Digital Services CMP Rs237
IMS business to drive 26% revenue CAGR over FY10-12
The experience and expertise in system integration (SI),
technologicall depth, wide onsite reach and sizeable remote
infrastructure make ADSL a leading IMS player in the domestic
market. The company has gained a strong foothold in the US market
with the acquisition of EPGS in mid-FY09. After struggling initially,
EPGS is now on a sturdy growth path with FY11 revenue expected
at US$55mn, a growth of 28% yoy despite offshoring. Overall IMS
revenues of the company are expected to witness FY10-12 CAGR
of 38% v/s 16% for SI segment. Resultantly, IMS revenue share
would increase from 56% in FY10 to 64% in FY12.
EBIDTA to expand 230bps over FY10-12; to reach 22% in FY12
ADSL’s margin improved significantly by 200bps in FY10 driven by
implementation of hybrid delivery model in EPGS, cross-selling of
value added services to EPGS clients, revenue mix shift in the
domestic business towards high-margin IMS segment and towards
RIM within. EPGS operating margin has improved to 7% from near
0% when acquired. We expect ADSL’s OPM to expand by ~190bps
in FY11 and ~40bps in FY12 on further expansion in EPGS OPM
(to 17-18% over next 2 years), continued revenue mix shift towards
IMS/RIM and contribution from theLenovo deal.
To turn FCF positive in FY11; growth without dilution/leverage
We estimate ADSL to have turned CFO positive in FY10 and become
FCF positive in FY11. Augmentation in CFO and FCF over FY10-12
would be driven by robust revenue growth, margin expansion,
reduction in working capital intensity (due to decline in SI revenue
share) and no significant capex (current NOC/SOC utilization is low).
This and the robust Cash balance (Rs2.2bn, 20% of m-cap) eliminate
the need for equity issuance and balance sheet leverage to fund
growth over the next 3-4 years. Another pleasant feature about ADSL
is its pure RoE of 20%+ (driven by high RoA) as the company has
negligible leverage. The utilization of significant C&E would only
improve RoE in the coming years.
Robust 30% earnings CAGR; valuations cheap at 6x FY12 P/E
A strong revenue growth of 26% over FY10-12 and material margin
expansion (230bps) would drive robust 30% earnings CAGR for
ADSL. Given the strong earnings growth, significant improvement in
cash flows and a robust/liquid balance sheet, we believe that current
valuation of ADSL at 7.4/6x FY11/12 P/E is extremely attractive.
Further, concerns with respect to EPGS growth/profitability may
lessen considerably over the next couple of quarters through
demonstrated performance. We see significant valuation re-rating
to 7.5-8x FY12 P/E over the next 6 months.
Financials
Source: Company, India Infoline Research
Y/e 31 Mar (Rs m) FY09 FY10 FY11E FY12E
Revenues 5,557 6,980 8,909 11,150
yoy growth (%) 86.9 25.6 27.6 25.2
Operating profit 996 1,387 1,937 2,469
OPM (%) 17.9 19.9 21.7 22.1
Reported PAT 774 1,060 1,449 1,782
yoy growth (%) 75.7 36.9 36.7 22.9
EPS (Rs) 20.6 22.8 31.1 38.2
P/E (x) 11.2 10.1 7.4 6.0
BUY
Dr. Reddy’s CMP Rs1,330
India Infoline Weekly Wrap
Fears of a slower global recovery got re-ignited this week. Existing and
new home sales in the US fell sharply, sending world markets into
tumbling. Despite strong F&O rollovers to the September series, the
NSE Nifty failed to sustain at support of 5,450 levels. Finally, the Nifty
and the BSE Sensex fell by 2.2% each.
Real estate sector bore the brunt of the selloff after the recent spurt.
Metal stocks also came under pressure despite an uptick in LME
prices. Profit booking was also seen in Banking and Auto stocks.
A fresh round of dismal US macroeconomic data rekindled fears of
a double-dip recession in the world's largest economy. Also, a report
scheduled to be released on Friday is likely to reveal that the US
economy grew at less than anticipated pace in the second quarter.
Separately, Standard & Poor's cut Ireland's long-term credit rating.
