Results better than expected on OPM front
IPCA Labs (CMP: `716/ TP: `986/ Upside: 20.4%)
IPCA Labs, during the quarter, posted sales and net profit just in line with expectations. On the sales front, the company posted sales of `928cr V/s `913cr expected, posting a 16.7% yoy growth. The sales growth was driven by exports , which posted sales of `571cr, posting a yoy growth of 14% yoy, while the domestic sales rose by 20.6% yoy. On the OPM front, the margins came in at 24.0% V/s 22.9% expected, an expansion of 410bps yoy, mainly on back of GPM expansion, which came in at 63.1% V/s 59.1% in 1QFY2014 and lower rise in other expenditure, which rose by 13.8% yoy .Thus, PAT came in at `145.5cr V/s `147.8cr, expected , registering a growth yoy of 35.2%. We retain our buy on the stock with a price target of `986.
Results better than expected on OPM and net profit front
Stock down 2.7%
HCL Tech (CMP: `1597/ TP: `1859/ Upside:16.4%)
HCL Technologies posted numbers better than expected on OPM and net profit front, while top-line came in just in line with expectations. The company posted revenues of US$1,407mn, up 3.4% qoq, in line with the expectation of US$1,407.5mn. On, Constant Currency terms (CC), the company has posted a 2.8% qoq in the sales terms. The growth came on back of Europe, which grew by 6.5% qoq ( CC), while USA grew by 1.3%qoq (CC) and ROW grew by 0.1% qoq (CC). In terms of services, it was business services which grew by 16.8% qoq (CC) and in terms of industry it was Telecommunications, Media, Publishing & Entertainment, which grew by 9.5% qoq (CC), while Financial Services grew by 8.2% qoq (CC).
In rupee terms, the revenue came in `8,424cr a growth of 0.9% qoq V/s expectation of `8,414cr. EBITDA margin came in at 26.3%, V/s 25.9% expected, posting a decline by ~43bp qoq, mainly on back of manpower cost hikes. The utilization levels of the company, came in at 84.5% V/s 84.2% in 3QFY2014.This lead the net profit come in at `1,834 V/s `1,629cr expected , up 12.9% qoq, on back of lower taxation during the quarter. The tax rate for the quarter, came in at 16.1% of PBT V/s 19.5% during the last corresponding period.
With this for FY2014 ( Year ending June), the company has posted net sales and net profit during the quarter was US$5359.8mn and US$1036.9mn respectively, posting a yoy growth of 14.4% and 41.6% respectively. The EBITA margins came in at 26.3% V/s 22.3% during the last corresponding period.
Client additions during the quarter mainly was in US$ 10-20mn. Overall, it added 1 client in US$100mn+ along with 4 clients in US$50mn + category and 16 clients in US$ 20mn.
We maintain our buy rating on the stock with a target price of `1,859
Results marginally lower on net profit, while OPM surprises
Stock up 3.4%
Cadila Healthcare (CMP: `1129/ TP:/ Upside:)
Cadila posted results mostly in line with expectations on sales front, while the OPM came in much higher and net profit marginally lower than expected. For, the quarter, the company posted sales of `2020cr V/s `2008cr expected, a yoy growth of 25.6%. The growth was driven by the exports which grew by 51.1% yoy, mainly driven by USA which grew by 87.6% yoy, while emerging markets posted 19.1% yoy. Another large market like Europe grew by 9.0% yoy. Domestic formulation market grew by 8.0% yoy during the period. On the operating front, the OPM came in 17.1% V/s 16.0% expected a 100bps yoy expansion. This acme inspite of the lower gross margin expansion, which dipped to 59.7% V/s 66.5% during the last corresponding period. This was mainly on back of the only 0.4% and 4.8% yoy rise in the R&D and other expenditure during the period. However, a significant rise in the tax expenses during the quarter, lead the Adj. PAT came in at `240cr V/s `195.9cr, registering a yoy growth of 22.7%. We remain neutral on the stock.
Results better on the OPM front
Stock up 5.2%
Lupin (CMP: `1114/ TP:/ Upside:)
Lupin, posted results, marginally better than expectations, both on sales and net profit front, but much better than expected on the OPM front. For, the quarter, the company posted sales of `3284cr V/s `3181cr expected, posting a yoy growth of 35.7% yoy, aided by robust growth in exports an domestic. Formulations during the quarter posted a growth of 37% yoy, while API grew by 21% yoy. USA and India was the key high growth formulation market, which posted a yoy growth of 57% yoy and 29% yoy respectively, while Japan and South Africa, which grew by 17% and 16% yoy respectively.
