Research: Credit Suisse
CMP: Rs 588
Credit Suisse initiates coverage on Glenmark Pharma with an 'outperform' rating. Glenmark's approach to the generics business has been as pragmatic as its well-acknowledged R&D strategy. It is likely to create value as the company embarks on an ambitious growth path.
Excitement about the stock is driven by the company's R&D pipeline, but valuation is increasingly supported by its stellar generics business. With an aggressive abbreviated new drug application (ANDA) filing schedule, and a sharp change in product mix away from plain generics, the company's aggressive US revenue guidance can be met without hurting margins.
In Latin America, the company's guidance of 45% FY07-10E compound annual growth rate (CAGR) is conservative, given a low base, secular market growth, rapidly increasing genericisation and appreciating currencies. The stock is rerated strongly around deals, and drifts in between.
Merck's decision to move away from diabetes creates some uncertainty on GRC8200, and announcement of Merck's plans is the only potentially negative catalyst from R&D until the fourth quarter of FY08. Credit Suisse values the company on a sum-of-parts basis, applying a 20x FY09E profit for formulations (in line with the multiples used for its peers), 15x on active pharmaceutical ingredient (API) profit and discounted cash flow (DCF) for the R&D pipeline (Rs 157 per share).
Research: Merrill Lynch
CMP: Rs 2,889
Reliance Industries (RIL) recently sold a 4% stake in Reliance Petroleum (RPL), reducing its stake to 71%. Chevron, which holds 5% stake in RPL, has an option to raise its stake by 24% by buying from RIL. In that case, RIL's stake in RPL will fall to 47% (below majority). This is the reason that Chevron's stake hike in RPL appears unlikely. Chevron may exit RPL by July '09, as per the other option it has.
Post Chevron's exit, RPL is likely to be merged with RIL, like its other subsidiaries in the past. Merrill Lynch views RIL more favourably than RPL. In case the RIL-RPL merger takes place soon, it will not be earnings-accretive for RIL, if RIL's 71% stake in RPL is not cancelled. In most other mergers, RIL's stake has not been cancelled, creating treasury shares. Merrill Lynch's calculation is based on swap ratio based on market price (12:1) and fair value (20:1).
The downside to RIL's FY09-FY10E earnings in the two scenarios is 6-14%. Chevron has to decide whether to hike its stake in RPL or exit by July '09. RIL-RPL merger is likely only after Chevron's exit. RIL's fair value is likely to rise further by '09, driven by exploration & production, retail and SEZ.
But RPL's share price may decline as a refining downturn approaches. Some analysts expect RIL's E&P business will be demerged. Merrill Lynch thinks this is unlikely, as it will not be earnings and value-accretive. This is because, after a demerger, the company's income tax outgo will increase since minimum alternate tax will have to be paid.
CMP: Rs 157
Indian Hotels (IH) met the chief executive officer (CEO) of Orient Express Hotels (OEH) on October 12, '07, after which, it sent a letter with a six-point alliance proposal to OEH, a response to this is still awaited. In the meantime, Indian Hotels has further increased its stake in OEH to 11.5% by investing $247 million, but it has denied plans of a hostile takeover.
1) OEH can bring IH's non-Indian hotels under its fold on terms to be agreed;
2) Both IH and OEH will jointly redevelop the St James Court site in London into a super-premium luxury hotel and service apartments;
3) They can set up a joint team for synergies in cross-marketing, air charter, ultra-luxury packages and sourcing;
4) They can induct a director on each other's Board,
5) IH will increase its stake in OEH and so can OEH, both at minority levels to be agreed; and
6) OEH will continue as a standalone public company.
In case efforts to partner with OEH do not progress/take longer, IH can do the following:
1) Increase its stake further;
2) Dispose of all/a portion of its holding; or
3) Take other action after considering the macro and financial scenario, OEH's share price and other opportunities available.
IH's interest to pursue an alliance with OEH ties-in with its strategy to grow overseas. If this proposal goes through, it should help IH to improve the profitability of its overseas properties, leverage the capital invested in global assets for a share of profits from OEH's properties and also diversify. However, this large investment can dampen return ratios in the near term.
Punjab National Bank
CMP: Rs 681
High loan slippages have pushed non-performing loan (NPL) levels to a record high. Punjab National Bank (PNB) added Rs 2,000 crore of gross NPLs in H1 FY08 vis-à-vis Rs 2,000 crore for the whole of FY07. This pushed its net NPL ratio to 1.86% at the end of September, which was the highest in the past six quarters and higher than most of its peers.
PNB should be able to improve its asset quality by March '08 as credit growth stabilises around 20-22% and there is increased focus on recovery processes. The bank's current & savings account (CASA) and net interest margins (NIM) have declined. As of September '07, it had a CASA of 41.6%, down from 44.2% in June '07, but above that of most state-owned banks.
Reported NIM was 3.5% for Q2 FY08, lower than 3.8% in Q1 FY08, but well above that of its peers. Sustained growth in low-cost deposit mix and less reliance on time deposits is needed to preserve a high NIM. HSBC values PNB using a mix of economic profit model, P/E and P/B methodologies and rolls over the target date by a quarter to December '08. P/E and P/B multiples are revised from 9.9x and 1.5x to 11.2x and 1.6x, respectively, by rolling over to the most recent six months.
Between June and November '07, the PNB scrip rose 13.9%, vis-à-vis 32% rise in the Sensex and 36% in the Bankex. But it outperformed these indices last month, when it rose 12.6%, vis-à-vis a rise of 0.2% in the Bankex and -1.2% in the Sensex.
CMP: Rs 1,301
Tata Power remains CLSA's top pick among power utilities. Given the sharp increase in coal prices over the past few weeks, CLSA's resources team has upgraded '08-09 coal prices, which has boosted Bumi Resources' '08-09 profit by 40-72%. Tata Power owns 30% stake in KPC and Arutmin mines of Bumi Resources. CLSA has valued these mines at Rs 468/share of Tata Power, based on 7x '09 earnings, a 30% discount to the current P/E multiple of Bumi Resources.