Weekend Highlights – 26th April, 2015

Model Concession Agreement for BOT on Railways

Ministry of Railways has issued Model Concession Agreement for Build, Operate and Transfer (BOT) model. Under this model, project will be bid out through competitive bidding to the private concessionaire who will Design, Build, Finance, Construct and maintain the project. Indian Railways will pay user charges to the concessionaire equal to 50 per cent of the apportioned revenue. The normal concession period will be for 25 years.A minimum of eighty percent of the projected revenue has been guaranteed under this model.

Model Concession Agreement provides for escalation of base tariff linked with Wholesale Price Index (WPI) during the concession period, to take care of the inflationary risk.

Move to increase R&D Expenditure to two percent of GDP

Indias Gross Expenditure on Research and Development (GERD) as percentage of GDP has remained so far less than 1% as compared to the developed and emerging economies despite increase in absolute terms. The Minister for Science & Technology and Earth Sciences, Dr. Harsh Vardhan said India had invested 0.88% of its Gross Domestic Product (GDP) towards Research and Development (R&D), whereas USA and South Korea spent 2.79% and 3.36% respectively during 2011-12. Among BRICS nations, Brazil, Russia and China also spent more than 1% of their GDP on R&D, he added.The Minister said the Science, Technology and Innovation (STI) Policy, 2013 envisages increasing R&D expenditure to 2% of GDP with enhanced participation of private sector through policy and reform processes. In addition, Department of Science and Technology (DST) brought out a White Paper on policy environment for n++Stimulation of investment of private sector into Research & Development in Indian++.

Union Cabinet gives its approval for signing of a shipping agreement between India and Jordan

The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi, gave its approval for signing of a shipping agreement between India and Jordan.Recognizing the significant mutual benefit that can be derived from cooperation in the area of shipping between the two countries, it has been decided to sign the agreement with a view to strengthening cooperation and to provide sustained mutual assistance and advice on merchant shipping and other related maritime matters.

Signing of the Agreement will help both countries in encouraging and facilitating development of their maritime relationship and cooperation in the task of enhancing and stimulating steady growth of maritime traffic. The agreement will also help in exchange and training of staff and students from various maritime establishments, exchange of information necessary for accelerating and facilitating flow of commercial goods at sea and at ports, establishment of joint ventures in maritime transportation, shipbuilding and repairs, maritime training, information technology, including development of simulators, port facilities and related activities.

Infosys – 4QFY2015 Result Review

This article has been authored by Ms. Sarabjit Kour Nangra

Results below expectations

Stock down 6.0%

Infosys (CMP: ₹2,123/ TP: ₹2,751/Upside: 30%)

Infosys, posted results below expectations. Company posted a dip of 2.6%qoq in USD revenues to US$2,159mn V/s US$2,236mn, on back of cross currency (CC). On, Constant Currency (CC) terms, the company posted a sales dip of 0.4% qoq. In rupee terms, the revenues come in at ₹13,411cr V/s ₹ 13,746cr, down 2.8% qoq. In terms of market, the USA posted a 0.7% qoq dip, Europe a 6.1% qoq dip and ROW, posted a dip of 5.7% qoq. On CC basis, the USA posted a -0.4% growth qoq, Europe -0.3% growth qoq and ROW, grew by 0.1% qoq on CC basis.

On the operating front, the EBITDA margin’s came in 27.7% V/s 28.0% expected (a dip of 97bps), on account of increase in S&M spends, an 8.7% growth qoq,. Consequently the PAT came in at ₹3,098cr V/s ₹3,184cr expected, down 4.6% qoq. Other key metrics like utilization during the period was, 72.6% (including trainee) V/s 75.7% in 3QFY2015. The attrition rate during the quarter was 18.9% V/s 20.4% in 3QFY2015. The client addition during the period was majorly in US $5-10mn, and one in US $50mn+ and one in US$100mn+ respectively.