On the operating front, the OPM came in at 32.2% V/s 24.3% expected and 22.1% in 1QFY2014, an expansion of 10.1% yoy. A huge part of the margin expansion came on back of the dip in other expenditure (which declined by 4.9% yoy) and gross margin expansion (66.3% V/s 63.9% in 1QFY2014). Thus, PAT came in at `624.7cr V/s `581.3cr expected, registering a yoy growth of 55.8%. We remain neutral on the stock.
Results lower than expected on sales and net profit
Stock up 2%
Dr Reddys Lab (CMP: `2,760/ TP:3,399/ Upside:23.2%)
Dr Redyys Lab (DRL), reported numbers lower than expected on sales and net profit. For, the quarter, the company posted sales of `3517cr V/s `3800cr expected, posting a yoy growth of 24.0% yoy aided by robust growth in exports and domestic. The key generic market posted a yoy growth of 32%, while the PSAI de-grew by 6.0%. The Generic market growth was on back of the US and India, which grew by 51% yoy and 14% yoy respectively. On the operating front, the EBIT came in line with expectation of 18.9% , inspite of 59% yoy growth in R&D expenses. This was an expansion of 370bps yoy. A part of it was aided by the expansion in the gross margins, which came in at 59.3% V/s 52.8% in 1QFY2014. Thus, PAT came in at `550cr V/s `600cr expected ( the variance is mainly on back of lower than expected sales), registering a yoy growth of 52.0%. We retain our buy on the stock with a price target of `3399.
Results below expectations on sales and profit, while better than expected on the OPM front
Stock moves up 15%
Indoco Remedies (CMP: `191/ TP:/ Upside:)
Indoco Remedies posted numbers lower than expected on sales and net profit front, expect the operating profit front. On sales the company posted a sales of `198cr V/s `206cr expected, posting a yoy growth of 33.7%. The growth was driven by both exports and domestic, which posted a yoy growth of 58.8% and 23.1% respectively. The domestic formulation sales grew by 24.4% yoy, much higher than the Industry growth of 8.8% yoy. On the operating front, the OPM’s came in 18.1% V/s 16.2% expected and an expansion of 560bps yoy, mainly on back of the gross margins, which expanded by 365bps yoy to end the period at 63.3% V/s 59.7% during the last corresponding period. Further the interest expenses during the quarter, dipped by 56.0% yoy, which aided the net profit come in at `20cr V/s `9.2cr in 1QFY2014, however lower than the `23.9cr expected, mainly on back of lower than expected sales, higher than expected depreciation and lower other income. We maintain our neutral view on the stock.
Stock remains flat
United Phosphorus (CMP: `314/ TP:`424/ Upside: 35.0%)
United Phosphorus, announced a good set of numbers for 1QFY2015. For the quarter, the company, posted a sales of `2720cr V/s `2409.7cr, posting a yoy growth of 12.9% yoy. On the operating front, the OPM came in at 17.9% V/s 17.0% in 1QFY2014, an expansion of 90bps yoy. As GPM’s expanded by 51.5% V/s 49.1% in 1QFY2014.Thus, Adj. PAT came in at `264cr V/s `212.6cr expected, registering a yoy growth of 23.9%. During the quarter the company, the company posted extra ordinary gains of `35.8cr, on back of its sale of the stake in the Brazilian subsidiary Sipcam UPL. We maintain our buy on the stock with a price target of `424.
Results mostly in line
Stock remains flat
Alembic Pharmaceuticals (CMP: `331/ TP:/ Upside:)
Alembic Pharmaceuticals, announced its 1QFY2015, which was mostly in line with the expectations. For the quarter, the company, posted a sales of `492cr V/s `506cr expected, posting a yoy growth of 15.6% yoy. The domestic sales came in at `278cr, posting a yoy growth of 15.4%, while exports grew by 16.1% yoy. On the operating front, the OPM came in at 19.5% (18.5% expected) V/s 16.7% in 1QFY2014, an expansion of 280bps yoy, mainly on back of GPM expansion, which came in at 64.0% V/s 59.5% in 1QFY2014.Thus, PAT came in at `64.6cr V/s `65.4cr expected, registering a yoy growth of 38.6%. We remain neutral on the stock.
