The performance of authorised generic Imitrex has so far been surprisingly good, and looks set to continue its good run into 4Q. In our view the market is likely to wait for stabilisation in Dr Reddy's major business divisions, in particular Domestic formulations, Betapharm and PSAI, before re-rating the stock.
3QFY09 results– authorised generic Imitrex boosts reported results
Dr Reddy’s reported net revenues of Rs18.4bn (+49% yoy), 6% higher than our estimate. The main surprise was higher than expected gImitrex sales at $72m vs our expectation of $40m. Excluding this, core business revenues were up 21% yoy to Rs14.9bn but 4% below our estimate. Higher margins associated with gImitrex sales boosted the EBIT margin to 21% (+1272bp yoy). Core PAT doubled to Rs1.9bn, translating into EPS of Rs11.4.
Core businesses yet to stabilise
Most of the major business divisions disappointed us. Domestic formulation and Betapharm registered 1% and 3% declines, respectively, while the PSAI (erstwhile API & Custom Pharma) business was flat, excluding the Dow Pharma acquisition. Management attributed the weak performance to a delay in new product launches and a change in supply chain model (in the case of Domestic formulation), destocking due to the AOK tender, and Olanzapine withdrawal from market (in the case of Betapharm). The company indicated that the Domestic formulation business may take a few more quarters to stabilise, while remaining non-committal on Betapharm’s outlook. Furthermore, none of the top 10 products (likely sales of $100m+) in Betapharm appears in the eight contracts awarded by AOK, which might necessitate impairment charges in future quarters. The company is also trying to focus more on its CMO (contract manufacturing) division than its CRO (contract research) division. Overall, we believe it will take two or three quarters for the various businesses to stabilise.
Near-term triggers appear limited
We maintain our estimates and long-term Buy recommendation. The stock trades at 12.1x our FY10F earnings and appears attractive, however we note that the market is likely to wait for Dr Reddy’s various businesses to stabilise before re-rating the stock.
Saturday, January 24, 2009
ITC - Cigarettes provide strength
ITC's EBITDA grew 13% yoy in 3Q09 despite three of its businesses reporting negative EBIT growth. Cigarette EBIT increased 17.5% in 2Q/3Q09 despite structural headwinds. Buy, with an increased target price of Rs214 (from Rs211).
The cigarette business gains momentum
ITC's cigarette business faced a significant increase in taxes in the last two years: in 2007, the tax rate increased 30% due to the implementation of VAT on the MRP of cigarettes; and, in 2008, there was a 140-390% increase due to the hike in excise duty on non-filter cigarettes. Nevertheless, cigarette EBIT growth averaged 13.4% in the last seven quarters. In 1Q09, EBIT grew only 2%, but it accelerated to 17.5% in 2Q/3Q09, reflecting an improved product mix. Volumes were hit only marginally, falling 1% in FY08 and 3.5% in FY09, though non-filter volumes were zero (19% of total volumes in FY08). Clearly, ITC's competitive position in cigarettes has improved, thanks to strong brands at all price points.
13% EBITDA growth despite negative EBIT growth in three key businesses
ITC’s 3Q09 earnings were in line with our expectations, although the loss in the other FMCG businesses exceeded our estimate, while hotels and paper EBIT disappointed. The 17.5% EBIT growth in the core cigarette business beat our estimates.
We see positive catalysts in the non-cigarettes business
Hotel EBIT declined 34% in 3Q09, due to the impact of the terrorist attack on Mumbai and the cancellation of a cricket event (for which ITC had several room bookings). While the macro environment remains weak, 3Q09 was also hit by one-off events. For paper, the full impact of the commissioning of a new paper machine and lower pulp and coal prices will be seen from 4Q09. Besides, we expect the other FMCG losses to moderate following the high launch expenses for personal-wash products.
Maintaining Buy at a target price of Rs214
We reduce FY10F EPS by 3.8% and introduce FY11F EPS. We expect EPS to grow 15% in FY09 and raise our DCF-based target price to Rs214, adjusting for changes in our risk-free rate and market risk premium assumptions.
