Biocon Ltd : BUY

Q4 In-Line; Margins to Improve Post AXICORP

Biocon’s Q4FY11 result was largely in-line with expectations. Sales grew 7% YoY to Rs 7.0 bn and net profit was up 25% YoY to Rs 1.0 bn. Biocon has announced that it would be divesting its 78% stake in its German subsidiary, AxiCorp for ~EUR 40 mn. 

The company had acquired AxiCorp stake in 2008 with a view to monetize its insulin portfolio in Germany/ Europe. Post the deal with Pfizer in Oct’10, it plans to use Pfizer’s platform and is hence exiting the low-margin AxiCorp business. We believe this will lead to margin expansion.  

Key Highlights

• Sales – Up 7% YoY to Rs 7.0 bn. Biopharma grew 14% to Rs 3.8 bn led by robust growth in domestic branded formulations, immunosuppressants, insulin (steady growth in ROW) and statins (Atorvastatin and Rosuvastatin). Licensing income at Rs 320 mn was up 56% YoY from Rs 205 mn in Q4FY10, largely driven by income under Pfizer deal. Ex-licensing income, Biopharma sales rose 11% to Rs 3.5 bn during the qtr. CRAMS grew 20% to Rs 887 mn. However, AxiCorp continued to decline– fell 6% to Rs 2.3 bn.   
• EBITDA  – Margin rose slightly by 61 bps YoY to 20.5% led by: (a) higher licensing income; (b) drop in other expenses (as some expenses are reimbursed by co-developers); and (c) lower contribution from low-margin AxiCorp, despite 27% rise in staff cost.
• PAT – Up 25% YoY to Rs 1.0 bn owing to higher EBITDA and other income and lower tax (9.8% vs. 14.5% in Q4FY10).
• Margins to improve post Axicorp divestiture – Axicorp reported 6% YoY decline in revenues to Rs 2.3 bn led by 16% rebate imposed by German Government. Margins continued to be under pressure with EBITDA margin of 6% and net margin of 3%. We thus believe that divestment of AxiCorp would significantly improve Biocon’s margins going ahead. However, field force expansion in domestic market (to hire 1,000 MRs over FY12) and higher R&D cost (to go up by 20-25% in FY12E) will continue to put pressure on EBITDA margin.
• Expects Pfizer sales to begin in Q2FY12 – Biocon expects that Pfizer would begin comarketing insulin in India from Q2FY12. Further, it expects to complete the clinical trials of Recombinant Human Insulin (RHI) in Europe by 2011 and file by mid-2012. 
• Tax rate – The Company has guided for +20% tax rate for FY12E (vs. 16.1% in FY11).

Lower EPS estimates; Maintain BUY

We reduce our FY12E EPS by 21% to Rs 16.0 to factor in divestment of AxiCorp and higher staff and R&D costs. Further, we introduce FY13E EPS at Rs 21.0. We maintain BUY rating on the stock with a lower TP of Rs 413, valuing the base biz at Rs 378/share (18xFY13E EPS, to capture the upside potential from the Pfizer deal), and ~Rs 35/share for the USD 200 mn payment received from Pfizer.

Dabur India : HOLD

Steady Performance

Dabur India Ltd (DIL) reported consol net revenue of Rs 11.1 bn (up 31% YoY), EBITDA of Rs 2.1 bn (up 27% YoY) & adj. PAT of Rs 1.5 bn (up 9% YoY) in Q4FY11, marginally below our expectations. Revenue growth in Q4 was driven by 9% volume growth, 5% price hike & 16% due to Hobi & Namaste acquisitions. 

