Weekend Highlights – 4 October, 2014

Ind-Ra: Status-quo on Policy Rate Aimed at Bringing CPI Inflation to 6% by January 2016
The Reserve Bank of Indias (RBI) policy stance of maintaining status-quo on policy rates (repo 8%, reverse repo 7% and marginal standing facility 9%) in its fourth bi-monthly monetary policy statement is in line with India Ratings & Researchs (Ind-Ra) expectations. Even though inflation has been declining, the RBI is of the view that it is too early to assume that it is firmly under control. We agree with the banks view and believe that under the current macroeconomic environment, this is the correct assessment.We believe the rainfall from the south-west monsoon, which is now expected to be about 12% lower than the long-period average, will weigh on the kharif crop, mainly due to its uneven spatial distribution. Although the Consumer Price Index (CPI) inflation came in at 7.8% in August 2014, the contribution of food inflation to headline inflation is still about 60%. Ind-Ra believes the RBI would rather wait than make the mistake of changing the policy stance before the inflation has been effectively tamed. We believe monetary easing will not be possible before 4QFY15. Also, the balance of risks is still on the upside due to risks from food price shocks and geo-political developments in the middle-east. The RBI has been trying to take the economy on a disinflationary course by containing the CPI inflation, its new nominal anchor, to 8.0% by January 2015 and further to 6% by January 2016.

HSBC India manufacturing PMI eases to nine-months low in September 2014
Operating conditions in the Indian manufacturing sector improved for the eleventh month in succession in September, although the pace of growth weakened to the slowest since December 2013. This was matched by slowdowns in output and new order growth, while cost pressures eased during the latest survey period. Adjusted for seasonal factors, the headline HSBC India Purchasing Managers Index (PMI) – a composite gauge designed to give a single – figure snapshot of manufacturing business conditions – dropped from 52.4 in August to 51.0 in September. The reading was indicative of a modest improvement in operating conditions. Overall, intermediate goods was the best performing among the three monitored sub-sectors.As a result of improvements in demand, output expanded for the eleventh consecutive month in September. However, the pace of growth slowed from

August and was moderate overall. By sub-sector, the strongest expansion occurred in the intermediate goods category. September data confirmed reports of stronger demand as new orders rose for the eleventh month running. That said, the rate of increase weakened to the joint-slowest in that sequence. Growth of new business was broad-based by sector, with the sharpest rise noted in capital goods.

Indian manufacturers saw new business from abroad grow at an accelerated pace in September. Panel members commented on strengthening demand from key export clients. Marked expansions in foreign orders were reported in the consumer and intermediate goods sub-sectors, while exports fell at producers of investment goods.

Meanwhile, purchasing activity rose in line with production and new orders, as the rate of expansion slowed to a four-month low in September. Buying activity grew across each of the surveyed categories during the month. Subsequently, input stocks increased fractionally in September. In contrast, Indian manufacturers reduced their post-production inventories, marking the end of a year-long period of accumulation. Workforce numbers remained broadly stable in September, as the vast majority of survey respondents signalled no change in staffing levels. Among the monitored sub-sectors, job losses in consumer and investment goods were offset by marginal job creation at intermediate goods companies.

Inflationary pressures from both inputs and outputs eased further in September. Input costs continued to rise at a solid pace, but the rate of cost inflation decelerated sharply from the prior month. Higher prices paid for metals, chemicals and energy led to the overall rise in raw material costs. Concurrently, selling prices were broadly unchanged in September, as the seasonally adjusted index posted only fractionally above the neutral 50.0 threshold.

As the liquidity in the system remained largely balanced, the recourse to liquidity provided under the export credit refinance (ECR) has declined. Therefore, the RBI has reduced the ECR facility from 32% of the eligible export credit outstanding to 15% effective 10 October 2014. The RBI is keeping a close watch on liquidity. Its liquidity management framework was changed effective 5 September 2014. As a result, the RBI is now carrying out increased 14-day term repos and daily overnight variable rate repo operations to ensure flexibility, transparency and predictability in liquidity management operations.

