Godrej Properties share price gained as much as 5.23 per cent in morning trade on Monday after the real estate arm of Godrej Group announced that it has sold 300 apartments within one week (Photo: Reuters)

Godrej Properties share price gained as much as 5.23 per cent in morning trade on Monday after the real estate arm of Godrej Group announced that it has sold 300 apartments within one week at its flagship project in Vikhroli, Mumbai called ‘The Trees’. This represents more than 80 per cent of the 374 apartments it opened for sale in the first phase of this project. The value of apartments sold is in excess of 700 crore making this Godrej Properties’ project the most successful ever launch in terms of value of real estate sold.

At 10.57 am, Godrej Properties share price was up 2.56 per cent at Rs 343.05. The scrip opened at Rs 335.10 and had touched a high and low of Rs 352 and Rs 335 respectively, in trade so far. Sensex was down 31.05 points, or 0.12 per cent, at 25,607.06. For live stock market updates click here.

‘The Trees’ mixed-use development contains a commercial precinct spread across 9.4 acres, which houses Godrej One, the Godrej Group’s global headquarters. The central mixed use precinct, spread over 9.2 acres, will comprise of a 5 star luxury hotel, cultural buildings, luxury residential, and a high street retail park. The more private luxury residential precinct spread across 6.7 acres, which was recently opened for sale, will house a community of residential buildings with private parks and an iconic clubhouse facility. Adaptive reuse of heritage industrial structures within the development creates a unique and distinctive design and cultural experience.

The promoters holding in the company stood at 74.86 per cent while institutions and non-institutions held 10.01 per cent and 15.13 per cent, respectively.

For the quarter ended September 2015, Godrej Propeties posted consolidated net profit of Rs 106.16 crore, up 127.80 per cent, against Rs 46.60 crore in the corresponding quarter a year ago.

Dalal Street is set to witness two initial public offers (IPOs) this week from pharma and healthcare related companies – Alkem Laboratories and Dr Lal Pathlabs — on December 8. (Graphic: Sanjay Tambe)

Dalal Street is set to witness two initial public offers (IPOs) this week from pharma and healthcare related companies – Alkem Laboratories and Dr Lal Pathlabs — on December 8. Dr Lal Pathlabs is a provider of diagnostic and related healthcare tests and services in India, while Alkem Laboratories is a domestic pharmaceutical company with global operations, engaged in the development, manufacture and sale of pharmaceutical and neutraceutical products. Both initial public offers (IPO) will close on December 10.

Below are five key points you should know about these companies before investing in their IPOs.

1. About the Public Offer

Alkem Laboratories: The company will raise Rs 1,315-1,355 crore from its upcoming IPO from equity markets. The public offer has a price band of Rs 1,020-1,050 per equity share.

Dr Lal Pathlabs: IPO of Dr Lal Pathlabs will raise Rs 626- 638 crore from equity markets at a price band of Rs 540-550 per equity share.

2. Positives

Alkem Laboratories: For the financial year ended March 2015, Alkem was the fifth largest pharmaceutical company in India by domestic sales, and unlike many domestic pharma companies that bank on sales in the USA, it derives the bulk of its revenues from the domestic market (around 75 per cent). The company also has a strong marketing and distribution network in India comprising of a field force of 5,856 medical representatives. Alkem Laboratories also has employed 483 scientists working on various drug products and substances in India and the USA. The research and development department carries out process development, formulation development and analytical research for domestic and international markets.

Dr Lal Pathlabs: Dr Lal PathLabs (DLP) is the second largest diagnostic chain in India with 172 clinical laboratories, 1,554 patient service centers and over 7,059 pickup points as of September 30, 2015. Though the company has pan India presence, more than 72 per cent of its revenue comes from North India region.

DLP operates through “hub & spoke” model whereby specimens are collected across multiple locations within region for delivery to a predesigned clinical laboratory for centralised diagnostic testing, providing greater economies of scale and offers scalable platform for continued growth of business. The centralised IT platform fully integrates the large network through common logistics and payment system and tracks operations and internal performance metrics, thereby enabling to improve the efficiencies of business.