Key Highlights  

• Sales growth outlook:  The mgmt has guided for ~10% vol growth & 5% pricing led growth in FY12E for the dom. biz. We expect the dom. business to grow at a similar rate but consolidated sales growth will be higher due to the Hobi & Namaste acquisitions. Consol growth expected at 31% in FY12E & 15% in FY13E. 
• Consumer Care Division (~67% of sales)  grew 15% YoY in FY11 led by health supplements (23% YoY), foods seg (28% YoY) & home care (32% YoY). Mkting initiatives in Hair care has led to improved growth (11% in Q4 vs. 5% for 9mFY11). Shampoo category is suffering due to increased competition. DIL improved the value proposition in Shampoos by offering 40% more vols (effected in Jan ‘11). We expect this division to grow at 15% over the next 2 yrs.
• EBITDA margins have remained flat (at 18.8% in FY11) for the standalone business despite rising RM cost pressures, mainly due to reduced ASP spends. On a consol basis, gross margins have declined by 100 bps YoY (to 53.3%) in FY11E while EBITDA margins have remained flat at 18.5%. For FY12E, we expect both rising RM costs & increased ASP spends to result in subdued margins.  We forecast a 60 bps decline in gross margins in FY12E to 53.1% due torise in RM costs. EBITDA margins expected at 18.2% in FY12E & 18.5% in FY13E.
• Int’l biz (17% of Rev, excl. Hobi & Namaste) grew 18% YoY in FY11: Growth was 22% in constant currency terms. N. Africa, Levant & Nigeria have been the fastest growing regions. The political turmoil in the MENA region did impact growth in Q4FY11 & management expects some near-term pressures (impacts ~7%-15% of int’l biz revenues). We have reduced our growth rate assumptions for the int’l biz to 19% for FY12E (vs. 23% earlier) & 18% for FY13E (vs. 20% earlier).
• Inorganic growth: Hobi & Namaste contributed ~4% to DIL’s consolidated sales in FY11. With consolidation for the full year in FY12E, this will go up to 13%.  Namaste witnessed an improvement in operating margins during the quarter (16% vs. prior avg ~13%), due to top-line driven operating leverage. Management hopes to maintain these margin levels, by rationalizing manufacturing & distributions costs.

We are not making any significant change to our EPS estimates – 1% reduction for both FY12E & FY13E. The stock currently trades at 25x 1-yr fwd EPS, close to its 5-yr median. We value the stock at 24x FY12E EPS with a 1-yr target price of Rs 96. HOLD rating

Exide Industries : BUY

Margins Recover as Capacity Constraints Ease

Exide Industries’ (Exide) Q4 performance was above expectations with strong 17% QoQ revenue growth (vs. est. of 7%) aided by a 217 bps improvement in EBITDA margins QoQ to 17.4% (after adjusting for Rs 200 mn towards gain on loan repaid). Margins have expanded on higher vols and an improved product mix due with easing capacity constraints.  

Key Highlights 

• Exide reported revenue of Rs 12.2 bn (up 17% QoQ, up 19% YoY), EBITDA of Rs 2.1 bn (up 34% QoQ, 2% YoY) and adj. PAT of Rs 1.43 bn (up 15% QoQ and 7% YoY) in Q4FY11.  
• Exide’s product mix (replacement: OEM) at 1.25:1 has marginally improved over Q3 (1.17:1). We expect this to improve  further  as  new  capacities  come  on  stream  in Q1  and Q3 of FY12. The co. has taken price increases of ~5% in Q4 and 3% in April-11, within the replacement market. 
• Performance of the industrial business remains muted for Q4 as well. The mgmt expects the industrial vertical to start improving from Q1FY12 onwards on higher seasonal demand for inverters. 
• Losses in FY11 from investments in ING Vyasa life insurance have reduced sharply to Rs 350 mn (vs. Rs 683 mn in FY10). We understand that this is due to a higher contribution from renewal premiums being collected. 

Upgrading est on higher volume growth. Maintain BUY rating

With increased available capacities and strong volume outlook for the replacement market (~20% volume growth), we raise our FY12 revenue est by 4%. On the other hand, we have tempered our profitability est marginally to 20.5% (vs. 20.8%) on higher lead prices. Our resultant FY12E EPS is higher by 2% at Rs 9.1.