Festive Season to be Good for Auto Sales: ZyFin Research
ZyFin Researchs Vehicle Purchase Sentiment Index has registered a steady uptrend since bottoming out in April this year. In September 2014, the index increased by 2.5 points to 17.5, with moderate upticks in consumer willingness to purchase both two- and four-wheelers. This signifies that a larger number of Indian consumers are planning to purchase a two- or four-wheelers within the next six months. Historically, the sentiment index has had a strong correlation with actual sales of passenger vehicles. With the festive season coinciding with the uptrend in sentiment, auto sales are expected to be better this season, as compared to 2012 or 2013.The Vehicle Purchase Sentiment Index reflects plans to purchase vehicles over the next six months. It is based on a monthly survey of 4,000 consumers in 18 cities across India, representing urban consumers. A score above 50 reflects optimism, while below 50 is an indication of pessimism.

Key Highlights of the ZyFin Vehicle Purchase Sentiment Index for September 2014:

n++ The ZyFin Vehicle Purchase Sentiment Index has registered a score of 17.5 in September 2014, as compared to 15.0 in the previous month. With willingness to spend improving, passenger vehicle sales are expected to pick up over the next six months, the bulk of which should happen during the festive season.

n++ However, consumer opinion varies significantly across cities. Among the tiers, metro and Tier-II cities show a markedly higher willingness to purchase vehicles than consumers in Tier-I cities. The index improved to 22.8 in September 2014 from 17.6 in the previous month for metro cities and to 20.3 from 18.5 in Tier-II cities. However, the score for Tier-I cities is just 8.0 in September 2014, having fallen from 8.9 in the previous month.

n++ Of the 18 cities surveyed, Mumbai, Guwahati, Mangalore, Hyderabad and Indore have the strongest willingness to purchase vehicles.

Wipro – Targets a leaner organization

Wipro- Targets a leaner organization: Wipro has started a 3 year exercise to become a leaner company. The company is in the process to slim its workflow down by about a third without resorting to mass layoffs, through deploying automation. The company is looking at being around 100,000-strong workforce in three years from 1,46,053 as on FY2014.

At Wipro, automated tools are expected to make their presence felt significantly in two departments—monitoring of computer infrastructure and administration, which together employ 48,000 people ~30% of workforce. The monitoring department makes up about one-fifth of Wipro’s workforce now (~30,000), and it is seen making up around 5% (~5,000) of the company’s headcount in three years. Those engaged in administrative tasks will number 7,000 at the end of three years from 20,000 at present. Wipro, has an attrition rate of 16-17%, translating into about 23,000 employees leaving the company each year. So, the company will be in a position to become lean without having to issue pink slips as much of its current attrition is not in important areas of operations. Hence, the company can replace these people by automating a lot of processes.

We believe, this move will further strengthen the operating matrix of the company and will improve its overall profitability in the medium to long term. At, CMP the stock remains a buy with a price target of `697.

Sun Pharmaceuticals to focus on dermatology post merger with Ranbaxy

Sun Pharmaceuticals to focus on dermatology post merger with Ranbaxy: Sun Pharmaceuticals plans to focus on dermatology post its merger with Ranbaxy labs, expected to be completed by 2014. The company has lined-up a strategy to make dermatology its biggest segment and expects almost 38-40% of US sales to come from dermatology by FY2018( the segment is expected to be around US$3-5bn in US).For, the same the company plans to ramp up its Dusa facilities in the US. After the merger, the company will generate around US $800mn from the dermatology segment, which is expected to double, thereby also pushing up the margins. We maintain our neutral on both the stock.

Cipla & Aurobindo signs agreement with MPP for TAF

Cipla & Aurobindo signs agreement with MPP for TAF: Medicines patent pool (MPP) announced six new sub-licences with Cipla, Aurobindo, Desano, Emcure, Hetero Labs and Laurus Labs to allow generic manufacture of tenofovir alafenamide fumarate (TAF) for HIV treatment in 112 developing countries. A day before, Gilead released positive results on two of its TAF Phase III studies, suggesting that the medicine has the potential to play a large role in the international community’s efforts to scale-up HIV treatment. The generic companies will begin development plans for this drug simultaneous with the US Food and Drug Administration’s review to expedite access to low- and middle-income countries once the medicine is approved. In studies, TAF has demonstrated comparable antiviral efficacy to that of 300 milligram tenofovir disoproxil fumarate (TDF) – a World Health Organization-preferred HIV therapy – but at a dose that is 10 times lower. The smaller milligram dose may also allow lower production costs, as well as greater ease in developing new fixed-dose combinations and single tablet regimens. The news is positive both for Cipla and Aurobindo, but as of now we are not incorporating in our numbers and hence maintain our neutral on the stock.

