Posts in category All News
Volatile market takes toll on institutional placements (13-09-2015)
India can get annual FII flows to the tune of $15-20 bn: Vikas Khemani (13-09-2015)
The art of wealth creation (13-09-2015)
thredUP raises $81 mn (13-09-2015)
Buy rating on Cipla; buys a shot in its arm: HSBC (13-09-2015)
Cipla acquires two generics businesses in the US: Cipla has announced it is acquiring two privately held generic pharma businesses, InvaGen and Exelan Pharma, in the US for a transaction value (TV) of $550m. The consideration values the two businesses at TV/sales of c2.4x based on their combined LTM June 2015 revenues of $225m. The acquisition of InvaGen will bring a product portfolio of 40 approved ANDAs (abbreviated new drug application), of which 32 are marketed products in the cardiac, CNS, anti-diabetic and diabetic segments, as well as 30 pipeline products (including five first-to-file opportunities). InvaGen will also provide Cipla with its first manufacturing base in the US as well as access to large wholesalers and retailers. Exelan Pharma will provide Cipla with access to the US government and institutional market.
Deal in line with Cipla’s stated strategy: Cipla aims to increase its US sales contribution to 20% by 2020 from 8% in FY15. We believe this deal is in line with this goal and should reduce the gap in US sales between the company and its Indian peers, such as Sun Pharma, Lupin and Dr Reddy’s, which derive 40-50% of their total sales from the US. The acquired businesses’ current portfolio and most of the ANDA pipeline known to us are largely oral products which appear competitive. Nonetheless this will scale up Cipla’s US presence and is in line with its long-term goal to participate directly in the generics industry. The valuation of the deals is justified, in our view, versus other recent deals, such as Lupin/Gavis (9.2x sales), Teva/Allergan (c6x) and Kremer Urban/Lannett (c3x).
Deal long-term positive, maintain Buy with TP of R795: We view this development as a long-term positive for Cipla, which has undergone significant transformation over the last two years. We will reflect the acquisitions in our model once there is clarity on product growth and pipeline. We maintain our Buy rating on Cipla. Our fair value TP of R795 is derived by discounting back our one-year forward target price valued using a 22x Gordon Growth based P/E and our FY17e EPS of R31.6, and adding a NPV (net present value) of R150/sh for its inhaler pipeline.
Valuation and risks
We reiterate our Buy rating on Cipla as its business outlook remains strong with a focus on increasing profitability through business rationalisation, strategic acquisitions and other initiatives. Its respiratory franchise, recently got a boost from the budesonide respules launch by its partner in the US. Cipla expects respiratory sales to increase threefold in the next five years from the current $350m level. Approval of gSeretide in the UK is a big potential catalyst in the near-to-medium term and so will be the initiation of phase III trials of gAdvair in the US.
Key downside risks: delay in gSeretide approval in the UK and slower-than-expected progress in inhalers in developed markets.
Neutral rating on ONGC; outlook remains dull: Nomura (13-09-2015)
Action: Earnings cut by 25-31%; not much upside in a low oil price scenario, and visibility poor on upside if oil rises; downgrade
Nomura’s global oil/gas team has cut its Brent oil price assumption by up to 21-25%.Our new oil price assumptions are $53/55/60/70/bbl for FY16F /17F /18F/long term, respectively (vs previously $60/70/80/bbl for FY16/17/LT). The reductions to our oil price and gas price assumptions plus the new subsidy formula result in 25-31% earnings estimate cuts for FY16-18F. After sharp under-performance (1-year ONGC -48% vs Sensex -5%), we believe valuations are inexpensive (trading at 0.9x FY17F P/B and 8.1x FY17F P/E), but we believe there are not many catalysts ahead, hence we downgrade to Neutral.
Not many positives: Subsidy will not go even at low oil; gas price set to fall steeply; production growth outlook weak; and b/s becoming stretched making big ticket M&A in low oil environment difficult.
o The new FY16 subsidy formula (caps government support at R12/L for kerosene and R18/kg for LPG) implies ONGC will have to bear the subsidy unless the oil price falls below $46/bbl. This is more negative than the earlier proposal (no subsidy for oil < $60/bbl), and will likely lead to near flat realisations when oil is over $65/bbl.
o Domestic gas price will be reduced to $4.2-4.3/mmbtu from October 1, with further reductions in 2016. Such low prices will deter new investment. Production growth outlook remains weak for both domestic and for OVL.
Also, after its large acquisition in Mozambique (ONGC chased valuations in our view, and now ONGC is not a net cash company), ability to do large ticket opportunistic M&A in current low oil prices is lower, in our view.
Valuation: Cut TP to R250; prefer downstream among oil PSUs
Due to sharp 25-31% earnings cut, our P/B based target price falls to R250 (from R395). We downgrade ONGC to Neutral. Among Indian oil PSUs, we prefer downstream names (IOCL>HPCL>BPCL) over upstream (ONGC, Oil India).
Gross oil realisation to decline; net oil realisation decline sharper as subsidies will remain at low oil prices
For upstream oil producers, low long-term oil prices are very negative. For Indian oil PSUs, which did not benefit much from high oil prices (due to high subsidies), there were expectations that the subsidy burden would not be there when oil prices are low.