According to Sharekhan, DLP management’s focus in future is to expand presence in existing markets (north and east India). The expansion of network can be organic as well as through strategic acquisitions and partnership especially in newer geographies (south and west India). The company also intends to focus on hospital-based clinical labs by increasing tie-ups and providing lab management and specialised lab testing services.

3) Risks

Alkem Laboratories: Alkem competes with different companies depending on the market and type of products. Its main competitors in India include leading domestic players, such as Torrent Pharmaceuticals, Ipca Laboratories and Alembic, and leading global players that have penetrated the domestic market, such as GSK Pharma, Pfizer and Abbott, who offer branded generics. In the US generics market, the principle competitors are Teva Pharmaceutical Industries, Mylan, Actavis PLC, Apotex, Amneal, Sun Pharmaceutical Industries, Dr Reddy’s Laboratories, Lupin, Zydus Cadila Healthcare and Camber Pharmaceuticals Inc.

Sharekhan in a research note said, “Any adverse outcome of inspection of the USFDA approved sites could affect the financials of the company and hamper future growth and profitability of the business.”

Dr Lal Pathlabs: India’s diagnostics industry is highly competitive with standalone centers having close to a 48 per cent market share, compared to around 37 per cent for hospital-based diagnostic centers. This increases competition for organised diagnostic chains in terms of volumes of patients’ samples and aggressive pricing of diagnostic tests.

According to Motilal Oswal, diagnostics centres have to constantly upgrade their technology to stay ahead of competition. However, these upgrades not only involve significant capital investments but also increase maintenance costs. This significantly increases cost overheads for service providers.

4. Financials

Alkem Laboratories: Revenues of the Alkem have grown at a CAGR of 22.3 per cent in FY11-15 to Rs 3788.7 crore mainly due to robust growth in the international market and above industry growth in the domestic market. EBITDA margins contracted 400 basis points from to 12.9 per cent in FY11-15 due to investments in the international business and chronic segments in the domestic market. However, in H1FY16, the EBITDA margin increased to 17.9 per cent due to strong gross margins and higher operating leverage. The net debt/equity has reduced to 0.1x in FY15 from 0.3x in FY12. Also, in the past two years, it has generated cumulative free cash flow of Rs 488 crore post incurring capex on capacity expansions, technological upgradation and maintenance.

Dr Lal Pathlabs: Revenues grew at a CAGR of 29.1 per cent in FY11-15 to Rs 659.6 crore mainly due to an increase in sample collection. The strong growth in sample collection was mainly due to network expansion and increase in the portfolio of diagnostic and related healthcare tests and services.

Net profit grew at 33.9 per cent CAGR to Rs 95 crore during the same period. Due to its assets light model, the balance sheet is leverage free. Similarly, due to a low cash conversion cycle and a strong operational performance, the company has cumulatively generated Rs 246 crore of free cash flow by FY15.

5. Should you Invest

Alkem Laboratories: Alkem has set forth an ambitious target of doubling its US contribution in the next five years. Today, US contributes a quarter of the overall revenue.

With its impending product pipeline and focused efforts in R&D, Reliance Securities in a research report said, “We believe the company is following the footsteps of Alembic and Torrent pharma. Besides, its India business is a steady cash cow at 17-18 per cent growth adding financial muscle to the company. Alkem is definitely entering late into chronic and lifestyle therapies but its experience of brand-building and a large prescriber base should come in handy. At a price band of Rs 1,020-1,050, Alkem is valued at 15.7/16.2x FY18E EPS, (as per our back of the envelope calculations) which we feel is fairly valued given its operational scale. We recommend ‘Subscribe’ to the issue.”

According to ICICIdirect.com, at the IPO price band of Rs 1,020-1,050, the stock is available at 26-27x on FY15 EPS of 38.7. Investors can ‘Subscribe’ to the issue.

