KPIT Cummins

KPIT Cummins’ stock has been a major outperformer recently, more than doubling in the last six months, wherein the BSE IT index and BSE Sensex gave flat returns. Most of the outperformance was in line with its improving business performance from a below-par first quarter. Besides improving outlook, semblance of stability returning from its largest client Cummins, after having declined in each of the previous four quarters, was a positive. Overall, KPIT delivered 4.4 per cent sequential revenue growth (in rupee terms) in December 2009 quarter. Pricing has improved sequentially, and integration of Sparta (acquired in November) not only added to its pricing power but also aided in garnering higher revenues from the US region.
Although the margins are comfortable at above 20 per cent, rupee appreciation, wage hikes and lower utilisation put pressure in the recent quarter. Expect some margin pressures in the coming quarters on these counts. In terms of segments, manufacturing segment has shown signs of revival (grew 10.7 per cent sequentially), while the semi-conductor vertical is yet to come onto the recovery path. Going ahead, auto electronics segment could be a growth driver in the next two-three years, while the company is focusing on the emerging markets to drive revenues in the business IT segment. For 2010-11, analysts expect its revenues and profits to grow by 15-16 per cent each. At Rs 112.2, the stock is trading at 8.8 times its 201011 estimated earnings, and can deliver 15-20 per cent returns in a year’s time.

BPCL

Nomura downgrades BPCL’s rating to `Reduce’ from `Neutral’ with a revised price target of Rs 450, down from Rs 525. BPCL has outperformed the BSE Sensex by 15% and 38% over the past three month and twelve months respectively. The stock is building in too much hope on de-regulation/low subsidy sharing, in our view. Apart from several positive statements of intent, OMCs (oil marketing companies) have been seen as defensive. At the revised oil price assumption and subsidy sharing estimates, the earnings estimate for BPCL declines by 36% for FY10E, 38% for FY11E and 44% for FY12E. Subsidy concerns significantly increase at higher oil prices.

With lots of hope already built in, we believe risk-reward is becoming increasingly unfavourable. Nomura has decreased the EPS estimates by 36%, 38% and 44% for FY10E, FY11E and FY12E respectively, due mainly to higher subsidy at higher oil price assumptions. Nomura continues to believe that for OMCs to emerge as a longterm investment idea, concrete steps to remove ad hocism and bring transparency on subsidy sharing are a must.

SUN PHARMACEUTICAL

Sun Pharma has achieved a very good trade-off between its risks and returns. It is a safe bet for investors looking for the right mix of risk, growth and dividends
Beta: 0.29
Institutional Holding: 25.3%
Dividend Yield: 0.97%
P/E: 10.7
M-Cap: Rs 22,874 cr

SUN PHARMACEUTICAL — the largest and currently the most valuable domestic pharma company on the bourses — is a safe bet for investors looking for the right mix of risk, growth and dividends. The stock has depreciated by 9% during the year till date, compared to a 55% fall in the BSE Sensex.

BUSINESS:

Sun Pharma has established itself as a niche player in the chronic super-specialty therapeutic segments with a focus on the US and Indian generics market. Nearly 40% of the company’s total revenues are contributed by the US generics market and a similar proportion is accounted for by the domestic market.

The company has always followed a strategy of differentiation, which has paid rich dividends in the past. Be it venturing into neuro-psychiatry, acquiring US companies with manufacturing facilities, staying out of European markets or hiving off innovative research & development (R&D) into a separate company, Sun Pharma’s business model has proved to be superior to that of its peers.

The company earns around 55% of its revenues from its international businesses, with the US being its largest market. In the US, it is an integrated generic manufacturer with flexibility to manufacture onshore/offshore. The company’s strategy is to manufacture technically complex generics and it attempts to be the first to market these products. Taking calculated risks, the company has made several ‘at risk’ launches in the US market. As of end of September ’08, it had abbreviated new drug applications (ANDAs) for 96 products pending.

The company has a dominant presence in the domestic branded generics market. It is among the top three players for nearly half of the branded generics products in India. Despite this, Sun Pharma’s top 10 brands in the domestic market account for a modest 21% of its domestic sales.

GROWTH STRATEGY:

The company has largely grown organically, making 11 acquisitions till date, five of them being cross-border. It intends to achieve cost leadership through vertical integration from manufacturing active pharmaceutical ingredients (APIs) and finished dosages to marketing them. Sun Pharma’s acquisitions have been made to further this objective. It has been quite successful in turning around loss-making companies — be it US-based Caraco or yet-to-be-acquired Israeli company Taro.

Sun Pharma is now eyeing the key generic markets in Europe and is working on complex generic products, including injectibles. Its strategy is to use India as a manufacturing base for drugs approved in Europe.

The company is also developing strength in yet another niche area of controlled substances. In ’05, Sun Pharma acquired a facility in Hungary authorised to make controlled substance APIs, starting from the initial stage, i.e. poppy farming. In the same year, the company acquired a brand new manufacturing site in New Jersey, equipped with special suites for the manufacture of controlled substances finished dosages.

