Traders are cautious ahead of the Reserve Bank of India’s monetary policy review on Tuesday. (Photo: Reuters)

9.49 am: Gammon India shares surged as much as 16.27 per cent in the early trade on Monday after the company announced on Thursday post market hours that it has secured the Engineering, Procurement & Construction (EPC) project worth Rs 1,709.99 crore from National Highways Authority of India (NHAI).

9.40 am: The rupee rose by 14 paise at 66.02 against the US dollar in early trade on Monday on fresh selling of the American currency by exporters.

9.34 am:  Traders are cautious ahead of the Reserve Bank of India’s monetary policy review on Tuesday. Sensex was down 80.94 points at 25782.56. Nifty was down 19.45 points at 7,849.

9.22 am: The BSE Bankex and BSE FMCG index were up 0.41 per cent and 0.39 per cent at 19776.41 and 7,602, respectively. Sensex and Nifty were up 6.03 points and 1.55 points at 25,869 and 7,870, respectively.

Domestic equity markets opened flat on Monday amid tepid cues from Asian markets. Sensex opened 59.21 points up at 25,922.71. Nifty opened 24.3 points down at 7,892.80. Banking and FMCG stocks also opened higher.

Back home, the Indian markets ended modestly higher on Thursday ahead of a long weekend and the upcoming monetary policy meeting on September 29. Mixed global cues, rupee weakness and portfolio churning on the eve of the expiry of September derivative contracts limited potential gains. Sensex and Nifty jumped 0.16 per cent and 0.29 per cent at 25,863.50 and 7868.50, respectively, on Thursday. Domestic equity markets were closed on Friday on account of Eid.

Global Markets

Asian stocks sagged on Monday after Wall Street’s uninspiring Friday performance and ahead of key economic indicators, while the dollar consolidated its gains against the yen and euro.

Tokyo’s Nikkei lost 1.1 per cent on caution ahead of coming announcements including Tuesday’s Japan industrial production, Thursday’s China Caixin Purchasing Managers’ Index (PMI) and US non-farm payrolls on Friday.

The S&P 500 erased an early Federal Reserve-driven rally on Friday and closed slightly lower amid a selloff in biotech shares, and the Nasdaq lost 1 per cent. The Dow , however, managed to rise 0.7 per cent.

MSCI’s broadest index of Asia-Pacific shares outside Japan  stood virtually flat. Shanghai shares  fell 0.3 per cent. Financial markets in South Korea, Hong Kong and Taiwan are closed on Monday for public holidays.

(With inputs from agencies)

More than 60 companies scrapped their IPO plans between 2011 and early 2014 due to unfavourable market conditions, halting plans of Indian companies to raise more than Rs 65,000 crore through primary markets. (Express Photo)

India Inc’s equity fund raising has already crossed Rs 1 lakh crore mark in 2015 so far with the markets having been on a roll for the better part of the year, reports Ankit Doshi in Mumbai. Companies have picked up Rs 1.04 lakh crore, the third highest mop-up after 2007 and 2010. Investment bankers said fund raising was largely dominated by secondary market offerings. Offers for sale (OFS) and qualified institutional placements (QIP) accounted for half the quantum of money raised this year.

Sumit Jalan, ECM head and director, Global Market Solutions at Credit Suisse (India) said the fund raising reflected a pick-up in investment cycle.

Jalan, however, pointed out that a huge quantum of secondary market offerings did not necessarily indicate economic growth or business expansion.

Many companies have tapped markets after a four-to-five year lull. The difference this year is that we have seen more secondary market offerings though that does not necessarily indicate economic growth or business expansion.

Nevertheless, the long-term macro trend remains intact and more companies could raise equity, said Jalan, whose firm helped Syngene International’s go public in July 2015.

More than 60 companies scrapped their IPO plans between 2011 and early 2014 due to unfavourable market conditions, halting plans of Indian companies to raise more than Rs 65,000 crore through primary markets. The government sold a 10% stake in Coal India (CIL) via the OFS in the end of January 2015 and raised Rs 22,557 crore in the biggest equity offering in India’s capital markets. In the last week of August, the government also sold a 10% stake in Indian Corp that helped mobilise R9,300 crore and making it the fourth largest OFS.

Dharmesh Mehta, MD & CEO, Axis Capital, said the Street had been starved of quality paper for the past few years, adding the numbers reflected confidence in India. Domestic and foreign money should continue to flow into equities. We will have short corrections and volatility but the long term trend is bullish, Mehta said.

