Analysts' corner

RESEARCH CALLS

CONTAINER CORPORATION
Reco price: Rs 1918
Current price: Rs 1944
Target price: NA
Research firm: ASK Securities

Despite unsatisfactory profits in 2Q FY08, ASK is positive on Container Corporation (Concor). The research firm believes that the changing competitive landscape is beginning to affect the incumbent's unparalleled and unchallenged supremacy.

The quarter's performance has been influenced by lower than expected exports and the changing business dynamics. The key challenge for Concor, going forward, will be to manage business-related complexities whilst maintaining its growth, both on topline and bottom line. Despite Concor's strong balance sheet, its leadership status and most importantly its domain expertise, the road ahead is tough.

Nevertheless, its robust business model will deliver results, unless the scenario gets altered dramatically. Therefore, the next few quarters would be very critical to monitor so as to identify any signs of reversal. ASK is positive on the company given its leadership status and strong financial position--debt free, cash rich and attractive return ratios (RoCE of 38-40%).

BIOCON
Reco price: Rs 513
Current price: 501
Target price: NA
Research firm: SSKI

SSKI believes Biocon's contract research business (Syngene and Clinigene) is poised to get rerated with the imminent IPO of TCG Lifesciences (Indian contract research player (CRO) which has recently filed its DRHP) and the soaring valuations of Wuxi Pharmatech (Chinese CRO listed on the NASDAQ). To put it in perspective, Biocon currently has a market cap of $1.3bn.

We value Biocon's non-CRO business (including R&D assets) at $750-850m (16-18xFY09E profits) which implies a market cap of $450-550m for CRO business. We expect Biocon's CRO business to generate profits of around $25m in FY09 e.g. valuation of 16-20xFY09E for the business which will grow at 40% CAGR over FY07-09 with ~40% net margins.

This is at a significant discount to peers like Wuxi - expected CY08 profits of ~$48m (Bloomberg estimates) and a market cap of $2.3bn; implied P/E 48xCY08E. TCG Lifesciences had FY07 profits of $1.2m and its valuations upon listing will become a benchmark for Biocon CRO valuations.

Given Biocon CRO business' significantly larger scale and superior profitability, we believe it deserves a premium to TCG Lifesciences. We have been very positive on Biocon's CRO business (Syngene and Clinigene) and maintain that Biocon's current valuations do not reflect the true value of these businesses.

While Biocon is likely to eventually demerge and separately list its CRO businesses, possibly in US, over the next 2-3 years, TCG Lifesciences IPO will be a re-rating trigger in the near term. The Indian pharma industry is becoming an integral part of the global pharma value chain and Indian CRAMS players are well placed to benefit from the growing outsourcing trend in global pharma industry.

PAREKH ALUMINEX
Reco price: Rs 247
Current price: Rs 244
Target price: NA
Research firm: IDBI Capital

Parekh Aluminex Limited (PAL) is the largest Indian manufacturer and exporter of aluminium foil containers. Its two manufacturing facilities are located in Dadra & Nagar Haveli, where the company enjoys a five-year income tax holiday and 15-year sales tax holiday.

At present, it has a capacity to manufacture 465 million pieces of casseroles/trays & containers/dishes and 250 million pieces of lids and 8 million pieces of aluminum foils and rolls. While 90% of PAL exports is headed for the United Kingdom, the company has entered into a contract with Alcan to market its products in the German markets.

The company has done some trial exports to Nigeria, Yeman & Sri-Lanka and is getting repeat orders. In order to cater to growing demand, the company is expanding its processing capacities to 20,000 MT implying an upside of 52 per cent.

The new capacities are expected to go on stream by FY09. The expansion will be funded through the mix of debt and warrants. PAL has reported good set of numbers in Q1 FY08. Net sales at Rs. 625 mn are up by 97 per cent YoY. Operating profit has grown by 92 per cent YoY at Rs 100. PAT at Rs 58 mn is up by 99 per cent YoY.

The recommended market price discounts Q1FY08 annualised EPS of Rs 33 by 7.4x.

DECCAN CHRONICLE
Reco price: Rs 198
Current price: Rs 170
Target price: Rs 182
Research firm: ICICI Securities

I-Sec has downgraded Deccan Chronicle Holdings (DCHL) to sell from buy due to intensified competition in Chennai. Also, increase in receivables and debt, high capex and decline in promoter ownership puts the company in a weak spot. The research firm has revised its FY08E and FY09E EPS estimates downwards 8.3% and 20.7% respectively.

The DCF-based target for the stock goes down to Rs182 from Rs 263. DCHL has witnessed huge surge in receivables to 261 days in FY07 from 150 days in FY06 as compared with a 60-90 day range for other print companies.

While the management has been lenient on collections prior to its Bangalore-edition launch, I-Sec does not see merit in the steep increase in receivables. DCHL's success strategy of low cover pricing and increasing colour inventory in Chennai is likely to be challenged in Bangalore,which is currently a two-player market post ToI acquiring Vijay Times and Deccan Herald. Entry of HT Media would make it difficult for DCHL to make significant inroads.