ONGC’s Q2 Ebitda was in line with our estimate; net profit was 13% higher due to lower exploration related write-offs which are volatile in nature. We cut our EPS (earnings per share) estimates and price target mainly to factor in lower crude price but remain positive on ONGC. We believe risk-reward is favourable as the stock price is already factoring in adverse impact of low crude price on near-term earning. Higher crude price and long-term clarity on subsidy sharing are key triggers.

Ebitda in line, beat in PAT due to lower exploration write-offs. ONGC’s Q2 Ebitda was largely in line with our estimate. Net profit was 13% higher but this was mainly on account of lower exploration related write-offs in the quarter as this tends to be volatile from quarter to quarter and its timing is difficult to predict. The government continued with its pre-decided subsidy sharing formula for FY16 of upstream contributing under-recoveries beyond Rs 12/l for kerosene (corresponding to ~$45/bbl) and beyond Rs 18/kg for LPG (corresponding to $70/bbl).

Production concerns continue: While there was slight improvement in crude production on sequential basis, ONGC’s production has largely remained stagnant despite start of new projects due to greater than expected decline in mature fields. Management guided for crude production of 22.7/23.5MMT in FY16/FY17 implying marginal increase even if achieved—our estimate is for 22.6/23.0MMT. Gas production declined sharply in Q2 to 21.2BCM annualised from 22BCM in Q1 due to shutdowns.

Key takeaways from earnings call: (1) Capex in H1FY16 has been R150 bn vs. full year capex target of R363 bn; (2) OVL remains on the look-out for more acquisitions post the recent Vankor deal; (3) Some of the higher other expenditure in recent quarters is due to work overs which may not sustain.

Cut estimates to mainly factor lower crude price. Maintain Buy. We have reduced our EPS estimates for ONGC to factor in lower crude price of $54/64/75/bbl over FY16-18e based on the estimates of our global oil & gas team vs. $62/70/ 80/bbl earlier. We have also increased our estimate for other expenditure to some extent. Our PT reduces to Rs 345 from Rs 372 previously as a result.

Valuation/Risks Our fair value of Rs 345  is based on 11x P/E (price-to-earnings ratio) on FY17 EPS, at a premium to historic median for the company due to expected clarity on subsidy sharing. Key risks (1) lower crude price; (2) production issues.

Taro’s Q2FY16 reported results missed our estimates on revenues and profitability, though adjusting for ~$19 m price protection charge, results were largely in line. In Q2FY15, the base business declined due to customer consolidation and competitive pressures, offsetting the benefits of price hikes. Management also painted a somber outlook on Keveyis sales trajectory in the first few years, in-line with expectations. We retain our SELL recommendation.

Q2 misses estimates on revenues and Ebitda

In its Q2FY16 results, Taro reported revenues of $212m, lower than our expectations of $230m, as the company took another $19.1m price protection charge in the quarter, following $14m charge in Q1FY16. Adjusting for price protection charge, revenues were flat q-o-q and in line with our expectations. Q2FY16 should have benefitted from the full impact of price increases implemented in Q1FY15, but the benefit was completely offset by pressures on the base business due to customer consolidation and increased competitive intensity. While Q3FY16 should now see the full impact of price increases implemented in Q2FY16, the benefits of price hikes have now peaked with pricing pressure likely to restrict future growth. Ebitda at ~$130m, too missed our expectations by 11%. Adjusting for $34m forex gain, net income missed our estimates by ~13%.

Early days for Keveyis, though our deep-dive suggests only ~$58 m in sales by FY2020e: At the call, management presented a cautious outlook on Keveyis in the initial days, and while Taro is targeting co-pay assistance to all patients on Keveyis, it is still early days to assess formulary feedback. In line with our thesis, management highlighted that Keveyis might face adoption hurdles in the mild to moderate patient sub-set, though it was unable to share granular details on the segmentation of the market. We present a detailed outlook on Keveyis, highlighting potential for ~730k patient penetration and sales of ~$58m by FY2020e.

FY2016 proving to be wash-out year for SUNP: Previously, Taro was the lynchpin of growth for SUNP given the successive rounds of price hikes implemented by SUNP since FY2012. However, with the impact of price hikes now at its peak, we see structural growth challenges for the company in FY2017 as the base business pressures on the US business get amplified. While the Gleevec settlement and Ranbaxy acquisition synergies partially take care of SUNP’s FY2017 growth, given the dilution to SUNP shareholders from RBXY, value creation is likely to be modest as SUNP grapples with a slow-down in RBXY’s US sales, currency headwinds in emerging markets and discontinuation of low profitability businesses such as tenders.

