Buy United Phosphorus For Target Rs.170Concerns overdone, CMP factors in all negatives: United Phosphorus (UPL) continues to trade at ~50% discount to peers due to investor concerns related to piling up of debt, further deterioration in working capital, margin dilutive acquisitions and decline in return ratios. However, we believe, concerns are overdone and CMP factors in all negatives. We would like to highlight that despite decline in return ratios from their peak, current RoE/RoA at 16.4%/6.1% are significantly higher than the global generic players, Nufarm & Makhteshim‐ Agan (MAI).
* Working capital unlikely to deteriorate further: Despite increasing contribution from Brazil which has longer credit cycles, we do not expect working capital to deteriorate further. On the contrary, we have modelled for working capital improvement of three days over the next two years to 143/142 in FY14E/FY15E. We believe there is room for improvement in inventory/receivables across multiple geographies as unfavourable weather conditions this year have resulted in piling up of inventory and longer credit days. However, rebound in these markets over the next two years would result in marginal improvement of working capital.
* Earnings growth, combined with improvement in return ratios, to trigger re‐rating: UPL’s higher exposure to emerging markets positions it well to deliver sustainable revenue growth over the medium term. EBITDA margins are likely to improve by 60bps over the next two years, driven by a turnaround in DVA(expect DVA to contribute 20-30 bps of improvement), significant cost savings initiatives and shift in product mix. We expect UPL to register 12.5%/14.1% CAGR in Revenue/PAT over FY12-15E. RoE/ROCEs are likely to improve ~150bps
to 17.8%/12.6% from FY13E-FY15E. With sustainable earnings growth and improvement in return ratios, stock is likely to get re-rated. We value UPL at 9x FY14 earnings and recommend ‘BUY’ with target of Rs 170 (43% upside to CMP).
Monthly Auto SectorHighlights of the month
* Auto companies’ showed a poor performance in the month of February, cars, trucks and tractors sales were under pressure, however, UVs and LCVs continue to record decent volume growth.
* Two wheelers sales also showed decline in volume. Hero MotoCorp and Bajaj Auto sales decreased 4% YoY and 3% YoY respectively.
* In Passenger car segment, Tata Motors remain weak during the month. Demand for diesel variants Indica and Indigo were muted while Maruti Suzuki also showed weaker performance led by de-growth in Mini segment.
* In the commercial vehicle segment, medium and heavy commercial vehicle (MHCV) sales remained weak, with Tata Motors reporting a decline of over 33% YoY.
* M&M performed well in automotive segment led by growth in Passenger Vehicles segment (which includes the UVs and Verito). Tractor sales drop by 15% MoM to 13,944 units.
* TVS Motor’s total volume fell by 4% YoY and 6% MoM to 1,65,696 units in February’13. Domestic volumes fell 2% YoY while export volumes dip by 18% YoY.
* Improvement in company’s three wheeler sales continued this month which saw a jump of 57% YoY and 9% MoM to 4,801 units but sales from motorcycle and scooter dragged total sales down. The Company’s motorcycle volume de-grew by 3% YoY to 60,985 units and scooter volume fell by 17% YoY to 30,611 units however, Moped sales remain flat.
Valuation: Competition for TVS has increased sharply especially with Honda Motorcycle added fresh two-wheeler capacity. However, recovery in three wheeler sales is positive for the company. At CMP Rs 38.85 the stock is trading at PE 11x and 8.47x of FY13E and FY14E EPS estimates lower than its mean of 12x. We maintain our neutral stance on the stock.
Buy Alembic Pharma Ltd For Target Rs.119News: Alembic Pharma has received USFDA approval for its NDA, Desvenlafaxine Base, a bioequivalent version of innovator drug, Pristiq® by Pfizer. Alembic is the sponsor and manufacturer of the NDA however marketing would be done by Ranbaxy. Desvenlafaxine Base is Alembic’s first 505 (b) (2) filing.
Our View: The IP of the product is on the name of Alembic showing the strong R&D capabilities of the company
Under the 505 (b) (2), Alembic along with its partner would try to convert prescriptions from succinate to base and expects to garner $10 - 30 mn revenues out of which APL’s share is 50%
Desvenlafaxine Succinate is a patented product with $538mn sales. Almost 11 players including Alembic Pharma have filed for ANDA for the product.
We have incorporated $5mn revenues from Desvenlafaxine Base in our FY14E projections.
APL has strong product pipeline of 55 ANDAs with 21 approvals and 15 launches including exclusive opportunities of five Para IV and one 505 B (2).
The company expects to file 10-12 more products every year including two 505 (b) (2) in FY14 with 7-8 approvals in FY14. It expects its international business to grow at CAGR of 30-35% over next 2-3 years
What is a 505 (b) (2)?
A 505(b) (2) application can be thought of as a hybrid that contains more data than an ANDA, but less data than an NDA. An NDA containing investigations of safety and effectiveness that are being relied upon for approval and were not conducted by or for the applicant, and for which the applicant has not obtained a right of reference.
Valuation & Recommendation
With domestic business growing at decent 12-14% CAGR and new businesses like US are growing at a much faster pace (~30-35%) with interesting opportunities like FTFs and 505 (b) (2), we remain positive on the future prospects of the company.
The stock has already re-rated since our initiation last year (22nd March 2012 at price of Rs 43), however we believe that there is still some room left for upside. We recommend investors to BUY the stock on declines with price target of Rs 119 (12x of FY14E EPS), an upside of 29% from current levels
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