Dr Lal Pathlabs: Dr Lal Pathlabs will be the only pure play listed diagnostic business in India. According to market experts, the company has a strong brand franchise, robust growth, net cash balance sheet and cash flow generation.

ICICIdirect.com in a research report said, “At the IPO price band of Rs 540-550, the stock is available at 46-47x on FY15 EPS of Rs 11.7. We recommend that investors should ‘Subscribe’ to the issue.”

Back home, Stocks trended down for the third day in a row on Friday as the BSE Sensex lost over 248 points to end at 25,638.11 — a two-week low — amid an intense global sell-off after the ECB stimulus fell short of the crease. (Source: PTI)

The BSE Sensex and NSE Nifty are likely to open in green on Monday tracking SGX Nifty and global markets. Asian share markets bounced on Monday after Wall Street welcomed an upbeat US jobs report that suggested the world’s biggest economy was well placed to handle an expected first increase in interest rates in almost a decade.

Back home, Stocks trended down for the third day in a row on Friday as the BSE Sensex lost over 248 points to end at 25,638.11 — a two-week low — amid an intense global sell-off after the ECB stimulus fell short of the crease.

Below are some of the stocks that are likely to be in focus today:

Lanco Infratech: Lanco Infratech on Monday announced commencement of power supply to Haryana Discoms from its domestic coal based 300 MW Unit # 2 of Lanco Amarkantak Power Limited (LAPL), Chhattisgarh. With the commencement of power supply to Haryana Discoms at regulated tariff from this pithead plant, the entire 1800 MW operating coal based power portfolio of Lanco is now utilised to its full capacity with fuel pass through.

Tata Steel: Stocks of Britain’s largest steelmaker will be in focus as the company is believed to nearing a deal to sell-off one of its UK steel plants, in a move expected to secure thousands of jobs. It is also likely to cut 720 jobs at one of its UK plants after talks to save redundancies failed.

Adani Ports: The company is keen to complete its own ‘Sagarmala’ dream by having presence in the three key states of Maharashtra, Karnataka and Andhra Pradesh, apart from setting up trans-shipment terminals in Southeast Asia and East Africa.

Essar Oil: Country’s second biggest non-state oil refiner on Saturday issued a public notice to delist the company from local bourses by buying out the non-promoter shareholding of 28.54 per cent at Rs 146.05 per share.

GMR Infra: The debt-laden company is pinning its hopes on a turnaround based on its under construction power generation capacity becoming operational, and growth envisaged in its airport vertical with the increase in passenger traffic.

Titan: Tata Sons, the promoter of major operating companies of the Tata group, will acquire additional 0.22 per cent stake in Titan Company at an estimated price of over Rs 66 crore, taking its total holding to 19.80 per cent.

SpiceJet: SpiceJet, which is evaluating a”substantial fleet order”, will seek shareholders’ approval for raising loans worth Rs 5,000 crore later this month.

ONGC: The Board of ONGC, led by its vocal independent directors and government nominee, had forced the firm’s management to take legal recourse that has now led to a damning finding that Rs 11,000 crore worth of its natural gas had flowed to neighbouring block of Reliance Industries.

Cipla: Cipla has reshuffled its senior management team, the third time it’s doing so in as many years.

JK Tyres: JK Tyre & Industries said operations at its Sriperumbadur-based manufacturing plant have been disrupted for eight shifts owing to unprecedented rains in Tamil Nadu.

NMDC: NMDC has reported 17.50 million tonnes (MT) of iron ore production and logged sales volume of 17.72 MT up to November 2015. The iron ore major stated that the company’s Chhattisgarh mines produced 10.03 MT and registered sales volume of 9.94 MT while Karnataka mines produced 7.47 MT and sold 7.78 MT up to November 2015. The mining company has also fixed the prices of iron ore with effect from December 04, 2015. The Lump Ore prices have been fixed at Rs 1,800 WMT (wet metric tonne) and Fines at Rs 1,560 WMT respectively. The above prices are excluding royalty, taxes, duties and levies.

