Investor's eye-july02_13.pmd

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Near-term opportunity shrinks in USA; long-term prospects remain strong Adverse outcome of patent litigation on Prevacid ODT shrinks short-termprospects in USA: Japan's Takeda Pharmaceutical (Takeda) won a patent infringement suit against Zydus Pharmaceuticals (US subsidiary of Cadila Healthcare) after proving to a New Jersey federal judge that Zydus Pharmaceuticals’ (USA) proposed generic gastric relief product would unfairly compete with Takeda's Prevacid SoluTab (Prevacid ODT) medication. Takeda had sued Cadila Healthcare on filing for generic Prevacid ODT. Prevacid ODT isused to treat gastric ulcers and its market size is estimated to be $300 million.
It was expected to have three to four competitors after patent expiry/invalidity.
Zydus Cadila is one of the litigants who seek to get generic entry before the patent expiry on May 17, 2017 (patent number 6328994). Prevacid ODT could provide a low competition opportunity for Zydus Cadila. This potentially limitsthe short-term opportunity in the US market for Cadila Healthcare, which could give nearly $80-100 million revenues under market exclusivity.
Long-term opportunity remains intact; complex generics to ensure better market share: Cadila Healthcare has recorded a slower growth during the recent quarters due to price erosion in plain generics and lack of new approvals. Though we do not see a big trigger in the US market in near future, the long-term prospects remain strong on account of complex generics and technology-intensive products like transdermal products, vaccines, injectibles, nasal sprays andbiosimilars. However, a surge in the US business would be visible only in FY2015,when some key approvals are likely to come. We estimate the US revenues to jump from $283 million in FY2013 to $340 million in FY2014 and $425 million inFY2015.
Ex-US business is doing fine; India, emerging markets stronger growth in FY2015 when most of these products to support the near-term growth: The near-term growth for the company is likely to come from theIndian formulation business (despite the new pricing Ex-US formulation business augurs well in near term policy impacting the revenues, we expect better than Cadila Healthcare’s Indian formulation business is likely industry growth rate in FY2014), Zydus Wellness to witness a better-than-industry growth despite the new (consumer business), emerging markets and some of pricing policy coming into force. The company is expected the joint ventures. We expect the revenues and profit to maintain the growth momentum on the back of launch compounded annual growth rate (CAGR) of 17% and of new products and improved market share in key segments. We expect a 15% revenue growth in FY2014and 20% in FY2015 from the Indian formulation business.
We maintain estimate, recommendation and price Besides, it is also expected to record a stronger revenue target: Despite a short-term disappointment, we keep growth from Zydus Wellness (nearly 20% in FY2014 and our earnings estimate intact and maintain Buy 18% in FY2015), animal healthcare business (15% growth recommendation on the stock with a price target of in FY2014 and FY2015 each) and supplies of additional Rs906 (implies 17x average earnings for FY2014 and products from joint ventures with Hospira, Nycomed and Bayer. It also started commercial supplies of two productsunder marketing deal with Abbott.
Near-term prospects remain muted in USA; long-termopportunity remains strong Operating performance to improve on better product Cadila Healthcare’s US business has been impacted due to lack of key approvals in FY2013.The company received The company is in the process of cost optimisation (called approvals for a total 15 abbreviated new drug applications PRISM2) through multiple levers. We expect the company to (ANDAs), including seven injectibles in FY2013, after achieve an operating profit margin (OPM) of 19.1% in FY2014 witnessing complete null in FY2012. Though the company as compared with 17.7% in FY2013. The OPM would enhance has nearly 100 ANDAs pending approval and 22 ANDA further to 20.5% in FY2015 on launch of key products.
approvals are likely to come in FY2014, the growthguidance of 20% given by the management signals only a Net profit to grow at CAGR of 39% over FY2013-15E, vanilla generics play in the US market without a big upside.
We expect the net profit to grow at 41% to Rs926 crore in However, the company’s focus on complex technologies FY2014 from a low base and 36% to Rs1,257 crore in FY2015 like transdermal products (three products filed and several on the back revenue growth of 15% to Rs7,302 crore in other patches under development), vaccines (several FY2014 and 19% to Rs8,694 crore in FY2015.
vaccines under different stages of development),injectibles (21 injectibles filed with the US Food and Drug We maintain estimate, recommendation and price target Administration [USFDA]; approvals for seven injectibles Despite a short-term disappointment, we keep our obtained), inhalation devices (five nasal spray products earnings estimate intact and maintain Buy filed) and ointments is likely to give sustainable growth recommendation on the stock with a price target of Rs906 and improved profitability going forward. We expect a (implies 17x average earnings for FY2014 and FY2015).
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
Receding regulatory concerns and easing competitive environment Over the last few weeks, a series of developments have taken place both on the regulatory front as well as on the As opposed to the earlier concern that the national business front for the telecommunication (telecom) roaming charges would be totally eradicated and roaming operators; here in this note we have analysed the implications would be free for subscribers, the Telecom Regulatory of the same on the sector and the players in particular.
Authority of India (TRAI) adopted a balanced approachand has reduced ceilings for national roaming calls and SMS, and has also given flexibility to the players to partially Ban on 3G intra-circle roaming agreement; matter in court offset the same via special tariff vouchers (STV) and combo The Department of Telecom (DoT) has sent legal notices to Bharti Airtel (Bharti), Vodafone India (Vodafone) and New ceiling on roaming rates as prescribed by TRAI Idea Cellular (Idea) for violation of licence conditions byentering into 3G roaming pacts. The operators have taken legal recourse and hence the case for the same is being Meanwhile, the court has barred these companies from adding 3G subscribers in the circles wherein they do not have 3G spectrum and are operating via the intra- circle roaming (ICR) pacts with the other players.