Ranbaxy Laboratories has signed a licensing agreement with Cipher Pharmaceuticals Inc to exclusively market, sell and distribute Cipher’s isotretinoin capsules in Brazil. The agreement extends the current relationship with Cipher, under which Ranbaxy is marketing and distributing Cipher’s isotretinoin product in the United States under the brand Absorica.Under the terms of the agreement, Cipher will receive an upfront payment and is eligible for additional pre-commercial milestone payments. Cipher will be supplying the product and Ranbaxy will be responsible for gaining regulatory approval of the product in Brazil.
IPCA Labs voluntary stops shipments of API for US from its Ratlam (Madhya Pradesh) facility
IPCA Labs voluntary stops shipments of API for US from its Ratlam (Madhya Pradesh) facility: During the recent USFDA inspection at the IPCA labs Active Pharmaceutical Ingredients(APls) manufacturing facility situated at Ratlam (Madhya Pradesh) the Company has received certain inspection observations in Form 483 from the USFDA.Consequent to this, the company has voluntarily decided to temporarily suspend API shipments from this manufacturing facility for the US markets till this issue is addressed. This voluntarily stoppage of API shipments from the Ratlam manufacturing facility will also have impact on the company’s formulations export business to the US market since the company’s formulations manufacturing units situated at Piparia (Silvassa) and SEZ, Indore (Pithampur) use the APls manufactured from the company’s Ratlam manufacturing facility for manufacturing formulations for the US market. The Company has committed in resolving this issue at the earliest.
While Form 483, does not imply a withdrawal from the market, but since company has voluntary withdrawn the products, the same could impact a part of its API and formulation business in US. US as on FY2014, contributed sales of `419.6cr (12% of total sales and 20% of exports). Of this Formulation:API mix is around 61:39.Further, the company has another API facility at Baroda, which is USFDA approved. Thus net impact on the company would depend on the time company takes to come out of the same (it will have to respond to the observation in 15 days, with a recourse and time line on resolving the issues) or shift its business to other USFDA approved facility. Thus, we expect the FY2015 sales to be impacted, while FY2016 should remain intact , thus we maintain our FY2016 numbers.As of now we have reduced our sales and net profit by 4.0% for FY2015, while maintaining our FY2016 numbers. We maintain our buy on the stock with a price target of `1046.
Crude oil – Iraq takes the centre stage
Oil markets have always been the favorite of momentum traders as these markets are always tensed with the state of affairs in the OPEC nations which contributes to a third of world supplies. Also, the geo-political tensions, seasonal demand, supply outages, refinery maintenance and turnarounds are the key factors determining price trajectory.
The year 2014 has been full of events for oil as prices have been trading in a positive trend after bottoming out at $91. Starting with the US, the country was hammered with frigid temperatures at the start of the year that led to record consumption of natural gas which in turn led to shortage of heating fuels prompting utilities to turn towards fuel oil for electricity generation. Rally in US equities and unemployment rate falling to five year led to rally in crude oil prices. On the flip side, geo-political tensions in Ukraine, unrest in Libya and production disturbances in South Sudan supported Brent.
Prices rose on concerns over the possibility of tougher sanctions on Russia and potential supply disruptions. In addition, positive US economic data, stronger US gasoline demand and continued tight supplies at Cushing, Oklahoma, led to the rally. Also, data from China suggested that banks disbursed the highest amount of loan in last four years and oil imports by China were at record highs in the first few months of the year. This coupled with strong world oil demand forecasts in 2014 by IEA (International Energy Agency) has been driving factor for oil prices. Half of 2014 is almost over and its time we assess the state of oil markets (Iraq situation) and the way going forward.
Iraq- the nation at war
Iraq borders Turkey to the north, Iran to the east, Kuwait to the southeast, Saudi Arabia to the south, Jordan to the southwest, and Syria to the west. The country with such strategic importance has been in a state of sectarian war between Sunnis and Shias for a very long time. The Sunni-Shia split is rooted in the question of who succeed Prophet Muhammad in leading Muslims after his death in 632. Iraq, which is in danger of exploding in sectarian bloodshed owing to targeted killings of Shias by the al-Qaeda offshoot ISIS, is 60 to 65 per cent Shia, and 32 to 37 per cent Sunni, according to the CIA’s World Fact Book.