Other highlights:
* Competitive intensity in the US dermatology market is likely to increase though management expects the market to remain less competitive than conventional oral solid generics.
* Cash generation declined in the quarter driven down by the cash impact of price charges recorded in Q2FY15 as trade receivables increased by $50m.
* Taro management suggested that the R&D spend is likely to stay at current levels (6-8% of sales) as the company pursues more clinical-led filings on an increasing revenue base.
* Taro now has $1.05 bn cash balance, and the management highlighted that it will continue to evaluate in-licensing and M&A opportunities, with a focus on expanding its dermatology presence in the US and potentially Canada.
* Medicaid sales account for ~15-20% of Taro’s US sales, varying each year depending on product launches. The company is yet to determine the potential impact of the implementation of Section 602 of Bipartisan Budget Act of 2015 that will cap the price increases for generics to Medicaid programme to the rate of inflation in the US.

Market sentiment may also take a hit in view of terror attacks in Paris Friday night, say experts. (Express photo by Heena Khandelwal)

Downward momentum in the stock market is likely to continue for some more time and trading sentiment would be further guided by announcement of wholesale inflation data tomorrow, say experts.

Market sentiment may also take a hit in view of terror attacks in Paris Friday night, they added.

“Markets to look out for external cues as the domestic result season is over for now. Hopes of a liftoff in the US interest rates and the after effects will make markets oscillate with a downward bias.

“How the government steers ahead with its reform agenda and its implementation thereof will be the key triggers for the bulls to re-enter the markets,” said Jimeet Modi, CEO, SAMCO Securities.

Markets last week came under heavy selling pressure due to dismal performance of NDA in Bihar elections. FIIs were in wait and watch mode prior to the elections and are still staying on the sidelines waiting for the magic wand of the economic reforms, he said.

“The downward momentum in the market is likely to continue for some more time,” Modi added.

Marketmen said that fears of a rate hike by the Fed next month may continue to hamper investor sentiment.

Earlier this month, US Fed Chair Janet Yellen had signalled that a December rate hike is very much on the table as the economy has performed well.

“Market movement may depend upon trend in global markets, investment by foreign investors, movement of rupee against the dollar and WPI data to be announced on November 16. Fed’s decision on interest rate will act as major trigger for the Indian market,” said Vivek Gupta, CMT – Director Research, CapitalVia Global Research Limited.

Indian economy is still not out of the woods as industrial production slackened to a four-month low of 3.6 per cent while retail inflation inched up to 5 per cent.

Markets ended in the red for the third consecutive week, where the Sensex slipped below the psychological 26,000-mark to close at 25,610.53, a loss of 654.71 or 2.49 per cent.

“This week will not have many economic data and traders will be taking cues mainly from the global markets. After the disappointing IIP and CPI data, traders will now be eyeing the wholesale price index (WPI) data for October to be announced on November 16 for further cues on economy,” said Jayant Manglik, President, Retail Distribution, Religare Securities.

Traders will also be eyeing political development as the Winter Session of Parliament is set to begin on November 26.

Undoubtedly, the recent fall in index has pushed the index majors in oversold zone but there is no sign of reversal yet, Manglik added.

Markets ended in the red for the third consecutive week, where the Sensex slipped below the 26,000-mark to close at 25,610.53, a loss of 654.71 or 2.49 per cent. (Express Photo by Heena Khandelwal)

The overall weakness in the equity market dragged down the combined market valuation of top 10 Sensex companies by a whopping Rs 94,560.96 crore last week, with TCS and ONGC taking the biggest hit.

Markets ended in the red for the third consecutive week, where the Sensex slipped below the 26,000-mark to close at 25,610.53, a loss of 654.71 or 2.49 per cent.

The market capitalisation (m-cap) of TCS nosedived by Rs 21,369.29 crore to Rs 4,72,370.69 crore.

ONGC’s valuation tumbled Rs 19,763.19 crore to Rs 1,95,749.61 crore and that of Sun Pharma plunged by Rs 14,907.88 crore to Rs 1,78,497.41 crore.

The m-cap of Infosys dropped by Rs 8,636.51 crore to Rs 2,52,767.28 crore and HDFC Bank lost Rs 7,486.54 crore to Rs 2,64,953.03 crore.

RIL also witnessed an erosion of Rs 7,206.91 crore to Rs 3,01,297.23 crore, ITC’s valuation tanked by Rs 5,981.49 crore to Rs 2,64,510.29 crore and HDFC lost Rs 4,314.95 crore to Rs 1,85,929.42 crore.

Similarly, CIL took a hit of Rs 2,526.55 crore to Rs 2,13,272.04 crore and SBI saw its m-cap tumble by Rs 2,367.65 crore to Rs 1,86,461.90 crore.

The ranking of top 10 firms remained as: TCS followed by RIL, HDFC Bank, ITC, Infosys, CIL, ONGC, SBI, HDFC and Sun Pharma.

With just a third of the offerings in past 12 years outperforming the market, retail investors must be more vigilant while jumping on the IPO bandwagon.

