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Brokerage Recommendations

Tuesday, October 15, 2013

Barclays calls a ‘Buy’ on Tata Steel
CMP: Rs. 302           Target Rs. 358
We have been cautious on Tata Steel given our concerns that weak cash flow visibility coupled with firm capex needs would lead to a further increase in balance sheet gearing. The stock has relatively underperformed its regional and global peers over the past year by 32%. However, early signs of a demand rebound in Europe, flexibility in India capex plans (Odisha Phase-II), strategic stake sales of non-core assets, and improving volume growth visibility in the India business make us positive on the stock. We upgrade to OW (from EW) with a revised PT of Rs358 (from Rs264) and Tata Steel becomes our top pick amongst steel producers in the Asia ex Japan region.

Intent to de-leverage the balance sheet is a positive: We sense an increasing willingness by the company to look at strategic options to reduce leverage and improve balance sheet health. It has recently sold various non-core assets and, more importantly, is displaying increasing flexibility in its capex programme (particularly for Odisha Phase-II). We continue to expect negative FCF over FY13-15E but increasing visibility on debt peaking by FY15E is a positive. Besides, there are other options that the company could consider to reduce leverage as highlighted in Figure 20.

Losses in Europe appear to be hitting a trough: Macroeconomic indicators in Europe are showing signs of recovery. Also, Tata Steel’s initiatives, such as reducing headcount, shutting down high-cost facilities, and rebuilding the Port Talbot blast furnace have started to yield results. Given its high operating leverage (high fixed cost), even a marginal recovery in volumes/margins could be a significant positive for the stock price (our sensitivity analysis shows a US$10/t EBITDA increase could lead to c17% upside). While we are not forecasting a sharp turnaround in European profitability, our estimate of US$24 EBITDA/t (vs. US$29/t average since GFC) appears to have limited downside.

Project execution risks reducing: Tata Steel’s Odisha Phase-I (3mt) is tracking its execution timelines and is expected to commission by 4QCY14. Timely execution would improve volume growth visibility beyond FY15. We now assign a US$1bn value for Odisha Phase-I (vs. US$4bn project cost) given reducing project execution risks.

Concerns priced in; upgrade to OW: We upgrade to OW with a revised PT of Rs358 (based on 6x FY15E EV/EBITDA; methodology unchanged) and raise FY15E EPS by 7% (updated currency assumptions).

Emkay calls a ‘Hold’ on Ranbaxy
CMP: Rs. 395           Target Rs. 308
Ranbaxy Laboratories’ Ohm Labs facility has received an Establishment Inspection Report (EIR) from the US-FDA. This establishes clearance of the previously unresolved 483 at this facility All other US-FDA facilities such as Paonta Sahib, Dewas and Mohali are still under import alert and consent decree The possibilities of pending FTFs like Diovan, Valcyte and Nexium getting monetized remains alive but is contingent on the timely approvals of site transfers from the US-FDA

Ranbaxy’s Ohm facility has received an Establishment Inspection Report (EIR) for its Dec’12 inspections. This establishes clearance of the previously unresolved ‘Form 483’ at this facility. An EIR indicates satisfactory resolution of issues related to good manufacturing practices (GMP) raised by US-FDA. We see this as a breather for an otherwise troubled US market operations for Ranbaxy as Ohm Labs is the only facilty, which is allowed to continue supplies in US market. All other US-FDA facilities viz Paonta Sahib, Dewas and Mohali are still under import alert and consent decree. The possibilities of pending FTFs like Diovan, Valcyte and Nexium getting monetized remains alive but is contingent on the timely approvals of site transfers from the USFDA. Although we expect FTFs to be monetized we would like to highlight that with Ohm Labs being the only US FDA approved facility and it being run at full capacity today, incremental launches from this facility might lead to slowdown / decline in base business for the company. We would also like to highlight that a clearance of this facility is in line with our expectations and is henced priced into our Target price. However, it being a sentimental boost to the stock we advise long-term investors to use this as an exit opportunity on rally.

Hanmi expects the drug to generate sales of ~$15mn for them in CY13. We believe Hanmi’s drug might be able to take upto 10% of Nexium share in the market. Hanmi is marketing the product under the brand of “Esomeprazole strontium delayed release capsule” with a local partner, Amneal Pharmaceuticals
Our Take: We reiterate that our Target Price of Rs308 is based on an assumption that Ranbaxy would be able to monetize all key FTFs in CY14E. FTF opportunities NPV comes to Rs. 55 a share. We value base business at 18x CY14E EPS of Rs 14

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