Iraq, the second largest crude supplier in the OPEC (Organization of Petroleum Exporting Countries) producing around 3.3 million barrels on an average has been in a state of civil war creating supply constraints in oil markets. The violence in Iraq has stoked regional tensions as militants advance swiftly over northern Iraq, a biggest threat to its sovereignty and integrity in years. Since seizing Mosul on June 10, the Islamic State in Iraq has been attacking towns along the main highway heading south, coming closer and closer to the capital. Hundreds of people have been killed since the start of the militant offensive in last couple of weeks, many of them believed to be captured soldiers publicly shot by ISIS-led firing squads. The militants have also taken control of the country’s biggest oil refinery (Bajji oil refinery). The refinery which is now shut down is critical for Iraq’s supplies of petrol and other petroleum products. It supplies a quarter of the country’s refining capacity.
Oil markets will closely watch how the events unfold in Iraq. If militants take control of the southern Iraq where major oil fields and infrastructures are located it would be nightmare for the country’s government and an uncertain situation leading to supply imbalance in turn higher crude prices. WTI crude prices can now head towards $114/barrel (CMP: $106/bbl) while on the MCX crude prices can turn higher towards Rs.6560/barrel.
Yellow metal- Where is it headed?
Half way through 2014, markets remain confused where gold prices are headed. Investors are still in dilemma and are now looking at fresh set of factors that will drive the price trajectory for rest of the year. While there was no real sign of sustained economic strength in 2013 for the world economy, just the idea of Federal Reserve in the US may start tapering at some point was enough to send gold bullion prices lower and the “Bull Run” in gold ended losing around 30 percent of its value last year.
Investors lean toward gold and other precious metals as a hedge against both a weak U.S. dollar and inflation. A tapering of the Federal Reserve’s monetary policy suggests that the U.S. economy is getting stronger. This optimistic view comes from the fact that housing sector and job market (the two important sectors) in the US is gaining traction as depicted in the graph above.
Although, the creation of ETFs like SPDR Gold Trust has changed the investment environment, the investment flows in the commodity remains largely subdued in 2014. Inflows in SPDR gold trust stood at 790.7 tonnes as on June 30’2014 which is largely flat when compared to gold holdings at the end of last year (31st Dec’ 2014) which stood at 798.2 tonnes.
Gold prices are nearly up by 10 percent in first half of 2014. The prime reason being Russia’s military intervention in Ukraine led to safe-haven buying and investors ditched assets perceived as riskier such as equities. In addition, lower U.S. 2014 growth forecast by the Fed and its lack of commitment to raise interest rates and continued tensions in the Middle East unleashed a wave of short covering. The recent esclated geopolitical situation in Ukraine and fresh round of sanctions imposed by the US on Russia also lifted the prices of the yellow metal.
However, further prices moves would be dependent on the complex set of factors. A report from the World Gold Council earlier this year said gold imported in to China was being used via gold loans and letters of credit to raise low-cost funds for business investment and speculation. China, the biggest consumer of the yellow metal is set to see imports’ declining as the government tightens controls on gold financing deals and measures to restrict the abuse of gold lending and other financial plays.
In India, the premiums charged by banks have declined from a high of $190 an ounce to $7-15 currently because of improved supply since May 21 after RBI renewed import licenses of nearly a score premier trading houses. On the contrary, there were wide expectations of the bullion industry that the government might reduce import duty (currently at 10%) on gold in the recent budget. The government however defied market expectations as it may not be keen on the move as increased gold imports following a duty cut (if any) could widen the current account deficit and impact the rupee adversely, raising inflationary expectations.
All other factors remaining constant, if gold prices do start to rally, investors will probably wait a little bit longer before jumping back into gold. However, taking in to consideration, the optimism in the US economy (growth in housing and the labor market), strength in the PMI numbers from US and China and possible tapering of QE by the end of this year and probability of rise in interest rates in the US sometime in 2015 are all indications that rally in gold price will not last long. Besides, growth in the world economy at large will be a driving factor for investors to put their money in to other asset class other than gold.
Spot gold prices can correct to an extent of $1100/oz ( from current price of $ 1315/oz) while gold prices on the MCX can correct towards Rs.26,500/10 gms in 2014 ( CMP : Rs. 28,000/ 10gms).
Associate Director – Commodities & Currencies