Thursday, September 13, 2007

Sharekhan Investor's Eye dated September 13, 2007

 

SHAREKHAN SPECIAL

Q2FY2008 FMCG earnings preview 

  • Backed by a pick-up in demand in the semi-urban as well as rural areas, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power of the FMCG companies.
  • Rising input prices is a concern for the industry. In the past quarters the FMCG companies had been able to combat this issue with price hikes, innovative products with higher realisations and prudent advertising spend.
  • We expect the earnings of the market leader in the segment, Hindustan Unilever Ltd (HUL), to grow by 17.2% year on year (yoy) backed by a 13% growth in the home & personal care (HPC) segment. We expect HUL's margin to improve from 13.1% in Q3CY2006 to 14.2% in Q3CY2007, primarily due to the price hike taken in many of its products as well as improved product mix.
  • ITC's growth is expected to be broad based with the reduction in the magnitude of the losses in the non-FMCG businesses. The imposition of the value added tax (VAT) and the price hike taken by the company in the first quarter of FY2008 had affected the growth of its cigarette business in that quarter and the second quarter is expected to witness a trailing effect of the same. Despite this, we expect higher realisations to boost ITC's bottom line by 11.2%.
  • In our past reports we had always opined that the implementation of VAT might have a dampening effect on the stock price of ITC but the same would likely be a temporary aberration. The recent spurt in the stock price substantiates our opinion. We continue to be bullish on the stock with a long-term perspective.
  • The long-term prospects of the FMCG sector appear favourable with the rising disposable income of Indians and the increased spending by them. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth, the sector still has considerable upside potential compared with the other sectors.

STOCK UPDATE

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs417

Lipitor launch in Canada delayed; Ranbaxy to appeal

Key points

  • Pfizer Inc has succeeded in winning patent protection in Canada for its blockbuster drug, Lipitor, thereby prohibiting its rival, Ranbaxy Laboratories (Ranbaxy), from launching a generic version of the cholesterol-reducing drug until the expiry of the patent in July 2016. 
  • The Canadian Federal Court in Toronto has ruled that Ranbaxy's proposed generic drug would infringe Pfizer Inc's patent that covers a crystalline form of atorvastatin (patent # 2,220,018) which is due to expire in July 2016. On the other hand, the Canadian court has granted a favourable ruling to Ranbaxy in the case of the patent # 2,220,455, which covers the process for making an amorphous form of atorvastatin and is also due to expire in July 2016. 
  • Despite handing out a mixed ruling wherein the validity of the patent for crystalline atorvastatin has been upheld and the patent for the amorphous form of the compound has been invalidated, the court has ordered the Canadian health ministry not to issue a notice of compliance (approval) to Ranbaxy for marketing the generic version of Lipitor until the expiry of the patent covering the crystalline form of atorvastatin in July 2016, thereby preventing the company from entering the market until July 2016. 
  • Ranbaxy has confirmed its intention to appeal against the ruling of the Canadian Federal Court to the Federal Court of Appeal in Canada and is confident of reversing the current ruling, thereby enabling it to launch the product in Canada before July 2016. Thus, Ranbaxy would be barred from launching the product until July 2016, unless it succeeds in reversing the court's current ruling in its appeal. 
  • The unfavourable ruling received in Canada would come as a major setback to Ranbaxy in its battle for launching generic Lipitor in various markets across the world. However, we remain optimistic on the company's ability to receive a favourable ruling on all the four patents in its appeal in Canada. At the current market price of Rs417, the stock is trading at 23.6x its CY2008E earnings. We maintain our Buy recommendation on the stock with a price target of Rs500.

MUTUAL FUNDS: INDUSTRY UPDATE 

Caution continues; strong cash position to spur buying
 Assets under management (AUM) of equity mutual funds rose by 1.9% to Rs174,381 crore in August 2007 from Rs171,110 crore in July 2007. The 1.9% rise in AUM of equity mutual funds was in the backdrop of a 1.5% decline in the BSE Sensex in August 2007

Posted by Tushar Surekha at 12:14 PM

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