During the quarter, announces definitive agreement to acquire Kallidus Inc. (d.b.a Skava) and invest in Airviz. The acquisition of Kallidus Inc. is an all-cash deal for a total consideration of US$120mn including retention bonus and a deferred component. Skava delivers a cloud hosted platform for mobile websites, apps, and other digital shopping experiences across mobile, tablet, desktop, in-store, and all emerging channels to large retail clients worldwide. The platform enables retailers to provide a mobile specific experience to their customers through an agile and flexible environment, enabling personalization and delivering customer analytics across multiple channels. The company also, entered into a definitive agreement for an early-stage investment of US$2mn in Airviz, to acquire a minority share. Airviz is a personal air quality monitoring startup and spinout from Carnegie Mellon University. This investment was made out of the $ 500 million Innovation Fund earmarked for investments in disruptive new technologies. These acquisitions are too small to significantly add anything to the top line of the company.

In terms of guidance, FY2016 revenues are expected to grow between 10%-12% in constant currency terms. Also during the quarter, the Dividend pay-out ratio increased to up to 50% of post-tax profits effective FY2015. Also, 1:1 bonus issue of equity shares and 1:1 stock dividend of American Depositary Shares were done during the period.

We maintain our buy rating on the stock with a target price of ₹2,751.

Views on HDFC Bank

HDFC Bank results in line with estimates

HDFC Bank reported a good set of numbers with profit growth of 20.6% yoy to ₹2806.9cr. Advances growth of 20.6% yoy led to 21.4% yoy growth in Net Interest Income. NIM was stable qoq and yoy at 4.4%. Non-interest income grew by 28.1% yoy, leading to operating income growth of 23.3% yoy. Operating expenses grew 21.4% yoy, leading to pre-provisioning profit growth of 24.9%. On the asset quality front, the bank reported slight improvement, as its reported Gross NPA ratio was 0.9% in the current quarter as against 0.99% in 3QFY2015 and 0.98% in 4QFY2014. At the CMP, the stock is trading at 3.1x FY2017E ABV.
We recommend Buy rating on the stock.

Wipro – Result Review 4QFY2015

This article has been authored by Ms. Sarabjit Kour Nangra

Results below expectations, EBDITA margins expand better than expected
Stock down by 4.4%
Wipro (CMP: ₹579/ TP: ₹753/ Upside: 30%)
Wipro announced its 4QFY2015 results today. The company’s IT services segment posted revenues of US$1,775mn V/s US$1,804mn expected, a dip of 1.2% qoq, mainly on back of the cross currency. On Constant currency, (CC), the company posted a qoq growth of 1.2%, the lower end of the guidance of US$1,771-1,806mn, on current currency realization.

The growth was mainly driven by the Finance Solutions, which grew by 3.7% qoq, while the Retail, Consumer Goods & Transportation, grew by 3.2% qoq on CC basis. The verticals, which remained soft during the quarter, were Energy, Natural Resources & Utilities, which is 16.2% of sales in 4QFY2015, posted a dip of 3.2% qoq on CC basis.

IT services EBIT margins were at 22.2%. At the consolidated level, the company posted revenues of ₹12,142cr V/s ₹11,688cr, a growth of 1.2% qoq. At a consolidated level, Wipro recorded a ~23bp qoq inch up in its EBIT margin to 22.0% V/s 19.5% expected, lead by improved utilization which moved from 70.5% V/s 68.5% in 3QFY2015. The attrition rate IT Services excl BPO and I&ME, came in at 16.5% same as last quarter. Thus, the PAT came in at `2,272cr V/s `2,217cr, a qoq growth of 3.6%.

Overall, the company added 65 new customers during the quarter. Revenues from IT Services business is expected to be in the range of US$1,765mn to US$1,793mn in 1QFY2016. We maintain our buy rating on the stock, with a price target of ₹753.

