Sunday, June 15, 2014

Buy Tata motors - Valuation hedges the downside - See upto 25 percent upside driven by turnaround of Indian business



  • JLR sales continues to rise year  on year and sequentially 
  • The stock is trading at 8x FY-15 earnings which is a steep discount to other companies in the sector.  Maruti Suzuki trades at 25x FY-15 earnings. From a price to book value perspective Tata Motors trades at 3x book value while Maruti Suzuki trades at 3.5x book value.
  • The low price earnings ratio for Tata Motors is despite the Indian business of the company incurring losses which  is  a drag on tata motors current earnings. I  foresee a turnaround  in Tata Motors Indian business profitability driven by a surge in commercial vehicle  demand (buses and trucks). Over the next 3 years Indian business should add about 25 to 30 percent of tata  motor's consolidated FY-14 earnings. 
  • JLR sales will further catch up in emerging Markets



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Should you buy Power Grid?

About 10 percent of incremental capacity commissioned in 2013-2014
  • Transmission line projects worth INR 40,000 crore would be commissioned in 2014 which is almost 50 percent of its existing gross block. If the newly comissioned block generates proportionate revenues we should expect profits jumping by around 40 percent in FY-15.
  •  Company is also expanding globally. Has received  orders from south asian countries and african countries
  • Cost of debt is close to 4 percent. With an ROE of 14 percent the stock promises attractive returns for investors. 
Power Grid  Stock currently trades at about 8.7x FY 2017 multiple.  Earnings have been projected assuming a INR 20,000 crore increase in Gross Fixed assets annually.

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Thursday, June 5, 2014

Why it makes sense to buy Power Finance Corporation ?

1) Power Finance corporation  lends to Power Plants and Power Transmission companies
2) The stock is trading at 8x 2014 earnings and at 1.4x book value. Most private sector banks in India trade at P/E > 20x and Price / Book value ratio > 3x
3) Earns a net interest margin of 3.4 percent which is better than most public sector banks and even some private sector banks
4) Return on equity of 24% which is better than most private sector banks  - HDFC bank has an RoE of 21 percent, Kotak bank has an RoE of 15 percent.
5) Capital Adequacy ratio of 20% which as well is notably better than most private and public sector bank. Kotak bank which probably has the best CAR of 19 percent is even lower than PFC.
6) Not to forget growth, Adjusted  EPS CAGR for the last 5 years has been a whooping 26 percent which as well is comparable to the best private sector banks in India.
7) Even from an NPA perspective PFC has a gross NPA ratio of 0.71 percent comparable to most private sector banks like HDFC, Kotak  Bank and ICICI

CONCLUSION - WITH BOTH PERFORMANCE AND VALUATION RATIOS SUPERIOR TO THE BEST PRIVATE SECTOR BANKS, I THINK PFC IS SIGNIFICANTLY UNDERVALUED.








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Thursday, May 1, 2014

Long acting Copaxone grabs one third of the total Copaxone (glatiramer acetate) market in the US

Teva reported its Q1 -2014 earnings and the highlight was an impressive uptake  of the recently launched thrice weekly version of Copaxone.  As on April 28th, Copaxone thrice weekly version was able  to replace approximately one third of the Copaxone market.  Hence the  market is much  less lucrative for generic launches which is believed to be around  the the corner (subject to USFDA approval). On an annualized basis the opportunity for branded Copaxone now will be $2 billion as against $3 billion earlier
Three generic players (Synthon, Natco/Mylan, Sandoz/Momenta) are expected to contest for a market share. Since Copaxone patents are being reviewed by the US supreme court any generic launch upon  USFDA approval will be considered at risk. Hence generic players will have limited strength in terms of discounting their version which will lead to restricted market share. Assuming a 40 -50 percent market share for generics and 50 percent price discount the  potential market opportunity is now worth about $450m which will be share among three players.


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Wednesday, April 16, 2014

Will Lupin post record high Q4 - FY-14 Earnings?

Driven by multiple new launches in the US, Lupin should post record high profits for Q4-FY14. Profit for the quarter should touch around INR 700 crores primarily driven by continued benefit from First to file launches and a few launches which are low competition opportunities.
First to file launches include 
1) gTrizvir ( INR 70 crore in incremental profits from 3 months of exclusiivity versus a few days in previous quarter )
2) gNiaspan (INR 40 crores in incremental profits from 9 days of  exclusivity sales in the current quarter versus none in previous quarter)
3) gCymbalta (INR 40 crores in incremental profits  from 3 months of exclusivity versus just a few days in the previous quarter)

Low competition and niche opportunities include
1) Trilipix (Incremental profit of INR 20 crores)
2) Mycobutin, Monodox and Cipro ( Incremental profit of INR 30 crores versus none in the previous quarter)

Hence based on incremental profit contribution from the US business, Lupin should be able to add atleast INR 200 crores to its bottom line while not  accounting for any growth in other business segments.


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