Indeed, under the earlier proposed formula for Q1 (there was no subsidy at an oil price <$60/bbl, 85% subsidy for oil between $60-100/bbl, 90% subsidy for oil >$100/bbl), there would have been no subsidy paid by upstream companies. However, this formula was not implemented even for Q1FY16. The Indian government (GoI) has now come up with a new upstream subsidy formula for FY16. As per this formula, subsidy sharing would be as below:
o Kerosene: The GoI budgetary support at R12/L and the remaining under-recovery will be borne by upstream companies.
o LPG: A fixed subsidy of R18/kg under the direct benefit transfer of LPG (DBTL).
This formula, in our view, is negative for upstream companies, and increases their problems, in the current environment of low oil prices.
o While for LPG, as the break-even price (including R18/kg government support) is ~$60/bbl, so there may be no subsidy sharing on LPG by upstream companies when oil prices are below $60/bbl.
o However, the break-even price for kerosene (including R12/L government support), is only $46/bbl. Thus upstream subsidy burden will continue even if the oil price remains below $60/bbl , and will vanish only when oil prices fall below $46/bbl.
Upstream net realisations will likely remain flat when oil moves over $65/bbl
Effectively under the newly adopted formula the upstream companies pay for all incremental subsidies for kerosene when oil prices are above $46/bbl, and all incremental LPG subsidies when oil prices are above $60/bbl.
As oil prices move up the subsidies on both LPG and kerosene are expected to rise very sharply (unless the retail prices are increased or government takes some section of consumers out of subsidy sharing for LPG). If upstream shares all incremental under-recoveries (over R18/kg for LPG, over R12/L for kerosene, as it currently is doing), we estimate that effective net oil price realisation will likely remain flat for ONGC/OIL when oil prices move over $65/bbl.
Gas prices declining; low prices deter new investment
Gas prices back to where it began, and will likely fall further
Last year when the government had adopted the new domestic gas pricing formula, we had highlighted that ‘gas price hike was not so good or well thought out’.
o The key reason for the industry seeking a higher gas price was to make current production more profitable and to encourage new investment. However, in our view, the basic intention (while modifying the Rangarajan formula) seemed to have been to limit price increases (to make increase more palatable for consumers).
o To keep prices low, GoI removed expensive LNG components (both Japanese and Indian imports) and instead included Alberta gas reference price and Russian price, in addition to retaining Henry Hub and NBP prices. In our view, primarily using gas-surplus/export regions (eg, US, Canada and Russia) to determine prices in a gas-deficit country like India was not logical. Moreover, to further keep prices lower, the GoI had excluded even the transport/gas treatment charges under different hubs.
While the gas prices increased 34% in November 2014 (from $4.2 to $5.6/mmbtu), these declined by 7% to $5.2/mmbtu when prices were first reset on 1-Apr-15. As international prices have further fallen, we expect a much steeper decline of 17-18%, and domestic gas prices will likely decline to just $4.2-4.3/mmbtu. Prices would then be at a similar level as when the new price formula was adopted.
Gas production has been falling; and new investments seem unlikely soon
As gas prices increase was not large, and prices are on a declining trend, it is not encouraging investment to sustain even current production, let alone development of existing discoveries. Similarly, as the government has not announced the premium for new discoveries (and expectations are not of very high premium), the likelihood of large scale investment remains low, in our view, in the short to medium term.
Operationally not much to cheer
Operationally, in our view, there are no major catalysts.
o ONGC has generally disappointed on production guidance.
o Its domestic oil production had declined for seven consecutive years till FY14. While the production decline trend was arrested last year, there is not much visibility of any meaningful production growth in the short to medium term, in our view. Similarly, gas production has largely remained stagnant over last several years. As we noted earlier, with the domestic gas price outlook remaining low, the outlook for any sharp domestic production growth remains weak, in our view.
ONGC’s overseas arm ONGC Videsh Limited (OVL) has also largely disappointed operationally over the last few years. Despite continued large investment, production has stagnated and profits declined sharply last year.
Sampling in a time-starved world (13-09-2015)
A dynamic pricing strategy is key to success in the hospitality industry: Adam Aron (13-09-2015)
Miners can expect some relief (13-09-2015)
District Mineral Foundation (DMF)—some relief likely from lower rates. As per unauthenticated media reports, the central government will soon notify DMF contribution at 30% of royalty rates for existing miners and 10% for new mines. The rates are lower than the maximum possible rate of 100% for existing mines as per MMDR Amendment Act and will be a relief for miners, especially Hindustan Zinc, Vedanta and Tata Steel. We cut commodity price assumptions by 3-11% and incorporate our economist’s revised Fx rate. We maintain BUY on Vedanta with target price of R165 (R185), HZ with target price of R190 (R205) and REDUCE on Tata Steel with TP (target price) of R205 (R225).
