Weak global shipping markets (esp. bulk) and lower crude prices which negatively impacts the offshore segment has been impacted the performance of GESCO. Increased scrapping, slow new orders and lower bunker prices are positive for the company, but we estimate that pressure of supply of ships to continue to keep freight rates subdued. Broadly, we estimate weak earnings for GESCO over FY16 to FY18E. Historically, GESCO has traded in a range of 0.6 to 1.0x of its NAV. To factor in weakness in the shipping markets, we continue to value GESCO at 0.67 x of the NAV of Rs 480. Maintain SELLwith an unchanged TP of Rs 320.
Sector Update: Cement
¾ CCI in its fresh order has imposed penalties on 11 cement companies for indulging in acts of cartelization.
¾ Competition Appellate tribunal (COMPAT) had asked CCI in Dec, 2015 to conduct fresh investigations. COMPAT had sat aside the original order of CCI and directed it to issue fresh order as per proper investigation.
¾ Correspondingly CCI has issued the order with similar penalties as imposed in its earlier order on 11 Cement companies (ACC, Ambuja, Ultratech, JPA, Shree, Century, Binani, Ramco, JK Cement, India Cement and Lafarge) cumulatively of Rs67bn on allegations of cartelisation.
¾ We see the sentiment impact of the same to be reflected in near term. However, companies are going to challenge this fresh order also and would again go through a long drawn process.
¾ We do not see any near term impact on the financials of the companies as litigation process is likely to take time.
Sector Update: Construction
¾ A) Government agencies would release 75% of the arbitral award amount to an escrow account against margin free bank guarantee, in those cases where the award is challenged and had initially come in favour of contractor.
¾ B) The escrow account can be used to repay bank loans or to meet commitments in ongoing projects.
¾ C) This is a major step which will allow recovery of loans by banks and allow construction companies to speed up execution of ongoing projects. It will also increase the ability of construction companies to bid for new contracts. This measure will provide a stimulus to the construction industry
¾ D) The government has proposed all construction companies to set up conciliation board that will help in dispute resolution. The government will also work with the Reserve Bank of India (RBI) on policy for stressed construction companies. More clarity would also come on margin free bank guarantees as banks generally carve higher margins for lending to disputed projects.
¾ E) Companies likely to benefit include distressed companies where a lot of claims are pending with government. In our coverage universe, we expect NCC and Simplex Infrastructure to benefit from the same.
Company Visit Note: RPG Life Sciences
¾ RPG life sciences (RPG Life) is primarily a domestic formulations focused company with over 100 brands in the market. RPG also has presence in RoW and emerging markets for both formulations and APIs. RPG has two manufacturing facilities, formulations plant at Ankleshwar (F1 and F2 units) and API plant at Navimumbai. The formulations F1 unit is WHO approved and F2 plant is EUGMP approved. The API plant is EU/TGA/WHO approved.
¾ Over last few years, the company has witnessed changes in its senior management team, with Mr CT. Renganathan (ex-GSK, Eli Lilly with over 30 years of experience) now at the helm. Under the new leadership, the company has enhanced its focus on the domestic formulations segment and has started in-licensing niche products as well as increased focus on launces in fast growing segments. In Jul-16, RPG launched two products in the cosmetology therapy which are in-licensed from Italian cosmetic leader Labo Cosprophar.
¾ For the export formulations segment too, company is targeting to enter the US markets over the next 2-3 years and is already enhancing its presence in current markets. The key products under the export segment for the company are Azathioprine, Lamotrigine and Mycophenolate Mofetil. Company is trying to expand its product basket by adding products like Nicorandil, Sodium Valproate and Amlodipine. RPG already has a supply agreements with companies like Apotex, Amneal UK, and Tillomed and plans to expand its existing relationship for more markets/products as well as add new partners.
¾ The non-core businesses - Biotech as well as APIs are the non-core segments of which the biotech business has already been hived off. Company sees the API business as a captive source and will be shifting its focus only on growing the formulations segment.
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