Weekend Highlights – 27 September, 2014

Revoke Hike In Delhi Circle Rates- PHD Chamber
PHD Chamber of Commerce and Industry has urged the Lt. Governor of Delhi to review the decision of the Delhi Government under him to revoke the steep hike of 20 per cent in circle rates for city properties under categories from A to H.In a statement issued, President of PHD Chamber Mr. Sharad Jaipuria contended that real estate market is under slump for quite sometime and the new Land Acquisition Act, enacted by the previous government has already made acquisition of land extremely cumbersome fall out of which has been extremely adverse on real estate.

On top of it, enhancement on circle rates in Delhi for city properties by 20 per cent would be totally unfair and cannot be justified under present circumstances in which the central government is totally focused to put in place friendly statutes and remove red-tapes on procedures, will send signals that might halt inbound investments and dampen investor interests in Real Estate Investment Trust (REIT).

Broadband to every home is target in Digital India: Secretary, Telecom
Private sector would have a n++hugen++ opportunity in creating the last mile wireless connectivity to villages from the countrywide fibre optic broadband network (FOBN) that would come up by the financial year 2016-17 connecting 2,50,000 panchayats, said Mr. Rakesh Garg Secretary, Telecommunication at an ASSOCHAM event.Business opportunity was also evident in providing content in local languages that alone would enthuse the grass roots people to get involved in utilising the connectivity, said Mr. Garg, who is also Chairman, Telecom Commission at an ASSOCHAM event on n++e-Governance and Digital Indian++.

n++Digital Indian++ was Prime Minister Mr. Narendra Modis largest programme and was targeting to reach every single home with broad band access in India, Mr. Garg disclosed.

Detailing what the Digital India programme meant for the common people, Mr. Garg asked private sector enterprises to enable village homes to connect to public services in health and education among others through localised content created for the purpose. n++Government had already completed surveys of two lakh villages to create a database of what they required from public services. As for the optical fibre network, more than 50,000 panchayats had already been connectedn++, said Mr. Garg.

Describing Digital India as a n++private-public-panchayat partnership (PPPP)n++ Mr. Ravi Shankar, Secretary, Department of Administrative Reforms, Public Grievances and Pensions said that computer literacy could eliminate illiteracy in the country.

He pointed out how even illiterates were able to manage smart phones. Digital India would create a citizen centric administration conferring empowerment, entitlement and engagement opportunities to all the citizens. The portal like My.Gov created last month would enable citizens to engage in public affairs and provide inputs to government.

He expected Indian industry to take up the challenge of making sub Rs 2000 a piece smart phone so that smart phones could become the normal connectivity devices across the villages of the country enabling rural people to access the whole range of services made available on the broadband network and last mile wireless connectivity.

The increased circle rates of Delhi if not withdrawn will have contagious impact as other States especially in the vicinity of Delhi would take a cue from it and make similar arrangements in their law books, putting huge burden on property buyers even at a time when real estate prices are beyond usual reach of salaried and working class, said Mr. Jaipuria.

The PHD Chamber suggested the Delhi Government that other states in the Indian federal structure are seeking uniform stamp duties on property so that price uniformity is brought about on sale of properties. However, with the present announcement of raising circle rates without exhaustive public consultations is not likely to bring any good to the government other than impacting the real estate and housing sector which is already under dire straits as of now.

Moodys: Indian public-sector banks will require more capital for Basel III compliance
Moodys estimates that public-sector Indian banks that it rates, could need up to US$37 billion in external capital as Basel III looms, assuming a moderate recovery in Indias GDP growth, and a gradual decline in nonperforming loans from current levels.More specifically, Moodys-rated public-sector banks in India will need to raise INR1.5 to INR2.2 trillion, or US$26 to US$37 billion between FY 2015 and the full implementation of Basel III in FY 2019, says Moodys. Moodys rates 11 public sector banks, representing 62% of net loans in the Indian banking system.

Indian public sector banks barely meet current minimum capital requirements, and we anticipate that they will find it difficult to raise capital quickly in the current environment, said Gene Fang, a Moodys Vice President.