In 2007, India Inc witnessed record equity issuances. Corporates raised Rs 1.37 lakh crore during the peak of the previous bull run followed by Rs 1.36 lakh crore in full-year 2010. Merchant bankers said primary markets have also shown marked improvement, albeit with caution. While the long-term is foreseen as positive, recent developments in global financial markets and fears of a hard landing in the Chinese economy have increased challenges for India’s primary markets that is recuperating after four years of lull.

Weak economic revival, global trade impacting port traffic: Our analysis of traffic at major ports, Adani Ports and Gujarat Pipavav (GPP), that cumulatively account for around 70% of India’s port volumes, suggests a slowdown in port traffic growth in 1H CY15, as weaker-than-expected domestic revival has impacted nonoil-non-gold imports while weak global growth continues to impact exports growth. The sector witnessed a tepid 3.9% y-o-y growth in 1H CY15.

Expect container traffic growth to be subdued near-term

After registering a robust 11% y-o-y (year on year) growth during 9MFY15, container traffic has slowed down to just 3% y-o-y in 1H CY15 owing to the weak EXIM trade. Our economics team has recently cut its growth estimates for non-oil-non-gold imports as well as for exports (ex-services). Besides, we believe that with containerisation already >50%, the scope for its rapid expansion going forward is limited. Consequently, we cut our estimates for container traffic growth for the sector from 9.5% CAGR (compound annual growth rate) in FY15-19 to 7.1% now.

Coal imports growth robust; but see risks going forward

Despite India’s muted power demand growth at 0.5% in 1HCY15 vs robust 8.5% domestic coal production growth, growth in coal traffic has remained strong at 20% driven by a robust 24% y-o-y growth in thermal coal. However, our bottom-up power and coal demand-supply analysis suggests that coal imports growth would turn flat in FY17 before starting to decline from FY18, as we expect Coal India to ramp-up its production at 11% CAGR in FY15-19. Thus, we cut our estimates for coal traffic growth for the sector from a 3.3% CAGR in FY15-19 to 1% now.

Expect only 4.5% CAGR in port traffic in FY15-19

Port traffic growth has a strong correlation with GDP. However, despite an improving economy, based on our bottom-up cargo-wise analysis, we expect port traffic to register a CAGR of only 4.5% in FY15-19 vs 4.7% recorded in FY10-15. We attribute our estimates to: (i) muted refinery capacity adds, which could hurt crude/POL (petroleum oil and lubricants) traffic (37% share in FY14), (ii) ramp up in domestic coal supply, impacting coal import traffic (24% share), and (iii) weak growth for containers (17%).

Market share gains by private sector ports would continue

Weak port traffic growth for the sector would also impact private sector operators. Consequently, we have cut our port traffic growth estimate for Adani Ports to 14% CAGR in FY15-19 (vs 18% earlier) and for Gujarat Pipavav to 9%
CAGR in FY15-19 (12%). However, these ports would continue to gain market share from the inefficient & congested major ports operated by the government and given their strategic location on India’s  west coast.

Upgrade GPP to Neutral; prefer Adani Ports

We continue to prefer Adani Ports as we expect market share gains to 19% by FY19e (vs 14% now), strong EPS (earnings per share) CAGR of 18% and >21% RoE (return on equity) in FY15E-17e (estimates). Additionally, we upgrade Gujarat Pipavav to Neutral (from U/P) post 29% correction in the share price since April 2015.

Price objective basis & risk

Adani Ports & SEZ Ltd

We value ADSEZ using SoTP (sum-of-the-parts) methodology to arrive at a PO (purchase order) of R394/share. We value each of its port assets based on the (FCFE) free cash to equity-based DCF (discounted cash flow) using cost of equity ranging from 12.8% to 15.5% and assuming it gets an extension in its concession agreements wherever applicable . We value its stake in Adani Logistics at 3x FY17e book value and its stake in other businesses at 3x the invested equity as of March 2017. Downside risks for ADSEZ are:

(i) Potential diversion of ADSEZ’s cash flows towards cash gap for Adani’s group companies (mainly Adani Power),

(ii) continuation of loans to related parties, (iii) $800m of contingent liability towards Abbot Point and (iv) issues in extending Mundra port’s concession agreement once it expires in 2031.

