8th March 2009

Lupin:

CMP Rs 590

Lupin’s strength is its presence in key international markets like US, EU and Japan. The co has shown a steady growth in revenues in the past. The stock is valued at about 11 times its likely FY-09 EPS.

Over last three years the company has managed to grow its revenues and earnings at a compounded growth rate of over 29 per cent and 65 per cent respectively. Driven by the renewed focus on generics in markets such as the US and Japan  the company is likely to deliver steady growth in future too. Among the Indian generic companies operating in the US, Lupin enjoys the largest share of prescription sales and has the highest per product sales. Lupin also has presence in the domestic formulation business.
 
However, in the light of the recent credit turmoil, the company’s API business has started showing some early signs of a slowdown. That, however, may not hamper its growth prospects significantly, as the incremental growth in future would rely more on its formulation business, primarily in the US and Japan.

In terms of risk, however, investors may need to closely monitor the developments on the USFDA front. Last November, the FDA had issued Lupin an inspection report (483) listing 15 inspectional observations. The management, however, has since then responded to the FDA on the concerns that were raised. The clean chit by the FDA would be the key catalyst to the stock’s movement.

Investors with a long-term perspective can consider accumulating the stock.

Tata Chem:

CMP Rs 104

This stock is available at a trailing PE of four and at current valuations it is a good buy as it factors in most of the negatives.

Tata Chemicals’ global soda ash business does face the prospect of both a volume and a price decline from the levels managed in the first nine months, this is likely to be offset partly by higher sales  in the fertiliser business and continued gains in the salt business.

The company’s soda ash operations are much less vulnerable to global recession than other commodities as they cater mainly to user industries such as detergents and container glass, which face little demand destruction even in a slowdown.

Flat glass, which accounts for about 20 per cent of the global soda ash offtake, is the only user sector facing the prospect of lower consumption as of now. This segment too may receive a boost if the Chinese stimulus plan really does pep up construction and infrastructure activity in the Asian region.

On the pricing front, Tata Chemicals’ diversified geographic presence has helped; with soda ash contracts in the US and Europe already locked in at higher prices, though contracts in Asia face price erosion.

Even if the soda ash business does see shrinkage in earnings over the next few quarters, the fertilizer business (60 per cent of revenues) appears set to ramp up its earnings performance. The completion of the de-bottlenecking project at Babrala increases the company’s urea capacities from 8.64 lakh to 11.55 lakh tonnes per annum and will bring in realizations linked to import parity prices. Improved gas availability from the Reliance project is also set to improve the margin profile of the urea business.

While phosphatic fertilisers may make a lower revenue contribution on the back of lower output or realisations, input cost pressures in this segment have eased significantly.

Though it too has sewn up several global acquisitions, Tata Chemicals is better placed than its peers in the group in terms of net debt: equity ratio at 1:1, borrowing costs (averaging just 6.2 per cent of the outstanding debt) and operating cash flows (both the fertilizer and salt businesses are cash cows).

With the urea expansion already completed and other capex deferred, future cash flows can be deployed to draw down debt on the balance-sheet. The high dividend yield of 8.6 per cent on the stock at current market prices makes it an attractive investment.

BHEL: