[T.S.R:14781] IIFL: RCOM (De-leveraging makes RCOM M&A savvy); Biocon (Confident on performance; investing more on R&D); Balkrishna Inds. (Growth picks up); Events calendar

Hi,
 

RCOM (De-leveraging makes RCOM M&A savvy, REDUCE): RCOM's towers will increase in value only if the merged tower company (which we call GTL Infratel) turns out to be truly neutral. According to our calculations, the merged company needs to raise US$1.7bn from new investors to contain the shareholding in the merged company of the current Reliance Infratel shareholders at 50% or less. This is a tall task, and we understand that shortly, details on this will become available. We believe that with a stronger balance sheet, RCOM's prospects of divesting 26% equity stake (as per the board resolution passed) are much brighter. However, we retain REDUCE on the stock in view of its sharp rise in recent times, as the industry—and particularly RCOM—has some way to go before a state of healthy revenue growth returns. But a back-of-the-envelope calculation based on the value of its various assets suggests an upside of 15% from the CMP of Rs202.
 
Biocon Ltd (Confident on performance; investing more on R&D, ADD): Our recent management meeting has added to our confidence in Biocon's prospects—more customers for new immunosuppressant products in US and semi-regulated market penetration of glargine insulin will be new drivers for the biopharma business, while Syngene (contract research subsidiary) will benefit from the general pick-up in the industry. However, the step-up in R&D spend, partly offset by continuing strong licensing fee income, could weigh on FY11 earnings growth; we expect it to pick up in FY12 (we estimate ~30% core earnings growth). Higher spend on R&D, we believe, improves the company's prospects in the large biosimilars opportunity in regulated markets. We raise our FY11 and FY12 revenue estimates by 3-5%; lower our core EPS estimate for FY11 by 5% to account for higher R&D spends, but raise it for FY12 by 1%. We raise our target price to Rs364 from Rs342, and retain ADD.
 
Balkrishna Industries (Growth picks up, BUY): In our recent meeting, Balkrishna Industries's (BIL) management said tyre demand continues to pick up across geographies, and hence FY11 volumes are likely to be at its previous expectation. We expect BIL to increase tyre prices to partly offset the increase in raw-material costs and the depreciation of the euro. We now expect a marginal dip in earnings in FY12, as opposed to our earlier expectation of an increase; accordingly, we cut our FY12 earnings estimate by 10%. We leave our FY11 earnings estimate unchanged, as BIL has covered forex exposure for FY11, and an acceleration in volume growth is likely to offset the increase in raw-material cost. The stock is trading at a PER of 5.5x on FY11ii, which is reasonable, in our view. We cut our target price to Rs721 from Rs770, but retain BUY.
 
Thanks & Regards,
 
IIFL – Institutional Equities
 
Mumbai
 

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