Our revised TP of Rs 167 is based on 16x FY12E core earnings (incl smeltors) + Rs 16/ share as value of insurance. We maintain our BUY rating on the stock.

ICICI Bank : BUY

Waning Provision Expenses & Robust NII Spur PAT

ICICI Bank’s PAT grew 44% YoY, in-line with our estimates, mainly due to a decline in provision expenses (down 61% YoY) and robust net interest income growth (23% YoY). Decline in provision expenses was mainly due to improved asset quality (gross NPA declined 1.5% QoQ). Advances growth maintained its momentum (up 5% QoQ) and supported margins at 2.7% (improved 10 bps QoQ). However, improvement in NIMs is mainly due to premature withdrawal of deposits; adjusting for this, NIM would have declined by ~6 bps QoQ. Deposits grew 4% QoQ while CASA ratio improved 90 bps QoQ to 45.1%. The bank continued to re-deploy funds from lower yielding investment book towards incremental advances, which will support NIMs in ensuing quarters. Other income declined by 13% YoY; however, fee income rose 18% YoY in-line with credit growth.

Zero net addition to NPAs:  Asset quality improved as gross NPAs shrunk by 1.5% QoQ to Rs 100 bn. Moreover, ICICI has shored up its provision coverage ratio to 76% (vs. 71.8% in Dec-

10) much above the regulatory requirement. Higher coverage will provide cushion to the bank’s profit in difficult times (maintains ~Rs 4 bn of excess provisions). Going forward, we expect that the credit cost will remain low & will support profitability.

Other highlights

• Growth gaining momentum:  ICICI’s balance sheet grew by 12% YoY (highest since 4QFY08) by focusing on lower risk but profitable business opportunities. The bank has envisaged fresh policy focusing towards improving corporate share in total credit at the start of FY11 and has successfully achieved it. SME and rural portfolio grew by 20% QoQ and 37% QoQ respectively which aided total advances growth at 5% QoQ. Unsecured retail book continue to contract; however, high growth in auto loan segment supported 6% QoQ growth in retail credit. Going forward, we expect a business growth of ~19% YoY for FY12E (management guidance – 20%) with significant contribution coming from corporate and mid corporate segments.
• CASA share improves: CASA ratio inched up to 45.1% (44.2% in Dec-10), despite higher term deposits rate during the quarter. Sequentially, current account deposits grew 10% while saving deposits grew 4% QoQ. Despite improving CASA ICICI Bank share, cost of deposits increased by 30 bps QoQ, which is mainly due to increase in term deposits rate.
• Re-pricing benefit to cushion NIM: In FY12E, ~75% of term deposits will be repriced likely at a higher rate against ~70% of total advances. This, coupled with falling share of international business, would likely to support margins in FY12E at current levels of ~2.6%.  Moreover, in 1HFY12, we expect NIMs to  contract marginally due to high disbursement towards agriculture sector in 4QFY11 (to meet priority sector lending norms). 
• Healthy fee income growth, treasury losses drag other income:  Other income declined by 13% YoY and 6% QoQ mainly due to treasury loss of Rs 1.9 bn. ICICI has booked ~Rs 1 bn of MTM losses in security receipts during the quarter. The bank  has  also  booked  some  MTM  losses  on  its  equity  and  G-Sec  portfolios  during the quarter (of ~Rs 0.9 bn). However, fees income growth at 18% YoY was in-line with the credit growth, mainly supported by revenues from corporate and SME advances. Going forward, we expect fees income growth to remain in-line with the credit growth.
• Higher staff expenses: Staff expenses grew by 47% YoY to Rs 8.5 bn mainly due to the bonuses paid and consideration of entire employee expenses of erstwhile BoR. This, along with decline in other income, led to an increase in cost to income ratio (up 216 bps QoQ) to 44.5% 
• Healthy CAR: The bank maintains a total CAR at 19.5% and Tier-I ratio at 13.1%. We expect return ratios to improve further, driven  by  robust  profit  growth  and increasing coverage. Management expects its credit cost at ~1% in the long term.

