[T.S.R:14430] Investor's Eye

Investor's Eye [June 09, 2010]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Bharti Airtel Cluster: Apple Green Recommendation: Hold Price target: Rs350 Current market price: Rs272 Zain deal sealed Bharti Airtel has achieved the closure of the purchase of Zain Telecom?s African assets. The enterprise value for the said deal is pegged at $10.7 billion (the equity amount being $9 billion). The company has made $7.9 billion cash payment while, as per the agreement, the balance $400 million would be paid by the year-end on achievement of certain milestones. Zain Africa now becomes a 100% subsidiary of Bharti Airtel and henceforth would be called Bharti International BV. The successful closure of the deal at a competitive interest cost (approximately 2%) and the end of the uncertainty surrounding the auction of 3G spectrum augur well for the stock. However, the impending roll-out of mobile number portability that poses a risk for the incumbent players like Bharti Airtel having high average revenue per user, post-paid customers and the uncertain regulatory environment remain an overhang on the stock. Thus, though from a valuation angle the stock looks attractive (at 6.8x FY12 enterprise value/EBITDA), we maintain our Hold recommendation on the stock with a price target of Rs350. Any positive news flow from Zain Africa and clarity on the regulatory environment would act as the key positive triggers for the stock.    Glenmark Pharmaceuticals Cluster: Apple Green Recommendation: Buy Price target: Rs400 Current market price: Rs259 Glenmark gets favourable ruling to launch Tarka  Glenmark Pharmaceuticals (Glenmark) has got a favourable verdict from a US court in its patent litigation against Abbott Laboratories (Abbott) and Sanofi-Aventis over the blood pressure reduction drug ?Tarka?. The total market for Tarka in the USA is around $60 million per annum. Glenmark has already got approval from the US Food and Drug Administration for launching the drug and is expected to start selling the drug effectively from June 9, 2010.  The emerging visibility of such niche generic opportunities in the USA (received approvals for Oxycodone, Malarone and Zetia amongst others in the recent past) is a positive read-through for the company. The Tarka opportunity in FY2011 followed by Oxycodone and Malarone in FY2012 highlights Glenmark?s ability to create value in the USA and provides impetus over the next couple of years. We also believe that the risk-reward ratio is in favour of the investors as there are signs of impending turnaround in the base business. The outlicencing deal of GRC 15300 has reaffirmed the strength in its new chemical entity pipeline. More outlicencing deals and milestone payments could thus spring a positive surprise on our estimates.  In view of the expectations of a healthy business performance and the favourable risk-reward ratio, we maintain our Buy recommendation on the stock with a price target of Rs400 (15x FY2012E core earnings for the base business plus Rs74 per share for the research and development pipeline). At the current market price of Rs259, the stock trades at 13.2x FY2011E earnings and 12.0x its FY2012E earnings.

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