The cigarette business gains momentum
ITC's cigarette business faced a significant increase in taxes in the last two years: in 2007, the tax rate increased 30% due to the implementation of VAT on the MRP of cigarettes; and, in 2008, there was a 140-390% increase due to the hike in excise duty on non-filter cigarettes. Nevertheless, cigarette EBIT growth averaged 13.4% in the last seven quarters. In 1Q09, EBIT grew only 2%, but it accelerated to 17.5% in 2Q/3Q09, reflecting an improved product mix. Volumes were hit only marginally, falling 1% in FY08 and 3.5% in FY09, though non-filter volumes were zero (19% of total volumes in FY08). Clearly, ITC's competitive position in cigarettes has improved, thanks to strong brands at all price points.
13% EBITDA growth despite negative EBIT growth in three key businesses
ITC’s 3Q09 earnings were in line with our expectations, although the loss in the other FMCG businesses exceeded our estimate, while hotels and paper EBIT disappointed. The 17.5% EBIT growth in the core cigarette business beat our estimates.
We see positive catalysts in the non-cigarettes business
Hotel EBIT declined 34% in 3Q09, due to the impact of the terrorist attack on Mumbai and the cancellation of a cricket event (for which ITC had several room bookings). While the macro environment remains weak, 3Q09 was also hit by one-off events. For paper, the full impact of the commissioning of a new paper machine and lower pulp and coal prices will be seen from 4Q09. Besides, we expect the other FMCG losses to moderate following the high launch expenses for personal-wash products.
Maintaining Buy at a target price of Rs214
We reduce FY10F EPS by 3.8% and introduce FY11F EPS. We expect EPS to grow 15% in FY09 and raise our DCF-based target price to Rs214, adjusting for changes in our risk-free rate and market risk premium assumptions.
NIIT Technologies - Digging its heels in
3Q09 results showed good margin management despite a sluggish top line and forex losses. With long-term contracts securing revenue stability, we find current valuations too pessimistic. However, given the reality of tiered valuations, we move to a peer-group valuation with a lower target price of Rs74. Reiterate Buy.
Large contracts secured, but revenue growth remains challenging
NIIT Technologies’ (NTL) 3Q09 constant currency revenues were down 4% qoq, with lower volumes and realisation, on higher offshore effort share. The 9M09 order intake was 16% higher than in FY08, as large engagements with key clients were converted to multi-year contracts. With pricing on renewals stable, we estimate a 4% negative revenue impact in FY10 on greater offshoring.
Aggressive bench management key to margin expansion; potential to sustain gains
NTL cut staff 13% in 9M08, pushing up utilisation 650bp and gross margin 472bp. We expect muted salary hikes in FY10, NTL’s recruitment strategy and savings on rent through campus consolidation to support margins, mitigating potential pricing pressure.
Potential margin upside diluted by FX losses, loan losses
We raise our EBITDA margin estimates about 5% for FY10/11 in light of the 339bp expansion in 3Q09. However, we now build estimated hedging losses into our income statement (which we earlier deducted from fair value/share). These reduce our FY10/11F EPS by 32% and 25%, respectively. An unrecognised loss of Rs95m on a loan to the NIITians Welfare Trust could also increase if NTL/NIIT’s share price slips further.
Switching to peer group valuations, Buy rating maintained
NTL’s valuations have hit all-time lows of <3x>
Large contracts secured, but revenue growth remains challenging
NIIT Technologies’ (NTL) 3Q09 constant currency revenues were down 4% qoq, with lower volumes and realisation, on higher offshore effort share. The 9M09 order intake was 16% higher than in FY08, as large engagements with key clients were converted to multi-year contracts. With pricing on renewals stable, we estimate a 4% negative revenue impact in FY10 on greater offshoring.
Aggressive bench management key to margin expansion; potential to sustain gains
NTL cut staff 13% in 9M08, pushing up utilisation 650bp and gross margin 472bp. We expect muted salary hikes in FY10, NTL’s recruitment strategy and savings on rent through campus consolidation to support margins, mitigating potential pricing pressure.
Potential margin upside diluted by FX losses, loan losses
We raise our EBITDA margin estimates about 5% for FY10/11 in light of the 339bp expansion in 3Q09. However, we now build estimated hedging losses into our income statement (which we earlier deducted from fair value/share). These reduce our FY10/11F EPS by 32% and 25%, respectively. An unrecognised loss of Rs95m on a loan to the NIITians Welfare Trust could also increase if NTL/NIIT’s share price slips further.
Switching to peer group valuations, Buy rating maintained
NTL’s valuations have hit all-time lows of <3x>
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