Insurance highlights: 

• Life insurance business remained under strain as reported APE declined by 26% YoY to Rs 39.8 bn. NBAP margins also continued to decline (~15.6% for 4QFY11 and 17.9% for full year), which was in-line with our estimates. Going forward, we have build in NBAP margins at ~15% for FY12E, and assumed 15% YoY APE growth.  
• ICICI Lombard General Insurance was required to provide ~Rs 2.7 bn towards  reserve for IMTPP (Indian Motor Third Party Pool) losses at 153% against 122-127% earlier (retrospectively from March-08). This has led to an impact of Rs 2.7 bn  in ICICI Lombard’s PAT. Due to this, the general insurance subsidiary reported a loss of Rs 800 mn in FY11. 

Valuations

Improving business momentum, robust asset quality, healthy margins, consistent fees income growth are the key highlights of ICICI’s 4Q result. NIMs, though improved 10 bps QoQ, likely to moderate in 1HFY12E (due to rising cost of deposits) and will be maintained at current levels in FY12E (due to re-pricing benefits and rising domestic advances share). ICICI has improved its coverage ratio to 76%, thereby creating cushion for future slippages. We expect calibrated business growth, lower credit cost and stable NIM for FY12E, will provide sufficient traction to

PAT growth (~17% YoY) – resulting in better return ratios. We reiterate our BUY rating with a target price of Rs 1,324 [2.5 x FY12E Adj. BV (adjusting for value and cost of investment) + Rs 331 value of investments]

JSW Energy : HOLD

FY11: Hit by Higher Fuel Costs & Execution Delays

JSW’s key FY11 highlights include: (a) sharp rise in imported spot coal prices (up from ~USD 75 to 110/tone); (b) stable merchant realizations at ~Rs 5/kWh; (c) issues with coal supply from

Indonesian fixed-priced contracts (resulting in higher dependence on spot market to ~85% from ~60% anticipated earlier); (d) execution delays in Ratnagiri (1,200 MW) & Barmer (1,080 MW) plants; (e) “under-review” status of the ~USD 400 mn bid to acquire CIC, due to regulatory hassles; and (f) worrisome rise in receivables to 65 days vs.avg. of 30 days for gencos.

Key Analyst meets takeaways

• Fuel: Blended fuel cost for FY11 stood at ~Rs 2.6/ unit (vs. Rs 1.9/ unit in FY10) and the mgmt expects it to remain in the range of Rs 2.6-2.8/ unit in FY12. During FY11, JSW sourced ~90% of its requirements from spot markets. To ensure stability in fuel sourcing, JSW is also looking to enter LT contracts with Indonesian suppliers for ~50% of its requirements. It expects price range of ~USD 50 (~4,000 GCV) to ~USD 90 (~5,500 GCV) for the same. The supplies from captive lignite mines in Rajasthan to commence from Q1FY12, thus reducing its dependence on imported coal requirements.
• Realizations:  For Q4, merchant was at Rs 4.71/unit while for FY11 it was at Rs 4.95/unit. Mgmt guided for moderation in merchant tariff and expects it to be in the range of Rs 4.5-4.75/ unit in FY12.
• Execution: At Ratnagiri (4x300 MW) project, the bottleneck in transmission has now been resolved and the mgmt expects commissioning of Unit 3&4 by Q1 and Q2FY12 resp. Further, at Rajasthan (8x135MW), the key bottleneck in captive lignite mines is also resolved & expects full commissioning progressively by end FY12. For captive-mine based Chhattisgarh (1,320 MW) and W. B. (300 MW) projects, mgmt expect construction to start by H2FY12.

HOLD with a Target price of Rs 74

We are concerned on the increased volatility in coal prices, as ~85% of coal requirement is from spot mkt. JSW is scouting for smaller mines (50-100 MMT) in Indonesia and currently has ~USD 225 mn cash. A successful acquisition would lead to re-rating of the stock.