District Mineral Foundation: rates for existing mines can be notified at only 30% (of royalty)
As per media reports, the central government will soon notify the DMF rates for existing miners at 30% of the royalty amount and for new mining leases at 10% of the royalty amount (against maximum of 33.3% as per the Act). The lower-than-expected rates will decrease the regulatory cost burden on miners, especially in a weak commodity cycle. We highlight that even on assuming 30% of the royalty payment towards DMF, the burden of regulatory costs on Indian miners is high and it works out to 12-50% of revenues (excluding corporate tax) for different commodities such as zinc, iron-ore, etc.
Cut commodity price assumptions by 3-11%; retain BUY on Vedanta/HZ, REDUCE on Tata Steel
The sharp decline in commodity prices means that even many of the efficient operations globally are operating at losses. The depressed prices and continued operating cash losses should logically end in supply-side response from closure of inefficient capacities and support prices. However, overcapacity, weak demand and high inventories for a few commodities can delay recovery. We discuss commodity-specific fundamentals in detail in later sections.
We cut our commodity price assumptions by 3-11% for FY2016-18e . We revise our (i) zinc price assumptions to $2,050/ton, $2,100/ton and $2,200/ton for FY2016e, FY2017e and FY2018e, (ii) all-in aluminium price assumptions to $1,850/ton, $1,950/ton and $1,950/ton for FY2016e, FY2017e and FY2018e and (iii) crude oil price assumptions to $60/bbl, $65/bbl and $70/bbl for FY2016e, FY2017e and FY2018e. We incorporate our economist’s revised INR:USD rate assumptions of R64.9, R66.5 and R67 for FY2016e, FY2017e and FY2018e. We had baked in 100% of royalty amount as DMF contribution in our assumptions, which we maintain pending a final rate notification.
Vedanta. We cut our FY2016-18 Ebitda (earnings before interest taxes depreciation and amortisation) estimates by 5-7% . The lower Ebitda estimate is due to cut in commodity price assumptions by 3-11% partially offset by lower INR:USD rate. We estimate EPS (earnings per share) of R16.7, R18.1 and R23.4 for FY2016e, FY2017e and FY2018e respectively. We cut our target price for Vedanta to R165 from R185 earlier.
Hindustan Zinc. We cut our FY2016-18 Ebitda estimates by 8-11%. The lower Ebitda estimate is largely due to cut in zinc price assumption by 8-11% for FY2016-18e partially offset by lower INR:USD rate. We estimate EPS of R16.6, R17.6 and R18.8 for FY2016e, FY2017e and FY2018e respectively. We cut our target price for HZ to R190 from R205 earlier.
Tata Steel. We cut our FY2016-18 Ebitda estimates by 1-2%. The lower Ebitda estimate is largely due to cut in our China HRC price assumptions by 5-8% for FY2016-18e partially offset by lower INR:USD rate. We cut our target price for Tata Steel to R205 from R225 earlier.
Lower DMF rates—Hindustan Zinc, Vedanta, Tata Steel, NMDC can benefit
Various companies provided for DMF costs in Q4FY15 and Q1FY16 at rates varying between 50% and 100% of the royalty amount. We note that Tata Steel provided for DMF costs at 100% of the royalty amount, Hindustan Zinc at 50% while NMDC has not provided for DMF costs yet.
On assuming only 30% of royalty as DMF contribution, our Ebitda estimates will increase by 5-15%. We detail the company-specific impact as follows.
Hindustan Zinc. Hindustan Zinc paid royalty of R13.7 bn (9.3% of revenues) in FY2015 given high royalty rates on zinc (9.5%), lead (14.5%) and silver (7%). On assuming 30% of royalty amount for DMF, we estimate royalty and DMF costs of R21 bn in FY2017e against R31.7 bn based on 100% of royalty amount factored in by us. Our Ebitda estimate increases by 15% to R82 bn and fair value by 10% to R210/share from R190/share.
Vedanta. The royalty on bauxite is low at 0.6% of LME prices (metal contained) due to higher conversion costs (energy costs) and hence the impact of higher DMF costs on Vedanta is mostly limited to HZ and increase in coal costs, assuming a pass-on of costs to end-consumers. On assuming 30% of royalty as DMF amount, our Ebitda estimate increases by 5% to R225 bn and fair value by 9% to R180/share from R165/share.
Tata Steel. Tata Steel’s cost will increase due to DMF pay-out at its captive iron ore and coking coal mines. Tata Steel paid a royalty of R11.3 bn/R8.1 bn in FY2014/15. On assuming 30% of royalty amount for DMF, we estimate royalty and DMF costs of R17 bn in FY2017e against R24.5 bn based on 100% royalty. Our Ebitda estimate increases by 5% to R168 bn and fair value to R255/share from R205/share. However, we highlight that
spot steel prices are very low and Tata Steel’s fair value at spot prices works out to R125/share assuming 30% DMF cost of the royalty amount.
NMDC. NMDC paid royalty of R13.9 bn (11.2% of revenues) in FY2015 given royalty rates of 15% on iron ore (royalty rates increased from 10% to 15% from September 2014). On assuming 30% of royalty amount for DMF, we estimate royalty and DMF costs of R17.6 bn in FY2017e against R27.1 bn based on 100% royalty. Our Ebitda estimate increases by 19% to R58 bn and fair value by 14% to R120/share from R105/share.