This article has been authored by Ms. Sarabjit Kour Nangra

Results below expectations, on back of cross currency

Stock down by 5.3% HCL Technologies (CMP: ₹923/ TP:₹ 1,148/ Upside: 24%)

HCL Technologies announced its 3QFY2015 below expectations. The company, posted revenue of US$1,491mn V/s US$1,507mn expected, almost flat with 0% qoq, mainly impacted on back of the cross currency. However, on Constant Currency (CC) basis growth came in at 2.7% qoq, with US posting 0.2% CC qoq growth, Europe posting 4.4% qoq and ROW, which posted 10.6% qoq growth. In rupee terms, the revenue, came in at -0.2% qoq to `8,349cr V/s `9,376cr expected. EBITDA margins came in at 22.5% V/s 25.0% expected a dip of 250 qoq. The utilisation levels dipped to 81.9% V/s 82.9% in 2QFY2015.Thus pat came in at `PAT `1683cr V/s `1,963cr expected a dip of 12.2% qoq. On the business front, strong client addition in the quarter continued: US $50mn + clients up by 1, US$30mn +clients up by 1, US$ 20mn + clients up by 4. The attrition rate during the quarter inched up to 8.3% V/s 6.7% in 2QFY2015.

We maintain our buy rating on the stock with a target price of ₹1,148.

Weekend Highlights 19th April, 2015

Investments in realty sector plummeted 6% in 4 years: ASSOCHAM

Investments attracted by real estate sector from various public and private sources across India have declined by six per cent in past four years i.e. from a level of Rs 15.2 lakh crore as of 2011-12 to about Rs 14.3 lakh crore as of 2014-15, apex industry body ASSOCHAM said today.n++However, there has been a slight increase of just over two per cent year-on-year in the investments attracted by realty sector i.e. from a level of Rs 14 lakh crore in 2013-14 to Rs 14.3 lakh crore in 2014-15,n++ noted the sector-specific survey conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

n++Ownership-wise, private sector accounted for lions share of 85 per cent of the total investments attracted by the real estate sector across India while government/public sources accounted for remaining share of 15 per cent,n++ according to the analysis carried out by the ASSOCHAM Economic Research Bureau (AERB).

n++Real estate projects with about 76 per cent of the total investments attracted by the sector remained non-starter as of the aforesaid period,n++ said Mr D.S. Rawat, secretary general of ASSOCHAM while releasing the findings of the chambers analysis.

n++Maharashtra (21 per cent), Uttar Pradesh (14 per cent), Gujarat (13 per cent), Karnataka (12 per cent) and Haryana (eight per cent) are top five states with highest share in total investments attracted by the real estate sector in India as of 2014-15,n++ further noted the ASSOCHAM analysis.

Clocking a compounded annual growth rate (CAGR) of about 82 per cent, Assam has recorded maximum growth in attracting investments in the real estate sector during 2011-12 and 2014-15 followed by Bihar (19 per cent), Odisha (17 per cent), Uttar Pradesh (16 per cent) and Uttarakhand (12 per cent) amid top five states in this regard.

While Jharkhand (40 per cent), Himachal Pradesh (37 per cent), Madhya Pradesh (29 per cent), Haryana (16 per cent) and Gujarat (seven per cent) have registered maximum fall in real estate investments, according to the ASSOCHAM analysis.

The ASSOCHAM Economic Research Bureau had also conducted a survey to ascertain Implications of Union Budget announcements on real estate sector, and interacted with as many as 100 small and big companies operating in realty sector in top cities of Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Indore, Jaipur, Lucknow, Mumbai and Pune.

Majority (75 per cent) of the total real estate developers interviewed by ASSOCHAM Economic Research Bureau (AERB) at aforesaid centres felt let down by the Union Government for lack of focus on improving demand/supply in the sector.

Highlights of ASSOCHAMs survey conducted primarily vis-n++-vis industrys view on real estate sector-specific budget proposals:

1. Increase in rate of service tax to 14 per cent will make real estate a bit more expensive and impact sales as it would wear down the purchasing power of an average consumer.

Real estate developers are also concerned about increase in service tax on construction and excise duty on input goods, as also increased on petrol and diesel coupled with increase in freight rates on cement will lead to rise in construction costs.

2. The survey indicated that the Union Budget disappointed the realty sector with exclusion of the plan for 100 smart cities, in the country.

3. No additional incentives were announced to promote affordable housing sector which is already facing problems in form of high costs and low margins.

4. Referring to urgent need for speeding up procedural requirements for real estate sector, the industry has pressed for a single window clearance system for various approvals leading to operational efficiencies and cost saving. Respondents also indicated that there is a need for a predictable and stable policy framework.

5. Many developers also said they expected some announcements related to lowering of land cost, measures leading to quick approvals and grant of infrastructure status to the real estate sector.

