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Sector Update: RBI's relief on capitalization
Positive for PSU banks
RBI has relaxed the criteria to improve the tier-I capital structure for banks, in line with its earlier indication to align the definition of regulatory capital with the BASEL III framework. These changes are 1) Revaluation reserve would be part of CET-I with 55% haircut. 2) Foreign currency translation reserve as a part of tier-I with discount of 25%. 3) DTA arising due to timing differences up to 10% of CET-1. We believe this is positive for PSU banks which are under capital constraint due to elevated asset quality stress and transition to the BASEL III regulatory norms. This could improve the CET-I by 20-70bps for companies under our coverage. However, SBI, which has not revalued its assets in past several years could further see improvement in CET-I by 60bps assuming creation of revaluation reserve of Rs.200 bn (management guidance). This is positive in medium term. However, these PSU banks need to raise capital from equity market to meet the capital requirements.
Company Update: Cipla Ltd
¾ Mylan recently announced that the FDA had accepted its application for a copy of generic Advair, the largest selling combination inhaler drug. Mylan became the third generic player to file for generic Advair after Hikma and Sandoz. Cipla has been eying the opportunity of combination inhalers in the US market and generic Advair remains the most looked upon opportunity for the company. With three players already ahead on filings, Cipla could be 4th or 5th player to enter the combination inhaler market in the US.
¾ We have been cautious on Cipla owing to lack of clarity on launch timelines of the combination inhaler (the key growth driver for Cipla) and an ever expanding cost (employees as well as other fixed costs) line items. We revise our FY16E as well as FY17E EPS by ~5% to factor slightly lower margins led by lower gross margins (assumed lower inhaler pricing in EU markets as well as lower gross margin in US region). We also incorporate the acquisition of Exelan/InvaGen in our FY17E estimates. Our revised EPS for FY16E and FY17E stands at Rs 22.5 (earlier Rs 23.6) and Rs 25.9 (earlier Rs 27.4). We continue to value the company at 19x FY17E EPS and add an NPV of Rs 40 for inhalers. Maintain REDUCE with a revised price target of Rs 530 (earlier Rs 560).
Company Update: Mahindra & Mahindra
We attended the conference call organized by M&M to share its view on implications of Union Budget on the company and auto industry. M&M expects impact of infrastructure cess to be marginal on the industry volumes. Since the companies will be passing the cost to the end consumers, margins will not be impacted. Management is of the view that overall budget is marginally positive for the auto industry as negative impact of infrastructure cess will be more than offset by strong focus on agriculture and rural infrastructure development. We maintain our SOTP based price target of Rs1,350 on the stock. Due to limited upside, we rate the stock as ACCUMULATE (earlier BUY).
Auto Industry Volume Update
In February 2016, auto companies reported mixed growth in wholesale dispatches across different segments. 2W companies like Eicher Motors, Hero MotoCorp and TVS Motors reported YoY jump in volumes. In the passenger car space, M&M witnessed volume increase but Maruti Suzuki volumes were impacted by reservation agitation in Haryana. In the CV space, key players like Tata Motors, Ashok Leyland and Eicher Motors reported robust growth. In the tractor segment, M&M reported growth but Escorts volumes declined due to weak demand in North and Central regions. In the budget, emphasis on agriculture and rural development bodes well for the 2W and tractor segment. Infrastructure cess was a set back of the passenger vehicle industry. In the medium term, government push on revival of rural economy and expected good monsoons may lead to strong demand recovery for the tractor and 2W segment. Price hike due to infrastructure cess will likely weigh in passenger vehicle demand in the near term. Commercial vehicle segment is likely to stay on the growth path in the near to medium term. Maruti Suzuki (Rating - BUY, TP Rs.4722), Hero MotoCorp (Rating - BUY, TP - Rs.2864) and Tata Motors (Rating - BUY, TP Rs.440) are our preferred picks in the auto OE space.
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