*As per previous close
FII & MF activity (Rs cr)
FII MF
Date Net Investment Net Investment
19-Aug 2,655 18
20-Aug 714 (247)
23-Aug - (4)
24-Aug 903 (716)
25-Aug (290) (419)
Total 2010 58,153 (15,400)
BSE Sensex BSE 200
CMP % CMP %
Company (Rs) Chg Company (Rs) Chg
ONGC 1,318 4.7 BPCL 777 11.3
Bharti Airtel 316 1.9 Videocon 261 7.3
NTPC 196 1.7 Nestle 3,060 6.7
SBI 2,794 0.3 Ispat Ind. 19 4.8
Dr. Reddy 1,328 0.1 ONGC 1,318 4.7
BSE Sensex & BSE 200 Top Five Gainers
BSE Sensex & BSE 200 Top Five Losers
BSE Sensex BSE 200
CMP % CMP %
Company (Rs) Chg Company (Rs) Chg
JP Associate 112 (9.5) Bombay Dyeing 570 (11.8)
Hindalco 164 (8.1) Jai Corp 258 (11.7)
Reliance Energy 983 (8.1) HDIL 261 (11.0)
DLF 307 (8.1) Indiabulls Real 172 (10.5)
Hero Honda 1,786 (6.8) Unitech 77 (9.5)
Market review
2
Book closures and record dates
Company Date Purpose
Hero Honda 30-Aug-10 Dividend
NRB Bearing 3-Sep-10 Bonus
PFC 3-Sep-10 Dividend
Insider Trades
Company Name B/S Qty (‘000)
Shree Ashtavinayak Dhilin Mehta B 180.0
MindTree Balaji A S 0.3
Asian Hotels Sushil Gupta B 634.5
ITC K. N. Grant S 120.0
S&P CNX NIFTY
5,544
5,505
5,462 5,478
5,409
23-Aug 24-Aug 25-Aug 26-Aug 27-Aug
Sectoral Indices
-8.5%
-3.3%
-2.5%
-2.4%
-2.1%
-2.0%
-1.9%
-1.3%
-1.2%
-1.1%
-1.1%
-0.6%
-10% -8% -6% -4% -2% 0% 2%
BSE Realty
BSE Metal
BSE Bank
BSE Small-Cap
BSE-200
BSE IT
BSE Auto
BSE Pharma
BSE Power
BSE Oil & Gas
BSE Cap Goods
BSE FMCG
Bulk deals
Date Institution Scrip name B/S Qty (lacs) Price
23-Aug Deutsche Sec Bank of Raj B 8.4 211
24-Aug Reliance Cap Prime Focus S 1.0 575
25-Aug Deutsche Sec Prakash Steel S 0.9 128
26-Aug Deutsche Sec Aurobindo Ph B 3.8 1,037
26-Aug Merrill Lynch Aurobindo Ph S 7.0 1,035
26-Aug Merrill Lynch Aurobindo Ph S 7.4 1,035
Global Indices
(2.2) (2.2)
(2.8) (2.8)
(1.8) (2.1)
(1.2)
(3.0)
(2.0)
(1.0)
0.0
1.0
Sensex Nifty Dow
Jones*
Nasdaq* Hang
Seng
Nikkei Shanghai
(%)
India Infoline Weekly Wrap
SELL
Hero Honda CMP Rs1,783
Hero Honda has been in a downtrend after hitting 52-week high of
Rs2,070 in last week of June 2010. This week, we saw the stock
breaking below its multiple support levels placed around Rs1,810-
1,830, which coincides with its 200-DMA.
The recent decline was accompanied by impressive volumes.
Further, it has formed Bearish candlestick pattern on the weekly
chart, confirming the negative trend.
The stock had been moving lower ever since it hit its 52-week high.
For the past two months, the stock has been trading within a range
of Rs1,945-1,830. However, it broke below this range on Friday
suggesting a fresh downward move in the coming days.
Every pullback is likely to face resistance around Rs1,830 (200-
DMA). The stock is going ex-dividend by Rs30 on Monday. Traders
are advised to short between the levels of Rs1,750-1,760 with stop
loss of Rs1,790 for target of Rs1,680.
SELL
Triveni Engineering CMP Rs98
After forming Head & shoulder top formation on medium term chart,
stock has broken below neckline prevailing at Rs101. A move below
the neckline is likely to accelerate downward momentum in coming
days all the way to Rs90.
On the weekly chart appearance of Bearish Engulfing pattern
accompanied with Bearish Belt hold is likely to keep stock under
selling pressure in coming days unless we close above Rs101.
We also see Rounding Top pattern which is inherently bearish
structure taking place at Left and Right shoulder suggesting
distribution phase taking place in the range of Rs101-104. We advise
initiating short positions in the counter below Rs97.5 with stop loss
of Rs101 for Target of Rs90.