In a matter of two weeks, two large IPOs met with contrasting fates at the stock exchanges. While Coffee Day Enterprises witnessed a cold listing at the bourses and is trading 18 per cent below its issue price, the public offering of InterGlobe Aviation, that got listed on Wednesday, brought cheer to investors as it rose 13.6 per cent on the first day of its listing to close at Rs 868 against the issue price of Rs 765 per share. In the first two days InterGlobe stocks have risen by over 20 per cent.

These are still early days and it will take a few more for the price to settle down, but the disparity in the performance of the IPOs calls for greater scrutiny by retail investors before they invest in public offerings. Even if the company is making profits, the pricing of the issue is crucial.

Capture

Interestingly, while both issues generated similar interest from retail investors, the difference was created by foreign institutional investors. While the Rs 1,150-crore Coffee Day IPO saw its retail portion subscribed 0.9 times, its qualified institutional buyers portion got subscribed 4.4 times. On the other hand, while the retail portion of the Rs 3,018-crore IPO of InterGlobe Aviation, that runs Indigo Airlines, was subscribed 0.92 times, the QIB portion received subscription of 17.8 times with overall subscription of 6.15 times.

As a result, InterGlobe Aviation emerged as the most actively traded stock at BSE on the day of its listing and it witnessed 1,12,386 trades with a turnover of Rs 445.86 crore during the day and saw its share price rise above the issue price. On the same day, the shares of SpiceJet and Jet Airways fell by 5.1 per cent and 4.3 per cent, respectively.

While Coffee Day continues to disappoint its investors who are still waiting to see the scrip rise above the issue price, the investors of InterGlobe Aviation have a reason to cheer as they are in the money. Market experts, however, feel that the upside for both the stocks is limited in the near term as both the issues were priced at a premium and not much was left by the promoters and the merchant bankers for the investors.

“The individual must be clear whether he is getting into an IPO for listing gains or as a long term investor. An IPO does not mean assured return but is as risky as any stock. However, if the IPO has witnessed a huge QIB demand and the market is buoyant on the day of listing then there may be listing gains,” said Prithvi Haldea, founder chairman, Prime Database.

The trendInvestment into initial public offering was a good way to invest in companies before the global financial crisis as they generated superior returns for investors at the time of listing. However, that has not been the case over the last few years.

Out of the 17 public issues that have hit the market this calendar year, 7 are trading below their issue price and one is trading close to its issue price. The overall trend in the last five years has not been very encouraging except for the two years when the markets rose sharply.

A large number of companies that came out with their public offering between 2010 and 2012 are still trading below their issue price and have not made money for their investors.

According to an IIFL note, over the past 12 years, there have been 575 IPOs, which raised more than $40 billion. Of these, just over 500 IPOs have a price history of more than a year. Of those 500 IPOs, a majority (54 per cent) have delivered negative returns after one year of trading. This means stocks of these companies were trading below issue price a year post listing.

Of the remaining IPOs that did deliver positive returns a year after listing, a further 20 per cent underperformed the benchmark Sensex. Thus, only about a third of the IPOs have historically outperformed the market and were (at least on ex-post basis) ‘investible’, the IIFL note said.

Even, Sebi chairman UK Sinha had in the past pulled up merchant bankers for extracting the maximum possible price from the investors and not leaving anything for them in the issue.

He had also pointed out that between 2010 and 2012 almost two-third of IPOs were trading below the issue price (at which public investors were sold shares in the IPO). Following this Sebi started asking a lot of question on pricing and put restrictions and obligations on merchant bankers. It started asking questions on their track record and told the bankers to preserve the due diligence on the issuer company for a period of three years.

Haldea, however, pointed that once the company gets listed then there are factors other than the pricing that drive the stock just like any other listed stock in the secondary market and so the comparison should not be with the issue price.

Where should you invest?

The performance of public issues that have hit the market this year is not very encouraging and therefore calls for investors to be more vigilant while investing in IPOs. While a lot of the companies that launched their IPOs are now available at a price much lower than their issue price, experts say that investors should not look for immediate gains now and along with reasonable pricing of the issue, they should also look for good stories and good promoters and invest with a relatively longer term horizon to benefit.

“Investing into good stories and with credible promoters will make sure that investors don’t lose their capital and will gain from the investment,” said the head of an investment banking firm.

The response from institutional investors is also very critical and investors should closely follow their interest in the issue before venturing. As can be seen from the QIB interest in the two companies that got listed this month — Coffee Day Enterprises and InterGope Aviation — the one that witnessed very strong QIB demand got listed at a premium as against the other one where the QIB interest was relatively muted.

A primary market expert said that retail investors should wait for the first two days of the issue period to see how they are investing and follow them accordingly. He, however, said that that is not the only thing to check.

“Another fact that retail investors should see is whether the private equity funds that invested into those companies earlier are fully or partially exiting the company at the time of the IPO. If they are exiting fully then it means that they do not see much upside in the company and therefore retail investors can simply give the issue a pass,” he added.