SHREE CEMENT
Reco price: Rs 1,545
Current market price: Rs 1,550.65
Target price: Rs 1,750
Upside: 12.9%
Brokerage: Sharekhan
Shree Cement grew its revenues by 29 per cent in 2008-09 on the back of capacity addition. The present cement grinding capacity of the company stands at 9.1 million tonne. The company’s captive power plant not only met its own power requirement but also generated Rs 80 crore through the sale of surplus power. It is setting up captive power plants of 85MW and 50 MW capacities to be operational by March 2010 and March 2011, respectively and these would add to the revenues going forward.
Due to the surge in the price of pet coke, higher freight charges coupled with a drop in the realisation resulted in a decline in operating margin during 2008-09. The management suggests that rural demand coupled with increased government allocation for infrastructure spending and the Commonwealth Games would drive the demand for cement in the northern region. Shree Cement is likely to make the most of these growth opportunities due to its earlier capacity expansion. At Rs 1,545, the stock trades at 12.5x, an EV/EBIDTA of 4.2x FY2011 and EV/tonne of $78 on expanded capacities of 12 million tonne. Maintain hold.
TATA CHEMICALS
Reco price: Rs 257
Current market price: Rs 259.25
Target price: Rs 287
Upside: 10.7%
Brokerage: Emkay Global
Tata Chemicals (TCL) has approved a proposal to purchase up to 35.8 per cent share in Rallis India through share transfer from promoter group companies that include Tata Tea, Tata Sons at a price not exceeding Rs 850 per share.
As a result, TCL could spend Rs 320 to Rs 360 crore, depending on final transfer price applicable for Rallis India. It will increase TCL’s holding in Rallis India from 9.4 per cent to 45.2 per cent post the deal. However, it will impact TCL’s cash flow in near term. As of June 2009, TCL’s consolidated debt stands at Rs 5,800 crore and cash of Rs 1,200 crore. At net debt equity of 1, funding the deal shouldn’t be a problem. At the upper limit, Rallis India is valued at 11x FY10 EPS and EV/EBITDA of 8x.
As businesses, both of them are different, one deals in fertiliser and the other in crop protection, company could benefit from synergies and offer a more diversified product basket to a farmer and boost overall revenues. The possibility of merger of the two companies in the future is not ruled out but the possibility of this happening in the near term is remote. This event is not expected to have any significant impact on estimates for TCL. Maintain hold.
BIOCON
Reco price: Rs 224.5
Current market price: Rs 227.55
Target price: Rs 140
Downside: 38.4%
Brokerage: Citi Investment
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The USFDA’s move to reject Astellas’ citizen’s petition on Prograf (tacrolimus) and approve Sandoz’s generic version is a surprise. Biocon is a key API player in tacrolimus, however, it is not expected to launch in the US before 2012 – earlier approvals for its partners would be positive.
Biocon has partnered for 5 ANDA filers for the US but whether Sandoz is one of them is not known. Although only Sandoz has received approval so far, expect other players should also get approval if the FDA’s decision holds as long as they have cleared the bioequivalence hurdle.
Astellas plans to approach the court for a preliminary injunction, enjoining the FDA’s approval. Also, generic substitution is likely to be slower than in other products given the complexity of immunosuppressants in general & Prograf in particular. Once generic penetration normalises, Prograf could generate incremental EPS of Rs 0.8-1.3 (7-10 per cent of FY11E EPS).
At Rs 140, Biocon is trading at 12x FY10 earnings, at a 25 per cent discount to most generic pharma companies in its universe. This is due to Biocon’s lower annual earnings growth and return ratios. A higher vulnerability of Biocon’s business model to pricing pressure and delayed product launches /scaling-up would continue to keep the stock’s multiples on the lower side. Maintain sell.
SESA GOA
Reco price: Rs 228
Current market price: Rs 240.3
Target price: NA
Brokerage: Edelweiss Securities
The steel ministry has proposed a 10 per cent ad-valorem royalty on iron ore sales; decision on the same will be taken by the mines and finance ministries. Iron ore miners such as Sesa Goa (SG) would have the maximum negative impact. Royalty for SG could increase from an estimated Rs 15/tonne currently to 10 per cent of FOB value less freight cost.
Assuming royalty mechanism comes to play, expect royalty of $2.6/tonne and $3.8/tonne for 2009-10 and 2010-11, respectively. 2009-10 would see the increased royalty only for part of the year. Consequently, 2009-10 and 2010-11 EPS for SG would be impacted by 7.5 per cent and 10 per cent, respectively. For steel companies with captive mines, steel costs could increase by Rs 250- 300/tonne, which is around 1 per cent of selling price.
The iron ore market is set to improve. Iron ore imports to China have increased 5 per cent M-o-M to 58.1 MMT in July 2009 and YTD are up 32 per cent Y-o-Y. While near-term corrections are possible, import levels would remain strong. Sesa Goa’s low-cost position, likelihood of strong volume growth and debt-free, cash-rich balance sheet are long-term positives. The stock is trading at 7.4x FY10 and 5.6x FY11 estimated earnings. Maintain hold.
STERLITE INDUSTRIES
Reco price: Rs 635
Current market price: Rs 662.35
Target price: Rs 550
Downside: 17%
Brokerage: Kotak Securities
Sterlite has increased the upfront cash component to $1.6 billion ($ 1.1 billion earlier) in its revised bid for acquiring the operating assets of
Asarco and reduced secured copper price participation notes to $208 million (versus $770 million previously).
An increase in upfront payment for the bid implicitly increases the proposed acquisition price by 17 per cent even though the absolute bid amount remains largely unchanged. Sterlite attributes the increase in its bid to higher expectations from Asarco’s creditors and increase in copper prices. Sterlite is expected to fund the acquisition through its cash reserve of $3.5 billion.
The revised bid of Sterlite for ASARCO implies a copper price of $ 4,500/ton ($ 4,350/ ton earlier) over the useful life of mine; spot price of copper stands at $6,150/ton. Sterlite’s management is expected to drive efficiencies and reduce the cost of production significantly from the current levels of 140 cents/lb.
The stock is trading at 7x FY2011E EV/EBITDA and is expensive; however Sterlite would have net cash of Rs 245/share in FY2011E.
The brokerage maintains a reduce rating.
However, the upside risk to valuation call arises from higher-than-expected commodity prices. Maintain neutral.