Godrej Consumer Products
Cluster: Apple Green
Recommendation: Hold
Price target: Rs263
Current market price: Rs245
Godrej Consumer Products Ltd (GCPL) recently acquired a 49% stake in Godrej Sara Lee (GSL) from group companies in a share swap deal valuing the joint venture at Rs845 crore. We believe Sara Lee?s plans to sell part of the non-food business to Unilever and divest the remaining of it could have major long-term implications for GCPL. We opine that Sara Lee?s strategy increases manifold the probability of GCPL acquiring the former?s 51% stake in GSL in the near to medium term as GCPL has the first right of refusal for the Indian business at a pre-determined price. We have already highlighted in our note dated May 28, 2009 that GCPL?s acquisition of a 49% stake in GSL adds immense value as it broadens the previously limited product portfolio (by adding brands like Good Knight, JET, HIT, Ambipur, Brylcreme and KIWI) and vastly improves the growth profile of GCPL. We believe GCPL?s move to acquire Sara Lee?s stake in GSL to make GSL a 100% owned business would be the icing on the cake and lead to the re-rating of GCPL?s business fundamentals. The acquisition, thus, holds merit.
Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,344
Current market price: Rs1,140
Price target revised to Rs1,344
Lupin has acquired the US marketing rights and inventory for Antara, an anti-cholesterol drug, for $38.6 million at 0.6x its FY2008 revenues ($70 million) from bankrupt Oscient Pharmaceuticals Corp. (Oscient) by outbidding Akrimax (another bidder company) at a court-supervised auction.
The deal would help strengthen Lupin's US branded portfolio (with sales of $75 million in FY2009), as the nearing genericisation of Suprax is an increasing risk to its sales in the USA.
Although Lupin has not disclosed any details regarding the deal, we believe Lupin could make a good payback (~2.5-3 years) on this acquisition, as it has been able to bag the deal at very attractive price.
With Antara falling under cardiovascular category, Lupin will be more than doubling its sales force (from 60 currently) and increase its promotional activities in the USA to support Antara, as Oscient (the innovator) had stopped all promotional activity since June 2009 (filed for bankruptcy in July 2009). Since Antara is a previously approved commercial product, we believe that Lupin would commence marketing and distribution of the drug immediately, garnering incremental earnings per share (EPS) of Rs3.4 for FY2010 (only for 4 months).
We await Q2FY2010 results and thus maintain our estimates at the moment. However, taking into account the growth registered by the company, its diversified product portfolio, growing exports and growth plans, we increase our target multiple to 16.5x from 14x earlier. At the current market price of Rs1,139.8, the stock trades at 16.4x FY2010E fully diluted earnings and at 14.0x FY2011E fully diluted earnings. We maintain our Buy recommendation on the stock with revised price target of Rs1,344.
Unity Infraprojects
Cluster: Vulture?s Pick
Recommendation: Buy
Price target: Rs500
Current market price: Rs409
Price target revised to Rs500
Unity?s order book grew by 11.8% year on year (yoy) to Rs2,694 crore in FY2009 despite a challenging environment. Recently, the company bagged orders aggregating ~Rs450 crore and another Rs600 crore worth of orders bagged in joint venture with Axelia Utility Management Pvt Ltd (Axelia). Apart from this, the company is currently the L-1 bidder for projects aggregating Rs1,100 crore and consisting of three to four orders. This implies a sharp increase in the average ticket size to Rs275-Rs370 crore. The strong order inflow coupled with the increase in the average ticket size has allayed the street?s concern over the muted order inflow in FY2010 due to scheduled election in Maharashtra (Unity?s major geography; the western region accounted for 57% of its order book in FY2009).
In terms of working capital (WC) requirement, the same increased sharply by 48.9% yoy to Rs639 crore in FY2009 led by a sharp increase in loans and advances. The sharp increase in loans and advances was due to a sharp rise in advances to contractors and suppliers. Given the sharp increase in the working capital requirement, the operating cash flow remained in the negative territory; though the same improved to Rs(100.1) crore in FY2009 from Rs(158.5) crore in FY2008. Going forward, with the improvement in the liquidity condition, we believe Unity?s working capital cycle and operating cash flow should improve going ahead.
To fund its higher working capital requirement, the company raised debt in FY2009 and its debt increased 68.9% yoy to Rs472 crore. Consequently, the company?s net debt to equity increased to 0.9x in FY2009 from 0.5x in FY2008. Going forward, as we have highlighted in our earlier updates, the company may come out with a qualified institutional placement (QIP) issue (the company has already passed an enabling resolution for a QIP of up to Rs400 crore and the QIP may be done in tranches). The funds raised through the QIP would be used partly to repay its debt, which should improve its leverage position considerably.
In terms of return ratios, Unity?s return on capital employed (RoCE) declined to 18.8% in FY2009 from 21.7% in FY2008. The decline in the RoCE was led by a 90-basis-point decline in the net profit margin (NPM) due to higher interest and depreciation expenses and higher working capital requirement during the year. However, the return on net worth (RoNW) declined only by 20 basis points to 18% in FY2009 as the decline in the NPM and asset turnover was partially offset by the company?s higher leverage.
In terms of outlook, the company is optimistic about the growth momentum in view of the easing liquidity condition, political stability and the rebound in demand. Given the government?s increased focus on the development of highways and urban infrastructure, the company also expects a lot of opportunities in these segments.
We have fine-tuned Unity?s earnings estimates marginally to reflect the updated FY2009 financials. Consequently, we have revised our FY2009 earnings estimate to Rs58.3 per share and our FY2010 earnings estimate to Rs62.1 per share.
Unity?s recent strong order inflow coupled with the higher average ticket size in the L-1 bids has allayed the street?s concern over the muted order inflow in FY2010 (due to the election scheduled in its major geography) and the stock is a strong contender for a re-rating in the construction space. We remain positive on the stock and maintain our Buy recommendation on it with a revised price target of Rs500. We have now assigned a target multiple of 8x, which is at ~45% discount to the basket of the mid-cap construction companies. At the current market price, the stock is trading at 6.6x FY2011 earnings estimate and 0.9x FY2011 price/book value (P/BV).
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