GPP (XJGUF, B-2-7, R171.85)

We value GPP’s core business based on a free cash flow-to-equity-based DCF valuation. We use an 11.9% cost of equity to value GPP, which is lower than our estimates for ADSEZ (cost of equity of 12.8% to 15.5% for ADSEZ), led by GPP’s superior balance sheet and strong parentage. We value its 38.8% stake in PRCL at 17x FY17 earnings, adjusted for the dividends received by GPP for its 18% earnings CAGR expected in FY15-17. Based on this, we arrive at a SoTP-based valuation of R187. Upside risks for GPP are (i) Faster-than-expected ramp-up of new capacities, (ii) Potential of higher-than-20% dividend payouts assumed in our estimates now. Downside risk for GPP is its potentialinability to grow container traffic until it expands its capacity in Mar 2016.

High impact approvals to drive earnings from Q4FY16F onwards: While the number of approvals has increased for LPC in FY16 (14 so far vs. 10 in FY15), the average time for an approval has also risen to more than 60 months. Most of the recent approvals were for pre-FY13 filings. With 43% of pending filings more than three years old, the rate of approvals should remain strong. None of the approvals in FY16 so far are likely to have any material impact on growth. In our opinion, more than the number of approvals, it is the approval of select high impact products— gGlumetza, gNexium, gWelchol and gRenvela/Renagel—that matter most for growth. We incorporate the recent currency movements, acquisitions by Lupin and the prospect of new launches into our financial projections. We lower our earnings by 7% for FY16F, but raise by 21% for FY17F. Our FY17F EPS is 18% above consensus.
The earnings momentum is likely to gather pace from 4QFY16F. We lift our TP (target price to R2,149 (from R1,698), based on 23x (unchanged) FY17-18F average EPS of Rs 93.4.

Valuation: TP lifted to Rs 2,149

The stock currently trades at 26.3x one-year forward EPS of R72.3. We continue to assess the fair valuation range to be 20-25x. Significant value-accretive acquisitions and visibility to sustain growth by moving up the complexity levels (inhalers and biosimilars) could justify a higher valuation multiple. However, currently we have very limited visibility on the same.

Pace of approvals has increased; old backlog being cleared

Lupin’s pace of approvals has picked up in the recent past. In Fig 1 we highlight the first wave of ANDA approvals for Lupin separately. The first-wave approvals consist of products in which Lupin is among the first set of companies to receive generic approvals or receive approvals just after the generic exclusivity period, if applicable. The approvals are an even mix of first-wave and follow-on approvals in the past three years as shown on Fig 1.

Large fraction of old ANDAs implies approval momentum to sustain in the near-term

Fig 2 shows the ANDA approval timeline and we map it with the filing period. So far Lupin has received approvals for 106 ANDAs. The company has not received approvals for any ANDA filed after FY13. Only two ANDAs filed in FY13 have received approvals. Most of the approvals received in FY16 were filed in FY11 and FY12. Approvals that are coming through now are more than three year old filings.

The average time for approval has been rising for Lupin, as is the case with the rest of the industry. The average time for approval for ANDAs approved in FY16 is 66 months compared with 51 months for approvals in FY15. With approximately 36 ANDAs which are more than 50 months old, the momentum for new approvals is likely to remain high in the near term.

Pipeline granularity

Out of the 106 ANDAs pending approval as on July 2015, we believe 61 ANDAs are in the public domain. This is based on litigation records and voluntary disclosure by Lupin. The 61 ANDAs have annual brand sales of $40bn, according to our estimates. Thus, we believe that 46 ANDAs with sales of $15bn are not in the public domain.

Therefore, the pipeline visibility is high at 57% in terms of the number of ANDAs and 73% in terms of brand value of the pending pipeline. The pipeline presents a lot more visibility in the near term and we see a lean patch again in FY18F (Fig 2). New filings from FY16F onwards are unlikely to have any material impact in FY18F given the timeline for product approvals, in our view. In general, we find that the value of the pipeline is growing at 10-11%. The FY19 portfolio is recording a stronger growth on the back of a 125% growth y-o-y in Lyrica.

A few products hold the key: Glumetza presents an attractive opportunity

A step-up in product approvals is a positive. With the high frequency of approvals, there are possibilities of positive surprises, but such upsides are unpredictable and may not be sustainable, we believe. Thus, we think a few high-impact products are key for the revival of Lupin’s US growth starting 4QFY16F. These include Glumetza, Nexium, Welchol and Renvela/Renagel for growth. Visibility on Glumetza’s upside is high as LPC has tentative approval and the recent price increase in Glumetza adds to the upside. The visibility on the approval timing is limited on the rest given the regulatory challenges that the product presents. Renvela/Renagel and Nexium remain FY16F prospects, but Welchol is now likely only in FY17F, in our view.