PNC Infratech: The company has approved the sale of investment and execution of Share Purchase Agreement thereof, held by the Company in Jaora – Nayagaon Toll Road Company (SPV) in the form of 2,44,23,700 equity shares representing 8.51% of the share capital of the SPV, to Viva Highways for an aggregate consideration of Rs 34,19,31,800. Accordingly, the company has entered into a Share Purchase Agreement with Viva Highways, which has made payment of an advance towards the consideration under the Share Purchase Agreement. The completion of the sale is subject to satisfaction of the conditions precedent mentioned in the Share Purchase Agreement by the parties, including receipt of approvals of the lenders of the SPV.

Sona Koyo Steering Systems: Auto components maker Sona Koyo Steering Systems (SKSS) plans to launch next fiscal the power steering technology for small tractors in the domestic market. The company is already exporting power steering technology called Electronic Power Assisted Module (EPAM), developed for off-road vehicles four years back, to the US market. The same technology is being adopted for small tractors in India. At present, power steering is available in big tractors alone and it cannot be fit into small tractors due to lower engine capacity and space constrain.

Artson Engineering: The company has bagged a purchase order for Fabrication and Supply of Steel Structures for a steel plant. The estimated order value is Rs 10.77 crore. The company had last month bagged order worth Rs 13.26 crore. The purchase order is for Fabrication and Supply of Building Structure for a mining plant. Artson Engineering is engaged in pioneering work in developing products and systems in fuel handling and tankage construction activities in refineries, which led the company to become one of the foremost companies in India with specialization in Petroleum Storage and handling systems.

Indian Oil Corporation: Assisted e-commerce platform StoreKing has tied up with Indian Oil Corporation (IOC) to provide services across petrol bunks in Tier-III and rural areas across the country. The partnership will give StoreKing access to 25,000 touch points across the country, of which 7,500 would be in rural locations. The programme, being piloted in Karnataka, will see the setting up of kiosks at petrol bunks, where customers will be able to order for products online, pay for these and pick up deliveries. StoreKing and IOC plan to set up 250 such centres across the state by March. The tie up will help IOC petrol pump owners earn additional income while the oil firm is looking at the partnership as a way to improve walk-ins.

Acquisition-led growth, regulatory risks to drive near-term sentiment

Product launches in US markets and synergies from recent acquisitions are set to drive sector earnings at a CAGR of 24% in FY15-18e (estimates), following a CAGR (compound annual growth rate) of 18% over the past three years.

Indian pharmaceutical companies will continue to use their under-leveraged balance sheets to pursue inorganic growth by acquiring assets in both the Indian and US markets. While regulatory risks will remain a sector overhang, the risk-reward profile appears favourable, with current valuations discounting recent moves by the FDA (S&P BSE Healthcare underperformed BSE Sensex by c.10% in last 3M).

Initiating with Buy on Sun, Lupin, Cipla, Glenmark, Torrent; Sell on Dr. Reddy’s

We initiate coverage with a Buy rating on Sun (PER of 22x, lower than historical multiple mainly on account of impending FDA issues), Lupin (PER of 23x, to factor in higher growth trajectory), Cipla (PER of 21x, discount to Sun and Lupin to factor in continuing front-end investments), Glenmark (PER of 21x, at c.5-10% discount to Sun and Lupin) and Torrent Pharma (PER of 20x, at c.5-15% discount to Sun and Lupin); a Sell rating on Dr. Reddy’s (PER of 18x to factor in USFDA warning letter on three of its plants); and a Hold rating on Cadila (PER of 18x to factor in delays in approvals for Moraiya plant). All our target prices are based on PER (x) assigned to our FY18 recurring earnings forecast plus relevant one-offs on a cash basis.

Regulatory risks appear highest for Dr. Reddy’s

While Dr. Reddy’s (US sales 44%) has received a warning letter for two of its bulk drug and one oncology formulation plant, Sun and Cadila have seen a slower pace of approvals in FY16 due to observations issued for their USFDA formulation plants in India (Halol and Moraiya). US sales, which represent the highest proportion (c.30%-45%) of sales for Indian pharma companies, will likely see sluggish growth rates as the ANDA approvals for Dr. Reddy’s, Sun and Cadila could be delayed, leading to downside risk to consensus earnings for these companies. We see low risk to our earnings forecasts for Sun as we do not factor in new approvals for Halol until 4QFY17.