Negative open interest build-up
Company Price % chg OI % chg Vol % chg
Orchid Chem (1.8) 6.7 (71.9)
JP Associate (1.3) 6.7 (59.8)
ABB (2.5) 6.6 (69.6)
Cipla (0.9) 6.3 (79.7)
Infosys Tech (2.0) 6.2 (66.5)
Positive open interest build-up
Company Price % chg OI % chg Vol % chg
BPCL 0.6 7.2 54.6
First Source 0.8 7.1 (88.3)
Cummins India 2.9 7.0 (16.7)
LIC Housing 0.9 4.5 (44.0)
AB Nuvo 0.1 4.4 (68.5)
Technically strong
10 days Total 10 days
Moving Traded Average
CMP Average Qty Traded Qty
Company (Rs) (Rs) (lacs) (lacs)
Mphasis 616 598 1.9 1.5
Cummins India 729 705 1.1 0.7
ONGC 1,318 1,273 3.2 1.0
Glenmark 290 278 1.5 2.4
Videocon Ind 261 250 5.8 4.3
Technical ideas
3
Technically weak
10 days Total 10 days
Moving Traded Average
CMP Average Qty Traded Qty
Company (Rs) (Rs) (lacs) (lacs)
Bajaj Hind 117 122 8.7 3.8
Glaxo 1,869 1,949 1.1 0.1
MTNL 62 64 2.1 1.9
Essar Oil 126 131 5.4 5.0
BEL 1,670 1,725 0.3 0.2
10:J F M A M J J A
IRIS
1600
1800
2000
Lk
10.00
50.00
Price
Vol
RSI(14,E,9)
HERO HONDA
Dly 10:J J A
IRIS
90.00
97.50
105
113
120
Lk
10.00
40.00
60.00
Price
Vol
RSI(14,E,9)
TRIVENI ENGG
Dly
0
India Infoline Weekly Wrap
Mutual fund round-up
IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013
The information in this newsletter is generally provided from the press reports, electronic media, research, websites and other media. The information also includes information from interviews conducted,
analysis, views expressed by our research team. Investors should not rely solely on the information contained in this publication and must make their own investment decisions based on their specific
investment objectives and financial position and using such independent advisors as they believe necessary. The materials and information provided by this newsletter are not, and should not be construed
as an advice to buy or sell any of the securities named in this newsletter. India Infoline may or may not hold positions in any of the securities named in this newsletter as a part of its business. Past performance
is not necessarily an indication of future performance. India Infoline does not assure for accuracy or correctness of information or reports in the newsletter.
Commodity, debt and currency graphs
* As per previous close
Fund this week: IDFC Small & Midcap Fund
Asset allocation (%)
Equity 74.9
Debt 0.0
Cash/call 25.1
Top 5 holdings (%)
Strides Arcolab 3.9
Bombay Rayon Fashions 3.8
IVRCL Infrastructures & Projects 3.7
Dewan Housing Finance 3.4
Exide Industries 3.2
Top 3 sectors (%)
Pharma 7.5
IT - Software 5.9
Breweries & Distilleries 4.4
Fund snapshot
Fund Manager Kenneth Andrade
Latest NAV Rs18.8
NAV 52 high/low Rs19/11
Latest AUM (cr) Rs826
Type Open-ended
Class Equity - Diversified
Options Growth & dividend
Min investment Rs5,000
Benchmark CNX Midcap
No. of stocks 40
No. of sectors 29
Expense ratio 1.9%
Exit load 1%
India Infoline picks
Mutual Funds Assets NAV Absolute return (%) as on August 26, 2010
(Rs Cr) (Rs) 1wk 1mth 3mth 6mth 1yr 2yr 3yr 5yr
HDFC Top 200 (G) 8,307 207.5 (0.1) 4.0 14.0 17.5 30.9 63.8 70.0 234.1
ICICI Pru Dynamic Plan (G) 2,391 102.4 (0.3) 0.6 8.5 12.0 31.1 44.9 46.3 183.4
IDFC Small & Midcap Eqty -(G) 746 18.8 (1.6) 4.8 15.7 22.7 48.0 111.7 -- --
HDFC Tax Saver (G) 2,646 234.3 0.4 4.6 14.9 19.0 40.8 67.2 49.6 153.1
Reliance RSF - Balanced (G) 594 22.9 (0.8) 5.0 13.4 17.1 32.0 74.2 80.4 127.4
4
NFO update
Fund Name Close Type Class
ICICI Pru FMP Sr-52-1Yr Plan C 7-Sep CE Debt - FMP
SBI DFS 370 Days (6) 7-Sep CE Debt - FMP
Reliance Small Cap Fund 9-Sep OE Equity - Div
Mutual Fund Dividend % Record date Class
Axis Tax Saver 10.0 31-Aug Eq - ELSS
UTI MNC Fund 15.0 31-Aug Eq - Sector
Religare Arbitrage Fund 1.8 31-Aug Hybrid
Dividend update
Currency
41
43
45
47
49
51
53
55
May-08 Feb-09 Nov-09 Aug-10
Gold $/OZ
650
850
1,050
1,250
1,450
May-08 Feb-09 Nov-09 Aug-10
Crude (US$/bbl)
10
40
70
100
130
160
May-08 Feb-09 Nov-09 Aug-10
10yr G-Sec Yield (%)
4.5
5.5
6.5
7.5
8.5
9.5
10.5
May-08 Feb-09 Nov-09 Aug-10
Copper (US$/ton)
2,000
4,000
6,000
8,000
10,000
May-08 Feb-09 Nov-09 Aug-10
Aluminium (US$/ton)
1,100
1,600
2,100
2,600
3,100
3,600
May-08 Feb-09 Nov-09 Aug-10