Basel III raises the minimum required capital levels for both total Tier 1 to 7.0% and Common Equity Tier 1 (CET1) capital to 5.5%, and banks will also need to meet a Capital Conservation Buffer in order to pay dividends, says Moodys. That will pressure Indian public-sector banks, as low capital levels remain a key credit weakness, added the rating agency.

Weak asset quality has depressed profitability and internal capital generation, leaving public-sector banks reliant on periodic capital injections from the government, added Fang. With Prime Minister Narendra Modis new administration looking to reduce the countrys budget deficit, the amount available for such injections is not likely to grow.

Banks may tap the equity markets to raise capital, but with still-low bank valuations, banks could struggle to raise the required amount, says Moodys. Thats even with the recent rally in Indian stock prices, says the rating agency.

Moodys notes that a significant part of the required capitaln++around INR800 billion to INR900 billion, or US$13 to US$15 billionn++could be in the form of Additional Tier 1 (AT1) capital.

NPPA withdraws price control guidelines of 108 formulations

NPPA withdraws price control guidelines of 108 formulations: The National Pharmaceutical Pricing Authority (NPPA) has withdrawn guidelines for price control of 108 formulations, which was issued under Para, 19 of the Drug Prices Control Order (DPCO). NPPA had capped prices of 108 cardiac and diabetes drugs on July 10’2014. Invoking Para, 19 of DPCO, NPPA had extended price control to drugs outside of National List of Essential Medicines (NLEM). Pharmaceuticals lobbies had contested NPPA order in Bombay High Court.

The provision, Paragraph 19 of DPCO, 2013, authorizes the NPPA “in extraordinary circumstances, if it considers necessary so to do in public interest, fix the ceiling price or retail price of any drug for such period as it deems fit”. The notification to fix prices of these medicines, which are non-scheduled formulations, was issued wherever the maximum retail price (MRP) of the brand of a particular formulation exceeds 25% of the simple average price, the same will be capped at the 25% level. Simply put, if the price of a drug brand exceeds the simple average price in that therapy group by 25%, or the price at which a new drug is launched for the first time is higher than the most expensive brand existing in the group, NPPA would initiate the process of fixing a price cap.

The drugs that were covered were Gliclazide, Glimepiride, Sitagliptin, Voglibose, Amlodipine, Telmisartan and Rosuvastatin, Heparin and Ramipril, covering an estimated market of around `5,500cr.These drugs had witnessed a price reduction from 10-15% to as high as 35%, with the average reduction around 12%.

For companies, the biggest positive impact will be felt for companies like Sanofi (~`139cr gain), Zydus Cadila (~`40cr gain), Ranbaxy (~`38cr gain), Cipla (~`19cr gain), Lupin (~`32cr gain) , DRL (~`14cr gain in sales) and Sun Pharma (~`25cr gain in sales), on the basis of AIOCD AWACS. Thus, amongst the domestic and MNC player, the latter would be impacted the most positively, as they mostly price their products much higher than the competition and then derive their 100% of the sales from domestic markets. The domestic companies not having very huge exposure to the domestic market, will be insulated to a large extent, as the pricing is not the key growth driver for their growth. Their products are therefore competitively priced. Thus, we maintain our recommendations in the sector.

Lupin Announces Strategic Alliance for Emerging Markets

Lupin has entered into a long term strategic partnership with Merck Serono, the Biopharmaceutical division of Merck. Lupin will support Merck Serono in the implementation of the company’s General Medicines portfolio expansion initiative in emerging markets. The agreement builds on an established working relationship between the two companies, and could add up to 20 new products to the current portfolio. The first launches are expected in 2016.

Through this partnership, Merck Serono will expand its overall portfolio in core therapeutic areas of Merck Serono´s General Medicine & Endocrinology franchise in selected countries in Latin America, Asia, Central Eastern Europe, and Africa. The partnership covers major markets such as Brazil, Mexico, Indonesia, Philippines alongside several countries in Africa and Central Eastern Europe as well as other countries in emerging markets, focusing on cardiovascular and diabetes diseases. In Africa, medicines will also be supplied for additional therapeutic areas, reflecting local healthcare needs such as availability of antibiotics.

With the alliance, Lupin will expand its presence in these markets with fordable player like Merck Serono, which grosses sales of €1.8bn (in 2013) in emerging markets. The deal will start reflecting from FY2017 and hence do not change our estimates and remain neutral on stock on back of valuations.

