Sunday, 9 September, 2007

Sharekhan's Recomendations

India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs263

Price target revised to Rs300

Key points

With a revised capital expenditure (capex) plan of 14 million metric tonne (MMT) by the end of FY2009, India Cements will emerge as one of the top five cement players in India in terms of capacity. The company will witness a robust volume growth of 23% over FY2007-09.

South India is expected to witness a strong cement demand in the next couple of years due to heightened industrial activity and upcoming government projects.
The company received the Madras High Court`s approval for merger of Visaka Cements in Q1FY2008.

For Q1FY2008, the combined turnover of the company stood at Rs701 crore. The turnover was much in line with our expectations. Backed by higher realisations, the operating profit margin (OPM) improved by 400 basis points year on year (yoy) to 38%, whereas the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne stood at Rs1,150. Consequently, the profit before tax (PBT) stood higher at Rs215 crore beating our expectation of Rs200 crore for the same.

In the last couple of months, the cement retail price have touched Rs280 per bag in certain regions and the dealers expect it to touch Rs300 per bag in the coming months. Considering the rise in prices, we are upgrading our estimates by 33.9% for FY2008 and 32.5% for FY2009.

The company`s strategy of augmenting its capacity through the brownfield route at a lower capital cost will enhance the company’s return on capital employed (RoCE) going forward. The Lower capital cost coupled with higher profitability will put the company`s financials in an enviable position.

Healthy financials, a leadership position in the South and a lower promoter stake make the company a potential target for acquisition. Whether the promoters will sell their stake is a question that time will answer but in case that happens we believe the acquirer will have to pay a hefty premium to the company as it will directly make them the market leader in the South.

We expect the earnings of the company to grow at a compounded annual growth rate (CAGR) of 27% over FY2007-09 on an enhanced equity capital of Rs260 crore. At the current market price of Rs263, the stock is currently trading at 9.5x its FY2009E earnings per share (EPS) and at an enterprise value (EV)/EBITDA of 5.1x. Considering all these aspects, we maintain our positive outlook on the stock with a revised price target of Rs300.

Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs399

Biomeda acquisition to be earnings accretive from FY2009

Key points

Elder Pharmaceuticals (Elder) has acquired a 51% stake in Biomeda Group in Bulgaria for 5 million euros (around Rs28 crore) in an all-cash deal.

Biomeda is among Bulgaria`s top ten oral dosage formulation manufacturer and distributor. The manufacturing division of the company includes a manufacturing facility to produce oral formulations and hard gelatin capsules. The company imports products from the global players and distributes them to clients all across the European Union through its warehouses.

In line with its strategy to expand its global footprint, Elder`s acquisition of a 51% stake in Bulgaria`s Biomeda group is expected to provide it with an entry point into the European markets. With Biomeda`s stable of nine products and its strong relationships with global pharmaceutical companies, Elder hopes to grow the existing business of Biomeda at an annual rate of 15-20% in the next two-three years. Further, Elder is also planning to introduce products from its own portfolio into Bulgaria and the other European countries through Biomeda.

We believe that through the introduction of Elder`s products into the Bulgarian and other key European markets, Biomeda`s sales will grow by 20% to 12 million euros in CY2008/FY2009 and by 50% to 18 million euros in CY2009/FY2010. Further, cheaper sourcing of the raw materials and rationalisation of operating costs will improve Biomeda`s margins from the current level of 8-10% to 12% in the next three years. Our back-of-the-envelope calculations indicate that after minority interest, the Biomeda acquisition will dilute Elder`s earnings by Rs0.06 per share in FY2008, but add Rs0.8 per share in FY2009 and Rs2.3 per share in FY2010.

At the current market price of Rs399, Elder is quoting at 9.9x its estimated FY2008 earnings and at 8.8x its estimated FY2009 earnings. We maintain our Buy recommendation on the stock with a price target of Rs508.