Last week, the company acquired a US-based registered narcotic API importer and producer. All these acquired units together will help the company to increase its presence in controlled substances due to vertical integration and help it to become an active player in the pain management segment in the US.

FINANCIALS:

The company’s net sales and profits have tripled in the past four years since FY05. Net sales have witnessed a compound annual growth rate (CAGR) of 27% to Rs 3,356.5 crore during the past five years. Likewise, the company’s profit has recorded a much faster CAGR of 43%.

The company, on an average, has distributed around 23% of its net profits as dividends in the past five years. The 36% growth in dividends has been lower than the growth in profits since FY03. Sun Pharma is in a growth phase and hence, prefers to maintain its payout ratio at around 25% of its profits.

While most pharma companies have been reeling under the pressure of foreign exchange losses on account of their forex borrowings in recent quarters, Sun Pharma has minimal exposure to forex derivatives and does not have any forex borrowings. Hence, it has managed to keep such extraordinary items out of its books. Rather, the company has been enjoying super-normal profits and profit margins of more than 40% since the past year due to 180-day marketing exclusivities on its products in the US.

VALUATIONS:

On a consolidated basis, the company is trading at a priceearnings (P/E) multiple of 10.7. This is attractive considering the valuations of its peers and the company’s historical growth in revenues and profits. Sun Pharma has achieved a very good tradeoff between its risks and returns. Even if the company registers normal growth in profit for FY09, it is still a safe and attractive bet for investors, who can consider picking up this stock on dips.

WELLNESS QUOTIENT

Sun Pharma has established itself as a niche player in the chronic super-specialty therapeutic segments with a focus on the US and Indian generics market The company has always followed a strategy of differentiation, which has paid rich dividends in the past It earns around 55% of its revenues from its international businesses, with the US being its largest market The company’s strategy is to manufacture technically complex generics and it attempts to be the first to market these products Sun Pharma is among the top three players for nearly half of the branded generics products in India It is now eyeing the key generic markets in Europe and is working on complex generic products, including injectibles The company is also developing strength in yet another niche area of controlled substances Its net sales and profits have tripled in the past four years since FY05

Stock Views on Crompton Greaves, Madhucon Projects, Great Offshore

SKP Securities on Great Offshore - Target Rs 454

SKP Securities has recommended a buy rating on Great Offshore, with a price target of Rs 454, in its report dated.


"GOL has forayed in to port management and single point mooring operations by acquiring 100% equity stake in two Hydrabad based companies KEI-RSOS Maritime Ltd. (KEI) and Rajamahendri Shipping & Oilfield Services Ltd (RSOS) with purchase consideration of Rs 1.6 billion. At the current market price of Rs 360, the stock is trading at a P/BV of 1.16x and 0.95x of FY10E and FY11E book value of Rs 310 and Rs 378 respectively. We recommend 'BUY' rating on the stock with a target price of Rs 454/- (26% upside) in 12 months implying a P/BV multiple of 1.2x of FY11E book value," says SKP Securities' report.


Angel Broking on Madhucon Projects - Target Rs 246

Angel Broking has recommended a buy rating on Madhucon Projects, with price target of Rs 246, in its report .


"Madhucon Projects stock has outperformed the BSE Sensex significantly (by 25.2%) in CY2009 YTD, which is in line with our expectation as the stock had slipped into a deep undervaluation zone. We have increased our Target Price for the stock on the back of the following factors, viz.

1) Better demand outlook: Post election verdict there has been a positive change in economic outlook and the concerns hovering over Infrastructure Sector have been put to rest; and
2) Increasing our Target Multiple: We have valued MPL's core Construction business at a P/E of 6x FY2011E (discount to historical average and to peers like IVRCL Infra, Nagarjuna Construction, etc.) from 4x earlier on account of improved Earnings visibility and re-rating of the sector. We recommend a Buy on the stock with a SOTP Target Price of Rs 246, at which level the stock would trade at 1.3x FY2011E P/BV (discount to its peers). It may be noted here that we have not factored in any potential upside from MPL's Coal and Power ventures," says Angel Broking's report.

Angel Broking on Crompton Greaves - Target Rs 306

Angel Broking has recommended an accumulate rating on Crompton Greaves, with price target of Rs 306, in its report.

"It is pertinent to note here that during April 2005 - June 2009, CGL traded at an average discount of about 48% to the forward rolling P/E of ABB primarily due to the technological gaps and superior growth for ABB. Currently also, CGL is quoting at a hefty discount of 43-44% to ABB. However, we believe that such a high gap is unwarranted and going ahead it would narrow down as CGL has been bridging the technological gaps through various acquisitions."

"The gap would also narrow down on the back of superior Earnings growth (15.6% CAGR for CGL as compared to 3.6% CAGR for ABB over the next two years) and higher average RoEs of 28-29% for CGL as against 21-22% for ABB. Nonetheless, some discount would continue to persist due to the relative advantage of access to the parental technology, which ABB posses. We assign CGL a Target P/E multiple of 15x and Initiate Coverage on the stock, with an Accumulate recommendation and Target Price of Rs 306," says Angel Broking's report.