India-Russia Trade Poised For US$30 Billion In A Decade: PHD Chamber

Trade and economic cooperation between India and Russia witnessed a steady rise over the last decade and hold a scope for manifold expansion in the coming times, say by 2017, their bilateral trade could touch US$10 billion by 2017 before scaling at respective levels of US$20 billion and US$30 billion in 2022 and 2025 against the present estimates of US$6 billion, according to PHD Chamber of Commerce and Industry.The aforesaid assessment of trade prospects between India and Russia by PHD Chamber is being released following its high level delegation visit that left New Delhi for Russia to participate in 7th Spring Summer St. Petersburg, exhibition, which is commencing from 16th of this month and coming to an end by 19th April 2015. The delegation is led by Senior Vice President PHD Chamber Mr. Mahesh Gupta.

According to him, though India and Russia have eventually given new dimensions to bilateral relations in the development of defence, energy, science and technology, however, current level of bilateral trade at US$6bn is not consistent with the potential trade trajectory. Even though the bilateral relations between the two nations have widened their basket, yet India is not among Russias key trade partners.

Indias position in trade with Russias is not strong as compared with EU and USA. Indias share in Russias total trade is 1.2% as compared with 49% of EU and 3.3% of USA.

Russias share in Indias trade is meagre 0.8% as compared with 13% of EU and 8% of USA.

Indias top export items to Russia are pharmaceuticals, electrical machinery, iron & steel, coffee, tea, nuclear reactors, aircraft, vehicles, edible fruit & nuts, among others.

Indias top import items from Russia are precious stones, mineral fuels, fertilisers, copper & articles, iron & steel, rubber products, paper products, salt and inorganic chemicals, among others.

Both the nations have undertaken initiatives to promote bilateral investments, primarily through facilitating Government to Business and Business to Business contacts, said Mr. Gupta.

Scope of expansion for investments exist in hydrocarbons, power, coal, nuclear power, fertilizers, IT, pharmaceuticals, mineral and metallurgy, among others, he said

Russias restrictions on import of food items from EU and USA can be a great opportunity for India to increase its exports of food products to Russia.

Also there are immense opportunities in machinery, electrical and electronic equipments and pharmaceuticals to extend exports to Russia

Currently, Russia imports these items from Western markets. But, these items are among the principle exports of India.

Bottom-up study of three emerging asia economies reveals developing challenges: S&P

An inaugural big data study of three major emerging Asia economies from the ground up has revealed some developing challenges, said Standard & Poors Ratings Services today in a report titled Top-Down And Bottom-Up Views For Three Big Emerging Asia Economies–Do They See Eye To Eye?Using company-level financial data from S&P Capital IQ aggregated by sector, Standard & Poors studied four major sectors in China, India, and Indonesia: consumer discretionary, energy, industrials, and materials, which includes mining.

At the regional level, debt growth has pulled ahead of capital expenditure and earnings growth, which suggests some credit quality deterioration, said Paul Gruenwald, Standard & Poors Asia-Pacific chief economist. The implication is that an increasing amount of debt was needed to sustain a given increase in output. So either debt has to be reined in, or earnings and capital expenditure need to rise.

The consumer discretionary sector at the regional level has relatively favorable credit quality. This is perhaps not too surprising, given that it is a less capital (and debt) intensive sector. But it does suggest that credit quality concerns are not a constraint on rebalancing growth toward consumption, particularly in China, Paul Gruenwald noted.

China appears to have a credit quality issue, according to our study. While the sharp rise in debt post-financial crisis initially led to higher capital expenditure and earnings, those effects have faded. The implication is that credit growth and debt creation need to slow, and the authorities have started to address that, Paul Gruenwald said.

India has a different scenario. Earnings have plateaued but debt has continued to rise, while investment slumped. We believe policy gridlock and administrative red tape have hindered investment. The challenge now is to unlock the earnings potential of existing assets.

Indonesias profile seems most balanced but it is also slowest in growing. Although debt, capital expenditures and earnings are trending together, their growth rates are below nominal GDP, suggesting a need for reforms to boost the capital markets for investment and growth.

