Re: Sharekhan Investor's Eye dated July 07, 2008

Investor's Eye [July 07, 2008] Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2009 FMCG earnings preview Expect margins to be under pressure We expect the overall revenues of Sharekhan's FMCG universe to increase by 13.2% year on year (yoy). The revenue growth was on the back of a steady volume growth and hefty price hikes during the quarter and the last twelve months. The volumes and prices were increased primarily to combat the steep increase in the raw material costs. During the quarter, we expect the margins of all the FMCG companies to be under pressure in spite of the price hikes affected by the companies, as the companies would see an increase in their input costs. Thus, we expect the operating profit for Sharekhan FMCG universe to grow only by 6.2% and the adjusted net profit for the quarter to grow by a meagre 6.9%.  STOCK UPDATE Cadila Healthcare   Cluster: Emerging Star Recommendation: Buy Price target: Rs372 Current market price: Rs314 Price target revised to Rs372 Key points Cadila Healthcare (Cadila) has decided to hive-off its consumer product business and merge the same with its listed subsidiary, Carnation Nutra Analogue (Carnation). In consideration, Carnation will allot to shareholders of Cadila four fully paid up equity shares of Rs10 each for 15 equity shares of Rs5 each held in Cadila. Consequently, Cadila's stake in Carnation would increase from 61.56% currently to 70.2% post the restructuring. Cadila would also amalgamate Zydus Hospital and Medical Research Private Ltd (ZHMRPL) with itself by cancelling the existing nine crore shares held by ZHMRPL in Cadila and issuing 10.08 crore fresh equity shares to ZHMRPL. The move would result in equity dilution of 8.7% in Cadila and add no value for the minority shareholders. The restructuring is intended to consolidate the group's consumer product business under one entity and aims to unlock value in its consumer product business.  To factor in the equity dilution and de-merger of the consumer product business, we have revised downwards our consolidated earnings estimates for FY2009 and FY2010 by 8.3% and 8.4% respectively. However, in consideration for the consumer product business, Cadila shareholders would get additional shares of Carnation (in the ratio of four shares of Carnation for every 15 shares of Cadila). We have valued Carnation at Rs87 per share (10x FY2010E earnings).  Thus, we believe that the restructuring process is largely neutral from the point of view of minority shareholders. We maintain our Buy call with a revised price target of Rs372.

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Regards, The Sharekhan Research Team myaccount@sharekhan.com