Companies under our coverage are expected to report a 30.9% increase in their revenues for Q1FY2009. This would be driven by a steady growth in the domestic market, the new product launches in the regulated markets, strong growth in the contract research and manufacturing services (CRAMS) businesses and the consolidation of the acquisitions made in the previous year. Further, with exports accounting for over 50% of the pharma industry's revenues, the weaker rupee would also aid the top line.
The operating profit margin (OPM) of companies under our coverage is expected to expand by 330 basis points, largely driven by exclusivity revenues (Sun Pharmaceuticals [Sun Pharma]), savings arising out of the de-merger of research and development (R&D) units (Piramal Healthcare) and the effect of operating leverage for companies with a strong top line growth (Lupin and Ranbaxy). On the other hand, we expect the rising input, and power and fuel costs to negatively affect the margins of companies like Orchid Chemicals (Orchid) and Surya Pharmaceuticals. Lastly, we believe that Wockhardt and Opto Circuits would reel under margin pressure on account of the consolidation of low-margin acquisitions.
Despite a strong top line growth and a robust operating performance, the reported net profit of companies under our coverage would grow by a meagre 1.6%. This would be on account of the mark-to-market (MTM) losses recorded by companies like Ranbaxy Laboratories (Ranbaxy), Orchid, Wockhardt and Ipca Laboratories (Ipca), which have outstanding foreign exchange (forex) liabilities. Higher interest and depreciation costs (due to acquisitions) would also affect the reported profits in the case of Wockhardt, Cadila Healthcare (Cadila) and Opto Circuits. On excluding the forex impact, we believe the adjusted net profits of companies under our coverage would grow by 50.5%.
Our top picks include Sun Pharma, which could surprise positively with higher than expected exclusivity revenues, and Lupin, which is expected to deliver strong top line and bottom line growth. On the other hand, companies like Ranbaxy, Wockhardt and Orchid could surprise negatively due to higher than anticipated forex losses.
The key risk to our estimates for Q1FY2009 is companies reporting MTM losses on hedging instruments or on foreign currency derivatives. We believe companies like Ranbaxy and Wockhardt would have outstanding foreign currency hedges, on which they could incur certain losses.
Financial closure for Taj Expressway: A big positive
Key points
Jaypee Infratech (in which Jaiprakash Associates [JPA] holds 98% stake) has achieved financial closure for Rs6,000-crore Taj Expressway Project. The company has renamed the project as Yamuna Expressway Project.
The estimated cost for Yamuna Expressway Project, which is to be executed through Jaypee Infratech, is around Rs6,000 crore. Of the estimated cost, ICICI Bank and Jaiprakash Associates will provide Rs3,200 crore and Rs1,000 crore respectively, while the remaining Rs1,800 crore will be provided through real estate sales.
Of the Rs3,200 crore to be provided by ICICI Bank, Rs2,950 crore would be in the form of debt. The remaining Rs250 crore would be in the form of equity for a 1% stake in Jaypee Infratech.
The Rs1,000 crore to be infused by JPA is for a 98% equity stake in Jaypee Infratech (Out of the remaining 2% stake in Jaypee Infratech, ~1% is held by ICICI Bank, while the remaining 1% is held by the employees).
As this project contributes about 53% to our valuation, the financial closure for this project is a big positive for JPA. This also improves the visibility for the execution of Yamuna Expressway Project.
The land acquisition of the entire 165km of land required for the construction of the expressway between Noida and Agra has been transferred to Jaypee Infratech.
The company is also progressing well on land acquisition of Noida land parcel for the real estate development project. The company has now received 1,080 acre at an average rate of Rs33 lakh per acre (compared to 940 acre in March 2008) of land in Noida out of 1,250 acre.
At the current market price, the stock is trading at 29x FY2009 and 23x FY2010 earning estimates. We continue to value the stock using the sum-of-the-parts valuation method and maintain our Buy recommendation with price target of Rs390.
We have analysed the recently released annual report of Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) and present the highlights below.
DFPCL registered a growth of 24.9% in its stand-alone net sales to Rs1,040.9 crore in FY2008 on the back of a strong performance by its chemical division. Consequently, the adjusted net profit for the year increased by 9.5% to Rs103 crore.
The manufacturing of chemical products increased by 44.5% year on yeay (yoy) to Rs642.5 crore on account of a higher contribution from isopropyl alcohol (IPA). The company manufactured and sold 52,239 tonne of IPA during FY2008, thus capturing over 80% market share in the domestic market. IPA realisations declined by 7.8% to Rs48,800 per metric tonne (MT).
Due to unavailability of feedstock, methanol production declined by 43.6%. Sales realisations also decreased by 23.4%. Consequently, net sales for methanol declined by 56.7% and methanol remained the major traded product in the chemical division.
Despite lower volumes, the contribution of concentrated and diluted nitric acid together increased by 27.6% to Rs118.8 crore as sales realisation improved by 34.7% and 30.6% respectively.
Increased raw material cost during the year restricted the operating profit margin (OPM) of the company. During the year, the return on capital employed declined from 11.1% to 10.4% while the return on net worth declined from 15.4% to 15%. The debt: equity ratio improved slightly to 0.5 even though the overall borrowings increased to Rs349.4 crore from Rs325.3 crore as on March 31, 2007.
The commissioning of the Dahej-Uran pipeline and the KG basin gas supply during H2FY2009 will ensure adequate supply of gas to the company's Taloja plant. Increased availability of natural gas with augmented capacity would increase the in-house manufacturing of ammonia, thereby reducing the cost of raw materials, which is the major trigger for the stock.
At the current market price of Rs91, the stock is trading at 7.0x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.8x. We maintain our Buy recommendation on the stock with a price target of Rs169.