An economists view from 35,000 feet is a useful way of identifying and analyzing the big macro trends. But, as we have seen in this study, the bottom-up view yields additional insights and challenges, Paul Gruenwald said.

The resolution it offers leads to a better understanding of the quality and sustainability of growth.

Under Standard & Poors policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating.

Aurobindo Pharma- gets USFDA approval for Cefixime

This article was authored by Ms. Sarabjit Kour Nangra

Aurobindo Pharma- gets USFDA approval for Cefixime: Aurobindo Pharma announced that the company has received final approvals from the US Food & Drug Administration (USFDA) to manufacture and market Cefixime for Oral Suspension USP, 100mg/5mL and 200mg/5mL (ANDA 204835). The product is ready for launch. The approved ANDAs are bioequivalent and therapeutically equivalent to the reference listed drug product (RLD) Suprax® Oral Suspension USP 100mg/5mL and 200mg/5mL respectively of Lupin Pharmaceuticals Inc.

Cefixime for Oral Suspension is indicated for the treatment of adults and pediatric patients six months of age or older, with infections caused by susceptible strains of the designated organisms in urinary tract infections, otitis media, acute exacerbations of chronic bronchitis, uncomplicated gonorrhea (cervical/urethral), pharyngitis and tonsillitis. The product has an estimated market size of US$123mn for the twelve months ending February 2015 according to IMS. The drug already has lot of competition. We maintain our accumulate with a price target of ₹1502.

Weekend Highlights – 11th April, 2015

Medical Devices parks to be set up in the country

The Government is going to set up Medical Devices Parks in the country, and first such park will come up in Gujarat soon. The Union Minister of Chemicals and fertilizers Shri Ananth Kumar said this while releasing the recommendations of the Task Force on Promotion of Domestic Production of High End Medical Devices & Pharmaceutical Manufacturing Equipment. He said that only 30% of the countrys requirement of Medical Devices is being met through indigenous production, and that of low end category. The Minister said that the Government is taking several steps to boost the domestic production of high end medical devices & pharmaceutical manufacturing equipment. He said that NIPER, Ahmedabad will be the nodal institute for undertaking research and development in the area. Shri Ananth Kumar said that the recommendations made by the Task force will be implemented in a time bound manner. He said that the Department has already taken up issues of incentives and taxation on such devices with the finance Ministry so that the indigenously produced medical devices can compete with the imported ones. The minister said that need is being felt to have a separate department to handle the issues of facilitation and regulation of high end medical devices & pharmaceutical manufacturing equipment, as their consumption is increasing very fast and there is need to make India self-dependent in the sector. He said that on the lines of National List of Essential Medicines, there should be a National List of Essential Medical Devices to enable providing affordable, quality products to masses easily.

Banks allowed to invest in competitors long term bonds

RBI in its First Bi-monthly Monetary Policy Statement, 2015-16 said banks will be allowed to invest in bonds issued by other banks to fund long-term infrastructure projects and affordable housing. RBI stated, In July 2014, banks were allowed to issue long term bonds (LTBs), with exemptions from certain regulatory pre-emptions, for lending to (i) long-term projects in infrastructure sub-sectors, and (ii) affordable housing. However, cross-holding of such bonds amongst banks is currently not permitted. On a review, it has been decided to allow banks to invest in such bonds issued by other banks, subject to the following conditions:i. Banks investment in these bonds will not be treated as assets with the banking system in India for the purpose of calculation of NDTL; and

ii. Any single banks holding of bonds in a particular issue will be subject to certain limits in relation to the bond issue size. Its aggregate holding of such bonds will also be subject to certain limits in relation to its own assets.

iii. LTBs held for trading will reduce the banks priority sector and liquidity benefits obtained from its own issuance of LTBs.

Steel Companies Sign Agreement with Ministry of Steel for Setting Up of Steel Research & Technology Mission of India SRTMI

Major Indian Steel Companies, signed a Memorandum of Agreement with Ministry of Steel in the presence of Shri Narendra Singh Tomar, Minister for Steel & Mines for setting up of Steel Research & Technology Mission of India (SRTMI) in New Delhi. It makes a new beginning in the R&D in steel sector of the country.Speaking on the occasion, Shri Narendra Singh Tomar said that the joint initiative of steel industry and government will definitely yield results, if same enthusiasm and spirit is maintained at all times. In a country like India where majority of population comprises of youth, steel industry can play a major role in creating employment, he added.