For Bharti and Idea, the 3G subscribers form 3.4% and 4.2% to the total subscribers respectively. We estimate that the revenues from the same to be around 3-4% ofthe total revenues.
Our take: We believe the TRAI’s policy of reducing the Our take: We believe that if the case ruling is against the ceiling on roaming compared with earlier envisaged free operators (implying no 3G ICR), the financial impact for roaming is a balanced approach as it achieves the twin the same would be minimal. Since no operator has a pan- objectives of benefiting the consumers and also safeguards India 3G licence and spectrum, all the players would feel the operator’s interest by not materially impacting the the heat. However, Bharti being the player having revenues as the current tariffs for most packages in the spectrum with maximum coverage (with spectrum in 13 market are largely in line with the new proposed ceilings.
circles, the company has ~73% revenue coverage), it would We do not expect most telecom companies to reduce tariffs to meet the new guidelines, except under one or 3G subscriber base as a % of total subscriber base two instances. In addition, the telecom companies wouldbe able to charge a “one-time” fee to subscribe to the STVs; hence, they should be able to partially offset any negative impact from an incoming roaming rate cut.
EGoM refers spectrum pricing back to TRAI After the two rounds of spectrum auctions, which received muted response (March 2013 auction received no bids for the 1800MHz and 900MHz spectrum), the recent development whereby the Empowered Group of Ministers (EGoM) has again referred spectrum pricing back to TRAI gives us the belief that the 2G spectrum prices would be lowered again in order to attract the players and make Our take: We believe the licences of Bharti, Vodafone and Idea would come up for renewal starting FY2014 onwards and a reduction in the spectrum payout would Steep cut in the 2G data rates by operators The data contribution to overall revenues has seen a substantial improvement and currently stands in the rangeof 7-9% for the operators.
Revenue market share points towards consolidation In an attempt to further increase the data usage and bring The Q4FY2013 revenue market share data points that the elasticity, the players have slashed their data tariffs in three incumbents, Bharti, Vodafone and Idea, collectively selective circles by 70-80%, which we believe will reflect gained around 180 basis points in the revenue market share in the contribution and overall revenues going forward.
(RMS; adjusted gross revenues). Over the whole year, these three operators have gained an impressive 200 basis pointsin RMS indicating that the industry dynamics are consolidating in their favour. However, consolidation in the industry is seemingly playing out at various levels.
Although the revenue per minute (RPM) growth has disappointed despite reduction in promotion expenses (driven by lower competitive intensity), the traffic growth has resulted in superior margins aided by lower churnand related expenses. The trailing operators have been unable to make dents in the three incumbents’ revenues.
The rupee has depreciated significantly against the dollar recently. This is likely to impact both Bharti and Idea in terms of foreign exchange (forex) fluctuation losses on the income statement and higher interest expenses.
Furthermore, the balance sheets would have to be restated to account for the higher foreign debt.
Consolidated market share of top three players at ~70%; highest in eight quarters Idea has presence mainly in the domestic market (India), implying that impact of forex fluctuations for it would be Improving domestic environment: The recent months limited to its foreign currency denominated debt (that have witnessed a substantial decline in the competitive forms 50% to the total loans of which 50% of the foreign intensity providing the telecom players with an elbow currency loans are hedged, thus the impact may be felt room to increase tariffs and reduce discount and on the income statement in the form of high interest and freebies. We believe that the era of cut-throat tariff war is over. Thus, the telecom companies shouldwitness a gradual return of pricing power. The top three In case of Bharti, its consolidated exposure to foreign operators are likely to benefit from the trend.
currency is high (in the form of long-term forex loan of ~$9billion taken to fund the African acquisition). Also since its Strong data growth opportunity: The data uptake, African business is reported in dollars, the impact of the which was subdued in 2011, has seen a substantial same gets translated into the consolidated revenue (in the improvement, and the operators in their commentary form of high revenues to the extent of rupee’s depreciation sounded very positive on the growth opportunity for coupled with bloated losses). On the consolidated level, this segment and believe that the data would drive the balance sheet‘s long-term debt is bloated with the the next big growth wave for the telecom players.
exchange depreciation, while on the asset side, the fixedasset gets equally impacted by the same amount. Thus, Receding regulatory hurdles: Though the outcomes gauging the impact of rupee’s deprecation in case of Bharti of a lot of regulatory issues remain ambiguous and are is very difficult, as apart from the rupee-dollar movement, being contested in the court of law, we believe that the forex is also impacted by other foreign currency loans the tepid response to the last two spectrum auctions and African currency movements (as apart from the dollar, would result in the lowering of the spectrum prices as the loan is also taken in various other currencies). Thus, and when the licence comes for approval, bringing there are too many variables impacting the final outcome Positive on telecom: Despite improving domestic fundamentals and a decent growth upside from thevoice and data opportunity, the Indian telecom players are trading in the range of 7-7.5x their one-year forward EV/EBITDA. Thus, we maintain our medium- to long-term positive bias on the sector and prefer Bharti and Idea in the Indian telecom space, though Q1FY2014 performance for Bharti as well as Idea would Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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