Low leverage and low dividend payouts expected to drive acquisitions

We expect Indian companies to capitalise on their low leverage by seeking inorganic growth opportunities, mainly in regulated markets like the US, to add to and diversify their existing portfolios, while also acquiring front-end businesses in emerging markets. Sun, Lupin, Dr. Reddy’s and Cipla look set to take the lead in seeking acquisitions globally. Consequently, we expect Sun, Lupin and Cipla to deliver the highest earnings growth in the sector. With organic growth capped for Dr. Reddy’s due to existing US FDA regulatory issues, it could be aggressive in seeking acquisitions globally. We believe acquiring assets at reasonable multiples will remain a challenge and payback periods may get stretched if integration synergies are delayed.

Demographics to drive IPM, product launches to fuel US generic sales: We forecast a c.12-15% CAGR in the Indian pharma market over the next five years and anticipate key product launches such as generic Gleevec (Sun), generic Glumetza (Lupin), generic Zetia (Glenmark) and generic Asacol HD (Cadila).

Executive summary
* Acquisition-led growth supported by balance sheet strength
* USFDA actions are NOT generic regulatory sector risk
* Regulatory risks for Dr. Reddy’s are higher than for Sun and Cadila

Acquisition-led growth to emerge as key sector theme: A confluence of factors, ranging from strong balance sheets following several years of robust cash flow generation to confidence in successfully integrating acquisitions, is set to drive an even faster pace of M&A activity in the sector. As M&A continues, the recent acquisition multiples could set the benchmark for secondary market valuations. US sales contribute c.30-50% of sales for most large Indian companies; others with lower US exposure are adding to their presence in this market by acquiring assets (Cipla—Invagen and Exelan). While non-US markets like Japan, Latam and the EU are large, every company has a different strategy in these markets, as they continue to pose challenges in relation to entry, regulation and currency volatility.

Regulatory challenges notwithstanding, we estimate that current business operations should drive an EPS CAGR of 24% for the sector for FY15-18E. The big outperformance should be from Sun (26.3% EPS CAGR in FY15-18E) and Lupin. We see downside risk to the consensus earnings of Dr. Reddy’s, which faces headwinds in the US.

Acquisitions by Indian pharma companies (with a few exceptions) have a payback period of 5-7 years under modest growth assumptions (Sun—Taro, Torrent— Elder).

USFDA actions are NOT generic regulatory sector risk

Following recent US FDA actions on Indian pharma manufacturing units, investors fear a generic regulatory risk for the sector. Our report should allay investor fears: not all 483 observation letters turn into warning letters, and not all warning letters turn into import alerts. Also, on most occasions, further USFDA actions have been initiated within a year of the issuance of 483 observations and warning letters.

Regulatory risks for Dr. Reddy’s are higher than for Sun and Cadila. In November 2015, the USFDA issued warning letters for three of Dr. Reddy’s Indian manufacturing sites. The US contributes 44% of Dr. Reddy’s sales and we believe that delays in the resolution of the issues at these plants will have an impact on new approvals, putting pressure on consensus sales and earnings. Currently, the status of Sun’s USFDA plant at Halol in Gujarat is Official Action Initiated; this plant has not seen any ANDA approvals for about a year. Sun transferred generic Gleevec from its Halol plant to another facility outside India. We see low risk to our earnings forecasts for Sun Pharma, as we do not factor in new approvals for Halol until Q3FY17. Sun and Cadila received 483 observations at the plants in September 2014.

