Citigroup is bullish on Shasun Chemicals & Drugs and has recommended a buy rating on the stock with 12-month target of Rs 165.

Rs 165 target on expected re-rating:

Shasun is in transition from a pure API supplier to a serious contract research and manufacturing services (CRAMS) player. Its dependence on the legacy active pharmaceutical ingredient (API) business (the key reason for low valuations) has declined materially post the acquisition of Rhodia’s CCS business and since its foray into formulations (tie ups with Glenmark & Actavis). As the benefits of integration reflect in financials, we expect the stock re-rate over the next 12-18 months.

Scaling up in innovator CRAMS:

Shasun's acquisition of Rhodia’s CCS business marked a major foray into innovator CRAMS, with access to an existing set of contracts and established relationships with emerging pharmacos, where it had limited presence. Innovator CRAMS accounted for c52% of sales in FY07, and is expected to increase further going forward as synergies are exploited.

More business drivers = Higher valuations:

Shasun’s foray into innovator CRAMS and generic formulations adds more exciting growth drivers as well as diversity to its business model – the absence of which is the main reason for low valuations, in our view. We expect this to change for the better in line with the improving revenue mix.

P-III contract: potential money-spinner:

Shasun indicates that SPSL has a contract for an NCE (currently in P-III trials), which could be a key growth driver. Shasun expects the innovator to launch the molecule in late 2008; if successfully launched, Shasun would be the sole API supplier for the US market for three years. We estimate an option value of Rs35 per share for this opportunity.

Valuations:

Given that Pharma is a growth sector, we use P/E as our primary method to value the base business of every company. At the same time, since many pharma companies have some unique opportunities that could play out, we ascribe a separate value for these. For Shasun, we use a combination of P/E (for the base business) and probability adjusted NPV (for a phase III contract) approaches to arrive at a 12-month target price of Rs 165 per share.

Hold Sun Pharma; target of Rs 1150: Citigroup

Citigroup Research has recommended hold rating on Sun Pharmaceuticals with a target price of Rs 1150.

We raise our FY08-09 FDEPS estimates by 17-18% on strong FY07 results and the spin-off of its innovative R&D business. Our Sell/Low Risk rating was purely a valuation call; however, with Sun beating our estimates and idle funds deployed in an accretive acquisition (Taro), we believe there is some steam left.

Strong FY07:

FY07 results were strong and above expectations, with 30% and35% growth in sales and PAT respectively, driven by higher Indian formulation and US sales. Sun’s 15-18% sales growth and flat margins guidance for FY08 appears conservative to us – especially the latter, in view of 400 bps savings likely from the spin-out of innovative R&D activities.

Taro- step in the right direction:

We expect the combined entity to be a key player in the US, with a large product basket/pipeline, integrated operations and multiple synergies. It also expands Sun’s global reach via access to the markets of Canada, Israel and the UK. Sun’s indicated payback of 5.5 years is encouraging; but we await details before incorporating it into our estimates.v Stronger in the US - Sun’s US business has got a boost with the acquisition of Taro, in our view. While Caraco has been doing well, Taro gives it scale (cumulative US sales of USD 370 million, 100+ products and 103 filings in the pipeline), without having to spend upfront and wait for sales to ramp up. While margins would be under pressure short-term, we believe that Taro’s high fixed cost structure leaves ample room for cost cutting / operating leverage over time.

Valuation:

Our target price of Rs 1,150 is based on a sum-of-the-parts approach. While we continue to value Sun’s base business using a P/E vs. earnings CAGR approach, we also now ascribe an option value for its patent challenge pipeline given greater visibility. We value Sun’s base business at 20x FY09E earnings (rolled forward from Dec 2007E). With a steadily growing profit line, we believe P/E is the best method to value Sun Pharma. We value frontline pharma stocks at a premium of around 40% to the broad market, due to the intellectual property built into the business models, faster growth as well as the potential to deliver positive earnings surprises. This works out to a multiple of 20x that we use for Sun Pharma as well as its peers such as Dr Reddy’s and Cipla.

Our estimates currently do not in corporate the Taro acquisition. However, we believe that it would be dilutive in the short term, FY08E, before being earnings neutral or mildly accretive inFY09E. As such, we believe that it is relevant to value Sun based on FY09Eestimates as the earnings dilution phase is transient, and should not affect fair value. At 20x FY09E earnings, we arrive at a value of Rs 1,136 per share for Sun’s base business. We also ascribe an option value of Rs 14 per share to Sun’s patent challenge pipeline, using a 15% success rate on the company’s patent challenges that are in the public domain.

Buy Idea Cellular; target of Rs 145: DSP ML

DSP Merrill Lynch is bullish on Idea Cellular and has recommended buy rating on the stock with a target of Rs 145. A merger with Spice would take Idea a step closer to becoming a pan-India operator.

