Rationale for the Investment Ideas - BSE Index

Tata Xenon is Tata's best selling vehicle in Europe. (Photo credit: Wikipedia)

BSE  Index , Sensex 

Strides Arcolab: To fire on all cylinders over next 2 years

Strides Arcolab Ltd (SAL) is well-positioned to capitalise on its strong portfolio of specialty products. We believe specialty segment will deliver superior revenue growth over next 2 years. EBITDA margin will be driven by improved product mix and launch of high margin on co products partially offset by increased spend on R&D and legal expenses to support its FTF portfolio and higher SG&A spend to support its front-end Brazilian business.Net margin will benefit from low interest cost on account of debt repayments over the year.

Q4 performance continues to beat our expectations. Company posted revenue of Rs 687 cr (51% y-o-y) driven primarily by both specialty as well as pharmaceutical segment. Adj. EBITDA stood at Rs 139.9 cr(60.8% y-o-y). Company has reported PAT of Rs 68.4 cr and adjusted PAT of Rs 41.2 cr (652.4% y-o-y).

Specialty Segment:

Revenues from Specialty segment in 4Q CY11 stood Rs. 273 cr (23.8% YoY) with an EBITDA margin of 27.7% (17.3% in 4Q CY10); mainly driven by higher product launches in this quarter.

Company has filed 29 new ANDA and received 25 approvals in CY11 from US FDA. Management plans to commercialise 25 ANDA (approved but not yet launched) in CY12.

Pharmaceutical Segment:

Revenues from this segment increased by63.7% y-o-y to Rs. 408 cr in 4Q CY11 whereas EBITDA margin contracted to 10.6% (21.7% in 4Q CY10).

Pharmaceutical business has primarily benefited from strong sales from its Australasia business coupled with licensing income and high growth from its Global Disease Initiative business.  EBITDA margin was impacted primarily on account of sales mix and higher operating charges.

Maintain Buy: We are introducing CY13 estimates in our projections. Based on our CY 13E EBITDA expectation of Rs 606 cr and assigning a multiple of 7x, we arrive at arevised target price of Rs 669(Previous target price was Rs 470) indicating 22% upside.

Tata Motor DVR: Available at significant discount

Differential voting rights (DVR) share have different voting rights compared to an ordinary share e.g. Tata Motors' DVR share will have only 10% voting right compared to its ordinary share. These shares have a different dividend rate. e.g. In case of Tata Motors, the dividend for DVR has been fixed at 5% (of the face value) higher than ordinary shares e.g. In FY 11, company gave  Rs 4 per share as  dividend (200% on Rs 2/- face value) on ordinary shares and Rs 4.10 (205% on Rs 2/- face value) to per DVR holder. Apart from less voting rights & higher dividend there is no difference between intrinsic ownership rights of DVR & ordinary shares.

We recommend to Invest in TATA Motor DVR with the following Investment Rational:

Management with utmost quality of corporate governance: TATA, the promoters of Tata motors, is considered to be one of the finest institutions amongst the corporate sector; hence a steep discount (~44%) to the ordinary shares, is unwarranted.

Promoter stake sale improves liquidity: Initially, illiquidity and lack of institutional interest has seen DVR trade at a wide discount to the original stock. Probably, it does not make sense for the promoters to hold these shares with 1/10th voting rights. Hence, with the DVR holdings gradually changing hands from promoters to domestic and foreign institutional investors, liquidity in the stock is improving, making a good case for investment. The institutional holding has been on a steady rise over past 3 year from ~13% in Q4 FY09 to ~75% Q3 FY12 respectively. Promoter holding on the other hand has come down from ~84% to ~9% (~4.4 cr shares) during the same period, which is currently valued at ~Rs 670 cr.

Higher Dividend yield: The DVR carry one-tenth the voting rights of the main shares but pay higher dividends vs. the ordinary shares. Dividend yield is 2.7% vs 1.5% on ordinary shares.

Discounting should be rationalized: Historically DVR shares have been quoting at an average discount of ~30% vs current discount of ~45% and we believe this would be bridged.

Even though there are no benchmarks as to what price DVR should trade, globally they are traded at 15%-20% discount as liquidity there is relatively higher. We would suggest investors to buy Tata motor DVR as they are able to get the same intrinsic worth at a significant discount of 45%, which we believe should narrow down to 30%.

We have a hold rating on Tata motors ordinary shares. Adjusted to a 30% discount, DVR should trade at Rs 184 per share which gives a 25% potential upside from current price.