Valuation based on PER, risks mainly relate to market growth

We have used PER as our principal valuation matrix for the sector. The critical parameter is our assessment of each company’s ability to enhance growth in key markets (US and India). We also consider the potential for growth beyond FY’18 that will be derived from acquisitions made in the past 1-2 years, as well as the historical valuation ranges, before arriving at the appropriate multiple for each stock. Our assessment suggests that Sun and Lupin are well entrenched in these key markets and have demonstrated above-industry growth rates; we therefore estimate that they should be able to sustain current one year forward multiples of 20x-24x. This is also premised on our EPS CAGR forecasts of 18-26% (FY15-18e)  for the two companies. For companies constrained by low growth and ongoing regulatory issues, we have factored in a marginal discount to historical trading averages.

Key takeaway: Recent domestic steel demand data appears positive, but weak global steel fundamentals, falling global prices and imports will continue to weigh on domestic steel prices, in our view. More protectionist policies are possible, which may offer some relief, but we have doubts around the effectiveness of these measures. Balance Sheet stress could intensify. We stay selective: prefer JSW in the current environment; SAIL remains our least preferred steel stock.

Global steel fundamentals remain challenging: Steel prices are down 7-18% across regions since end September. With Chinese apparent steel demand continuing to contract (-4% y-o-y Oct) and global steel utilisation falling to 68.3% in Oct (69.3% Sept), signs of inflection remain elusive. Iron ore prices have also dipped 21% since September. This lowers cost support further. While downside to steel prices may be limited, steel prices could stay at low levels given the oversupplied steel and iron ore market.

Domestic steel demand data in October encouraging: Domestic apparent steel demand grew 5.5%/6.6% y-o-y in Sept/Oct (YTD 4.5%) as per initial JPC data. This compares to a muted 1.4%y-o-y demand growth in September quarter. Monthly data is often volatile due to data bunching, restatement and inventory data issues, but positive steel demand data seems to corroborate other positive macro data recently. However, imports continue to gain share of domestic demand. Producer inventories have increased further in October.

Steel pricing pressure will persist: Domestic steel prices remain under pressure, as domestic prices are largely driven by import parity and a sharp fall in Chinese steel prices has negated the 20% safeguard duty imposed on HRC (hot-rolled coils) in September. Price hikes announced post safeguard duty have been rolled back. Prices of downstream products are largely unaffected by the duty. Domestic HRC prices are down 3.5%, and long product prices are down 14% since September. We see scope for more correction in December as domestic HRC prices are still at a 4-5% premium to import parity.

Steel mills are seeking greater protection: Imports grew 27% m-o-m (month-on-month) in October, though this mainly pertains to bookings made before the safeguard duty was imposed. A clearer picture will emerge in the coming months. We understand HRC import bookings have moderated, but import orders of downstream products have increased after the safeguard duty was imposed. Steel producers are now seeking a higher safeguard duty, and safeguard duty in other product categories. Producers are also asking the government to set a floor price on steel imports. We think further protectionist measures are possible, but government will also weigh the impact on end-use sectors, especially given its ‘Make in India’ thrust. There was strong opposition from steel consuming industries (autos, re rollers, industry bodies) at the recently held public hearing with regard to safeguard duty on HRC. We are also sceptical of the effectiveness of potential floor prices on imports as (i) implementation would be difficult given large variants of steel grades/products and (ii) exporters would find ways to circumvent floor price restrictions.

Stress testing FY17 Ebitda and balance sheet: We believe balance sheet pressure could mount if prices do not recover materially. If prices sustain near spot (Rs 27,500/t) vs. our est. of Rs 30,500/ton in FY17, FY17 Ebitda at our covered steel names would be lower by over 22% vs. our base case. Net gearing would rise to 0.8-2.5x and net debt/Ebitda would stay over 6.5x across our covered steel names. At SAIL, Ebitda would be inadequate to pay interest costs. We do not foresee major interest payment issues at Tata or JSW Steel but net gearing would exceed 2.5x (2.2x FY16) in FY17 at Tata. Covenant risks appear low and repayments are back-ended at Tata, but operating cash flows may be inadequate to meet capex and debt servicing requirements at Tata and JSW, if steel prices sustain near spot.