Media says Spice Tele to merge with Idea; confirm awaited

Media (CNBC) has flashed that Spice Telecom will likely merge with Idea Cellular. Spice shareholders would reportedly own ~12% of the merged entity. As per media the deal values Spice at Rs45-50bn. Idea is yet to confirm the news.

Spice - 2 circle presence; No.2 in Punjab; weak in K’taka

Spice operates in 2 circles - Punjab & Karnataka. The Co’s wireless sub base totaled ~2.8mn subs as of Apr '07 i.e ~1.7% subscriber mkt share on a pan-India basis. In Punjab, Spice is ranked No.2 (behind Bharti) with ~23% share of total subs. In Karnataka, Spice is ranked No.6 with ~7% mkt share. Latest (Sep ’06) financials indicate Spice is EBITDA positive but makes net loss.

EV/EBITDA valuation reportedly at premium versus Idea

The deal appears to value Spice ~30x historical-EV/E vs Idea's EV/E of ~24-25x FY07 i.e. ~20-25% premium likely attributable to mgt. control. Deal valuations compare with Hutch's exit multiple of ~30x EV/E when it sold its controlling stake in India to Vodafone, earlier this year. The scale of Hutch’s India ops was stronger but market valuations (esp. of Bharti) appear to have risen since the Hutch deal.

EV/sub likely cheaper due to lower profit of Spice subs

On an EV/sub basis, the potential deal appears to value Spice at ~US$428/sub vs Idea's valuation at ~US$610/sub. This likely reflects lower profitability of Spice subs; EBITDA margin was ~33.5% for Idea in FY07 vs ~22% for Spice in Sep ’06 qtr.

Good strategic fitment with Idea

A merger with Spice would take Idea a step closer to becoming a pan-India operator. Currently, Idea does not have any presence in Spice’s circles.


Buy Punj Lloyd; target of Rs 273: HDFC Sec

Broking house, HDFC Securities is bullish on Punj Lloyd and has recommended buy rating on the stock with a target of Rs 273.

For FY07, PLL reported robust top line growth of 204% from Rs 16.85 billion to Rs 52 billion. These figures are not comparable because during the year, PLL consolidated its 100% subsidiary SEC, which contributed Rs 21.5 billion to the consolidated revenues of Rs 52 billion. We were positively surprised on the operating margins front. The company clocked OPMs of 7.3%, against our estimates of 6.3%, ensuring a growth of 96% in operating profits from Rs 1.91 billion to Rs 3.74 billion.

Bottom line for the year was up 255% from Rs 0.56 billion to Rs 1.97 billion. Earnings per share, post spilt (1:5), stood at Rs 7.44, against Rs 2.55 in FY06.

With synergies unfolding post-acquisition of SEC, a changing order mix and hence revenue mix (in favour of oil & gas), increasing order size (improving profitability), newer investment initiatives (Saudi JV, Medicity) and new business verticals, our positive bias on the company, is further reinforced. With the new orders, PLL’s Book-to-Bill ratio moves a notch higher to 3.1x FY07 revenues. We expect robust revenue growth of CAGR 44% over FY07-09E and a net profit growth of CAGR 51% for the same period. Presently, the stock trades at a PER of 18x & 13x our FY08E and FY09E EPS estimates respectively. We maintain our BUY rating on PLL, with a price target of Rs 273.


Buy SREI Infra; target of Rs 110: Emkay

Emkay is bullish on SREI Infrastructure Finance and has recommended a buy rating on the stock with a target price of Rs 110.

French financial services giant BNP Paribas’s leasing group (BPLG) has taken 50% stake in SREI Infrastructure Finance’s (SREI) equipment financing business for Rs 7.8 billion. Of the total consideration of Rs 7.8 billion, Rs 3.75 billion will be paid to SREI as a consideration of transferring the equipment financing business to the 50:50 JV.

The deal puts valuation of SREI’s equipment financing business (100%) at Rs 15.5 billion, which is 2x, its current market capitalisation. Add to that the value of its subsidiaries like private equity (AUM of USD 185 million, valued at Rs 1.3 billion), value of existing project financing business (Rs 4.8 billion at 1xFY07 book value) and value of the 16% stake in Quippo (Rs 640 million at 1xbook value), the total value of SREI comes to Rs 11.6 billion.

We expect significant synergies from the deal for SREI as with BPLG holding its back; it could result in significant savings in cost of funds. On its current asset base of Rs 45 billion, a 25 bps reduction in cost of funds can add Rs 120 million to the net profit. Also BLPG, being one of the largest leasing companies in Europe brings in its huge expertise in the business.

Even if one were to give 40% discount to the valuation given by BNP Paribas to the equipment financing business, SREI’s valuation works out to Rs 11.6 billion or Rs 110 per share.

We have always contended that SREI’s valuations at 0.7x FY09E ABV are at significant discount to its peers and need re-rating looking at the niche positioning, high market share and less risky model in the equipment financing business. The above-mentioned deal exactly signifies that. We are revising our price target on the stock to Rs 110.