[T.S.R:14479] Investor's Eye

 

Investor's Eye: Pulse - April IIP growth robust at 17.6%; Update - RIL (Forays into broadband market), FMCG (India FMCG-the monsoon connect); Viewpoint - Strides Arcolab (Growth at a faster pace)

 

Investor's Eye [June 11, 2010]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK April IIP growth robust at 17.6% STOCK UPDATE Reliance Industries Cluster: Evergreen Recommendation: Hold Price target: Rs1,215 Current market price: Rs1,046 Forays into broadband market; focuses to strengthen E&P assets Key points  After Mukesh Dhirubhai Ambani and Anil Dhirubhai Ambani scarpped the non-compete agreement between them, Reliance Industries Ltd (RIL; led by Mukesh Ambani) has announced its foray into the broadband and data services market. The company has entered into an agreement to acquire 95% stake in Infotel Broadband Services (P) Ltd (Infotel) for Rs4,800 crore through fresh issue of equity shares at par. RIL would be largely focusing on the enterprise and the corporate side of the data market that presently is less competitive and provides high margins. Infotel is the only company to win a pan India (22 circles) broadband wireless license for Rs12,848 crore. On the exploration and procurement (E&P) front, RIL has made large number of discoveries in Cambay Basin and has indicated towards considerable hydrocarbon potential in the block. Though we agree that the discoveries are yet to be certified by the directorate general of hydrocarbons (DGH) and though the exact amount of hydrocarbon reserves cannot be ascertained at the moment, three discoveries in less than two months? time make us comfortable in regard to RIL?s E&P portfolio going forward. The overseas acquisition has also been on the high focus of the company in the recent times. On this front, the media reports are indicating that RIL is considering acquiring stake in two energy assets in the US: 1) Shale gas assets of Pioneer Natural Resources in the Eagle Ford Shale play in South Texas and 2) Some energy assets (including shale gas) from East Resources. The news indicates RIL?s focus on non-conventional energy assets and its plans to enter the US gas market. We highlight here that RIL has not confirmed the news as yet. RIL?s foray into the broadband and data services market and its recent joint venture with Atlas Energy coupled with the news of acquiring assets from Pioneer Natural Resources and East Resources would ensure utilisation of cash flows (around USD10-12 billion over FY2010-FY2012E) that the company is expected to generate from the start of Krishna-Godavari (KG) D-6 field and new Jamnagar refinery.  The company however still faces uncertainties on the following fronts: (1) The gas pricing in the ongoing court case with National Thermal Power Corporation (NTPC; though RIL?s position has strengthened now) and (2) The tax benefits on the natural gas business under section 80-IB (on which clarity is still awaited). Further, in spite of the light heavy price differential (currently at USD3.1 per barrel from USD1.7 per barrel in January 2010) showing signs of improvement with the Organisation of Petroleum Exporting Countries (OPEC) increasing its heavy crude production, the weak commodity prices are likely to keep the middle distillate crack spread weak and thus keep the gross refining margin (GRM) under check. Hence, we maintain our Hold recommendation on the stock with a price target of Rs1,215 in spite of around 16% upside at the current market price. At the current market price, the stock trades at a price/earnings ratio of 12.9x FY2012E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.1x FY2012E. SECTOR UPDATE Fast moving consumer goods India FMCG?the monsoon connect After a drought prone year that led to soaring food prices, India is expected to witness a normal monsoon in 2010 that is likely to lead to a strong growth in food grain production. Thus, higher production coupled with remunerative prices will ensure high disposable incomes for farm-based households and lead to the sustenance of the strong growth in rural consumption. We believe this bodes well for the growth of the fast moving consumer goods (FMCG) companies in general as they continue with their thrust on increasing their rural presence to tap this growth opportunity.  Also, compared to 2009 the likely softening of prices of farm (agriculture) based inputs, such as wheat, milk and milk powder, sugar and tea, will particularly benefit companies such as Britannia Industries, Nestle (India) and GSK Consumer in FY2011 and should lead to an improvement in the profitability of these companies. VIEWPOINT Strides Arcolab Growth at a faster pace Strides Arcolab (Strides) has been receiving approvals on a fast track in CY2010, with eight abbreviated new drug application (ANDA) in the sterile injectable space getting approval in the last three months. With this quantum leap?only three sterile injectable approvals in CY2008 to 23 approvals in the space in CY2010 till date?we believe that the company is well on track to achieve its guidance of developing around 120 products per annum translating into 40+ filings for sterile generic products for the next couple of years each, resulting into a robust portfolio of more than 180+ products. Strides? focus on the sterile injectable space could be well supported by its collaboration with Pfizer for 40 generic injectables in the US market. The first product under this agreement is expected to be commercialised in CY2010. Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com  Manage your newsletter subscriptions