[Investors Please Listen] View from Research Desk on April 02, 2009

View from Research Desk on April 02, 2009

 

Piramal Healthcare (PIHC@IN, CMP– Rs193, M Cap- Rs40.5bn, Buy)

Restructuring of CMG assets is long term positive for the company

In a bid to improve operating performance of its Pharma Solution (CMG) business, Piramal Healthcare is re-aligning its CMG assets by closing down its Huddersfield faculty (FY09 revenue- Sterling pound 19mn and operating margins < 3%, 93 employees, 30-35% capacity utilization). Company will take one time hit of Sterling pound 10.1mn on account of redundancy payments, pension top ups, contract termination costs and other professional fees in FY09 itself. Company will be shifting these contracts to Digwal (India) and Morpeth (UK) facilities. Management has indicated that this restructuring will enable them to improve the operating margins of its Pharma Solution business by 6 to 8 ppt from FY10E itself. The improvement in the margins is driven by a) Close down of Huddersfield facility, b) Increase in early phase pipeline, c) Cost improvement & clinical packaging offerings at Morpeth and d) Strong commercial projects pipeline at Digwal. However, because of shifting of contracts from Huddersfield to other sites, which may take 6-9 months in validation and stability temporary slowdown in CMG space because of inventory rationalization and de-stocking at customers end (may last till H1FY10E); company has indicated that its revenue from Pharma Solution business will be lowered by 5% in FY10E over FY09. Management has given very positive outlook for long term prospects of CRAMS business and indicated that they expect its CRAMS business from Indian assets to be doubled in next three years.

 

We view the restructuring of its Pharma Solution business as long term positive for the company. It will not only improve the capacity utilization of its Morpeth (currently at 50-55%) and Indian Assets (55-60%) but will also bring better realization from CMG assets. At present, Piramal has lowest operating margins in its Pharma Solution business (~12.6%) compared to other peers (~above 20-22%) because of low margins and under capacity utilization of it's oversees assets. Company expects steady still margins of 24-25% in the horizon of 2-3 years from Pharma Solution segment. We have revised our revenue and earning estimates downward because of these restructuring. We have downward our revenue estimates by 8% and 9% and earnings estimates by 7% and 6% for FY10E and FY11E respectively. On the back of downward revision in earnings, our target price has been revised downward by 13% to Rs264. At CMP of Rs193, the stock is trading at 8.4x FY10E EPS of Rs23.1.

 

The trade deficit for February 2009 was slightly higher at USD4.9bn (compared to our estimates of USD4-4.1bn) mainly driven by a pick up in non-oil imports. The exports have fallen by 22% yoy to USD11.8bn (one also has to consider 28days this year compared with 29 days last year). The exports declined by just 4.4% mom despite having 3 less days.

 

The imports declined by 19.2% yoy to USD16.8b, mainly driven by 36% drop in oil imports. The non-oil imports surprisingly picked up by 4.7% yoy. We expect the trade deficit to move down further to USD4bn in March 2009.

 

USDbn	Feb-09	Feb-08	Jan-09	% yoy chg	% mom chg	YTD FY09	YTD FY08	% yoy chg
Exports	11.8	15.1	12.4	-21.7	-4.4	155.9	141.2	10.4
Imports	16.8	20.8	18.5	-19.2	-8.9	258.0	215.0	20.0
Oil	4.0	6.3	4.5	-35.6	-9.5	83.5	69.2	20.7
Non-oil	12.8	12.2	14.0	4.7	-8.7	171.7	143.6	19.6
Trade deficit	-5.0	-5.7	-6.1	-12.5	-18.1	-102.1	-73.8	38.4

 

 

Cement dispatches have shown robust growth. On top of this the cement majors have initiated another increase in prices of cement in the range of Rs 5-7 per bag. We reiterate our bullish stance on the sector. We believe many of the cement companies will come out with excellent performance in Q1FY10 on the back of double benefit from reduction in input cost & increase in finished product.  Our top picks continue to be Grasim, Ultratech, and ACC & India Cement. 

 

Severe power cuts in AP affects India Cement operations

India Cement dispatch numbers have continued to decline during the past few months mainly on account of severe power cuts in the state of Andhra Pradesh and also on account of maintainance work at its Vishunpuram unit and Chilamkur unit. AP is witnessing 2 day a week power cut in the industrial area. Also on the other day the units are allowed to run only lightings and auxiliary units where as the main plant are kept shut. This has resulted in India Cement shifting to generation of power from higher power through high cost DG sets. Consequently the cost benefit it is witnessing from lower international coal prices is partly negated by higher power cost. However the company is indirectly benefiting from this situation.  The sever power shortage is affecting the operations of all small and medium cement manufacturers in the region affecting their production and restricting the supply in the AP as well as Tamilnadu markets. This is also helping the cement prices to firm up in these markets. India Cement is in a position to run its operations on power from DG set and thus gain more market share in the region.

Global Cues:  The US mkts chose to shrug-off any negative data & just moved ahead. The ISM data & unemployment numbers were nothing to cheer about & infact proved that the economic problems still continue as they were. However the stock mkts decided not to consider this data, instead took cues from better than existing home sales data. The US mkts moved up by almost 2%. Asian mkts took cues from the US mkts & perhaps expecting some major action coming from G-20 meeting presently underway at London. Almost all the Asian mkts are trading with huge gains some are trading up by upto 4%. SGX is trading up by 80 points.

Our Markets:  Yesterday our mkts opened with negative bias, behave in a very choppy manner but finally remained in an upward move ending the day with smart gains.

For today we expect the mkts to start with a significant gap up as indicated by Asian & western mkts. Since we do not have any domestic cues to fall back we will be guided by international cues. We want to draw attention of investors to the fact that the current trend is definitely in upward mode though there may not be any visible reason for that. When many of the mid cap stocks & punter like stocks start witnessing large up-moves in single trading sessions that makes us cautious about the sustainability of that rally. Just as there is no fundamental reasons for rally in US mkts we do not see any reason for our domestic mkts. But we believe the mkts are always right so one should remain with trend. Mkts may ignore the economic or fundamental realty for a long time but this is also sure that ultimately fundamentals will prevail.    

 

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