Attempt to move up the value chain

After the slowdown in US revenues in FY14 and FY15, and potential single-digit growth in FY16F, we expect a revival in growth in FY17F due to the specific product opportunities highlighted above. Lupin has recorded $8.76m of generic sales per approved ANDA in FY15, which is ahead of peers. Lupin’s strong execution, in terms of the timely approval and strong customer service, has led to market share gains, supporting higher sales per ANDA. With a step-up in approvals and not a proportionate rise in revenue, we expect sales per ANDA to decline in FY16F, before reviving back in FY17F.

In terms of product complexity, the gains for Lupin have been limited with gFortamet being an exception. In Fig 3, we present the sales split based on product formulations. LPC’s portfolio is largely oral solids at the moment, with little presence in other formulation segments like derm and injectables. Even the pipeline is largely oral solids. Of the 61 ANDAs in the public domain, we believe that 51 ANDAs are oral solids.

We initiate coverage of Strides with a Buy rating and TP of Rs 1,500. The management track record in capital allocation and execution gives us comfort on its unique business model. We believe backward integration and product mix will lead to 320 bps margin improvement in the next three years. US and Africa are the key revenue growth drivers. Organic EPS CAGR of 32% for FY16E-18e and sharp ROE improvement should see the stock re-rate from current levels. Strides is trading at 16x FY17 P/E (price to earnings ratio), a 25% discount to the sector and 20% to mid-cap peers. Given the 23% FY18 EPS growth and improving fundamentals (RoE of 25% and net debt to equity of 0.8 by FY18), we expect the gap to narrow. We initiate at Buy with a TP of Rs 1,500, FY17E P/E of 20x, in line with mid/small cap peers. Risks: approval delays and currency.

Unique strategy across markets: Strides has a unique business model in all its key markets compared with its Indian peers. In the US, Strides is working towards being a niche player with portfolio of small off-patent products and is not focused on large Para IV challenges. In Africa, it is building a strong branded presence outside South Africa with integrated and local manufacturing. In Australia, it is now a top-three generic player with front-end presence.

Focus on asset utilisation: We believe following significant inorganic growth over the past two years, the management is now focusing on integration of businesses. It plans to backward integrate its US and Institutional business using Shasun’s API facility and also bring Australia production in-house. It now has sufficient tangible (production) and intangible (R&D) capabilities to execute its strategy and grow the business. We expect US revenues to grow at 35% CAGR over FY15-18, driven by new product launches and market share gains, and Africa business to grow at 24% CAGR over FY15-18, led by branded business and benefits from local manufacturing assets. As a result, we expect margins to improve 320bps by FY18. Strides is building a global integrated business with front-end presence in the US, Africa and Australia. We expect reported EPS to grow at a CAGR of 62% over FY15-18,driven by both organic and inorganic drivers. We expect organic EPS CAGR of 32% over FY16-18. The company has a unique business model in all its key markets: (i) branded presence in Africa, (ii) portfolio of small molecules in the US and (iii) a large product portfolio in Australia. We believe that inorganic expansion is largely complete and going forward the focus will be on growing the US and Africa businesses through new launches and market share gains, and improving margins through backward integration of key products. The stock is trading at 16x FY17 PE, at a 25% discount to the sector.

Strong earnings growth ahead: We expect Strides’ reported EPS to grow at FY15-18 CAGR of 62%, return ratios to improve to 25% and net debt to equity to decline to 0.8x by FY18, from 1.6x currently. While part of the growth is due to low base and M&A, we expect organic growth CAGR post FY16 to be 32% over the next two years. We expect revenue to grow to $800m by FY18, led by M&A and organic growth in the US and Africa. We expect US revenue to grow 36% CAGR over FY15-18, led by doubling of product portfolio and market share gains in the current portfolio. We expect Africa to grow 24% CAGR over FY15-18, driven by branded business and gains from local manufacturing. We expect reported margins to see 320 bps improvement to c22% by FY18, driven by improved mix in the US, Africa and CRAMS business, and backward integration of Institutional and Australian businesses.

Shasun — a booster for base business: In September 2014, Strides announced its merger with Shasun. The merger is a gamechanger for Strides business, making it a vertically integrated global pharma player. The merger provided Strides with three key assets: (i) an API backend which it currently lacks for its products, (ii) strong R&D team with complementary therapeutic focus and (iii) heavily under-utilised infrastructure. The acquisition provides additional drivers for its US and institutional businesses. The management focus post the completion will be on better utilisation of Shasun’s capabilities.