The SRTMI is an industry-led initiative in association with the Steel Ministry to promote collaborative research programmes in steel sector, which aims at increasing investment on Research & Development in the steel sector from present level of 0.2-0.3% of turnover progressively towards the international benchmark of 1-2% of turnover.

The conceptualization of SRTMI was done by a high level Task Force set up by the Ministry of Steel. The task force had recommended that SRTMI is to be formed as a registered society in close cooperation amongst the steel companies, Ministry of Steel, academia and other institutions in the country. SRTMI will be governed by a Governing Board of CEOs of steel and associated companies, domain experts of national and international repute and nominee from Ministry of Steel. There will be an Oversight Committee under the Chairmanship of Secretary (Steel) to periodically assess the functioning & performance of SRTMI.

SRTMI will carry out R&D in priority areas of national importance covering best usage of available raw materials & conservation of natural resources, optimum energy conservation & minimum emissions, innovations and in-house development of design, engineering & manufacturing facilities of key steel plant equipments.

Presently, SAIL, Tata Steel, JSW Steel, JSPL, RINL, NMDC & MECON are the participating companies who have signed the agreement today with the Ministry of Steel. The initial corpus for setting up of SRTMI is to the tune of Rs. 200 crore wherein Rs. 100 crore will be contributed from the Steel Development Fund of the Ministry, and Rs. 100 crore will be provided by these participating companies.

Indoco Remedies – Acquisition of CRO division of Piramal Enterprise Ltd

Indoco Remedies announced the acquisition of the Clinical/Contract Research Organisation (CRO) division of Piramal Enterprises Ltd (PEL). The Acquisition will be effective April 06, 2015 and Indoco Remedies Limited will acquire the assets of the division along with its employees in an all cash-deal and the same would be funded via internal accruals.
Equipped with a 98-bed facility, the CRO (formerly known as Wellquest), is located in Hyderabad and spread across 30,000 square feet. It is equipped with monitoring stations, phlebotomy stations, four-bed ICU, state-of-the-art analytical lab and capabilities of eCTD submission. It also has regulatory approvals from several bodies including USFDA and was the first CRO from India to receive GCP certification from UK-MHRA. While the exact numbers are not available, the concerned acquisition is unlikely to add significantly to the top line, and since the company has comfortable debt:equity ratio, we believe it can easily fund the same. We remain neutral on the stock.

Sun Pharmaceuticals – Settlement with The Medicines Company

Sun Pharmaceutical Industries and certain of its subsidiaries have executed a settlement agreement with ‘The Medicines Company USA’ (MDCO) settling the lawsuit filed against the company and its subsidiaries regarding submission of abbreviated new drug application (ANDA) by one of its subsidiaries, for a generic version of Angiomax, Bivalirudin injection.

Under the terms of the agreement, the company’s subsidiary is entitled to launch its version of generic Angiomax in the US on June 30, 2019 or earlier under certain limited circumstances. The product ended by with sales of ~US$630mn in 2014, and had been growing at a CAGR of 30%+ since its launch. Thus, the product, can contribute significantly from FY2020 onwards.

Earlier, in October 2011, MDCO received a Paragraph IV Certification Notice Letter from a subsidiary of Sun Pharma notifying MDCO that the subsidiary had submitted an ANDA to the U.S. Food and Drug Administration for approval to market a generic version of Angiomax®. In November 2011, MDCO filed a patent infringement lawsuit against Sun. The complaint, filed in the U.S. District Court for the District of New Jersey, alleged infringement of U.S. Patent Nos. 7,582,727 and 7,598,343.

After this settlement the MDCO remains in infringement litigation involving U.S. Patent Nos. 7,582,727 and 7,598,343 with Hospira, Inc., Mylan Pharmaceuticals, Dr. Reddy’s Laboratories, Apotex Inc., Accord Healthcare Inc. USA, Aurobindo Pharma Ltd.and Exela Pharma Sciences, and LLC.

We remain neutral on the stock.

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