Sun Pharma, Merck & Co Inc enters into pact for Tildrakizumab

Sun Pharmaceutical entered into a licensing agreement with Merck & Co Inc for investigational therapeutic antibody candidate, Tildrakizumab to be used for treatment of plaque psoriasis. Under terms of the agreement, Sun Pharmaceuticals will acquire worldwide rights to Tildrakizumab for use in all human indications from Merck in exchange for an upfront payment of US $80mn.Tildrakizumab is being evaluated in Phase III registration trials for the treatment of chronic plaque psoriasis, a skin ailment. Merck will continue all clinical development and regulatory activities, which will be funded by Sun Pharma.

Upon product approval, Sun Pharma will be responsible for regulatory activities, including subsequent submissions, pharmacovigilance, post approval studies, manufacturing and commercialisation of the approved product. Merck is eligible to receive undisclosed payments associated with regulatory (including product approval) and sales milestones, as well as tiered royalties ranging from mid-single digit through “teen percentage” rates on sales. This collaboration will enable Sun Pharmaceuticals in building its pipeline of innovative dermatology products in a market with strong growth potential. Thus, the development is positive for the long term growth potential of the company. We are neutral on the stock.

Ranbaxy Labs to enter into a licensing agreement with Gilead to increase access to Hepatitis C treatment

Ranbaxy Labs, like Cadila healthcare and Cipla have signed a non-exclusive licensing agreement with Gilead Sciences, Inc. for manufacturing and distribution of Sofosbuvir mono, investigational Ledipasvir mono, the fixed-dose combination of Ledipasvir/Sofosbuvir with each other and the combination of Sofosbuvir or Ledipasvir with other active substances, for the treatment of hepatitis C.

Under this licensing agreement, Ranbaxy will be allowed to manufacture and market Sofosbuvir, Ledipasvir in 90-91 countries including its home markets India and South Africa under their own brand names. It also covers countries like Egypt which has a high incidence of Hepatitis C.

According to World Health Organization (WHO), 130-150 million people globally have Hepatitis C infection. In India alone, it is estimated that 10-20 million patients are infected with Hepatitis C which is several fold greater than those with HIV/AIDS. The countries within the agreement account for more than 100 million people living with hepatitis C globally representing 54% of the total global infected population. As per the agreement, Cipla has the option of receiving a technology transfer of the manufacturing process from Gilead.

Sofosbuvir is a new antiviral drug which in combination therapy has shown to have higher cure rates. It represents a breakthrough in the treatment of hepatitis C. Sofosbuvir was approved by the U.S. Food and Drug Administration (FDA) in December 2013 and by the European Commission in January 2014. Sofosbuvir, in combination with other agents, offers a cure with a short-term course of treatment with few side effects and without the need for injections.

While the exact financial details are not known, we believe the deal can potentially add around `200cr to the company’s full year sales. Thus we upgrade our company’s FY2015 and FY2016 EPS by 4.9% and 9.0% respectively. However, on back of valuations, we remain neutral on the stock.

Gilead to allow 5 Indian firms to sell hepatitis generics in 90 countries

Gilead to allow 5 Indian firms to sell hepatitis generics in 90 countries: According to sources, multinational American drug maker Gilead Sciences is set to join hands with at least 5 Indian generic pharmaceutical companies and allow them to manufacture and sell cheaper versions of its new hepatitis C medicines - sofosbuvir and ledipasvir – in 90 countries. Among the companies likely to sign deals with Gilead are Cadila, Hetero, Strides Arcolab and Mylan, while Cipla is expected to earn active pharmaceutical ingredient (API) rights. Gilead has applied for a patent on these drugs in many countries, including India.

As part of the deal, Gilead might allow technology transfer and data sharing for the two drugs by generic companies but sale of the cheaper versions by partners might be restricted to the countries part of the deal, even in the absence of patent rights there. The agreement will exclude economies like China, Brazil, Ukraine and Malaysia. While the generic penetration will allow prices to come down significantly in those 90 markets, including India, irrespective of the drugs’ patent status, Gilead is likely to retain its monopoly in all other geographies. While the exact details are not know, a back of the envelope calculations, suggest that the drug can potentially be a US$300-500mn and US$110-185mn formulation and API opportunity respectively. Currently, on back of non-confirmation of news, we retain our numbers and recommendations on the stock. We remain neutral on Cipla and Cadila healthcare.

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