Bank of India, Ranbaxy Labs

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs340

Generic Imitrex—exclusivity opportunity for CY2008

Key points

• As part of its settlement with Glaxo SmithKline, Ranbaxy Laboratories (Ranbaxy) has been awarded the 180-day exclusivity for Sumatriptan Succinate, the generic version of Glaxo SmithKline's Imitrex. Ranbaxy will launch the product sometime in December 2008 in the US market.
• The annual market sales for Sumatriptan Succinate (Imitrex®) were USD985 million (IMS- MAT: September 2007). Assuming a market share of 40% for Ranbaxy and a price erosion of 60%, the product can generate revenues and profits of $79 million and $47 million respectively for Ranbaxy during the 180-day exclusivity period. This will translate into incremental earnings of Rs4.5 per share.
• Ranbaxy's strategy of monetising the Para IV first-to-file (FTF) pipeline has paid off and Ranbaxy has four opportunities, including the recently announced deal on Imitrex, addressing a collective market opportunity of $12 billion lined up until 2010. Based on our discount-cash-flow (DCF) calculations, we believe that the FTF opportunities announced so far are collectively valued at Rs2,724 crore, translating into a per share value of Rs68.
• We are in the process of upgrading our revenue and earnings estimates for Ranbaxy and will update you shortly. At the current market price of Rs340, Ranbaxy is discounting our CY2008 earnings estimate by 19.3x. We maintain our Buy recommendation on the stock with a price target of Rs500.
  

Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs432
Current market price: Rs391

Q3FY2008 results: First-cut analysis

Result highlights

• Bank of India's (BoI) profit after tax (PAT) during Q3FY2008 grew by a whooping 101% year on year (yoy) and 20.4% quarter on quarter (qoq) to Rs511.9 crore. The PAT growth was significantly above our and consensus estimates. The strong PAT growth was on the back of robust rise in the interest income, spike in the non-interest income led by treasury gains, and contained operating expenses.
• The net interest income (NII) of Rs1,079.5 crore during the quarter indicates a robust growth of 25.7% yoy mainly due to continued strong growth in advances coupled with an improvement in the net interest margin (NIM).
• The reported NIM of 3.14% for the quarter reflects an improvement of 10 basis points yoy from 3.04% for the year-ago period. The NIM improvement was mainly due to the improvement in yields on advances (115 basis points) and the investments (105 basis points), which outweighed the 83-basis-points year-on-year (y-o-y) increase in the cost of funds.
• During the quarter, the advances grew by a strong 30% yoy to Rs103,657 crore indicating an uptick in the credit off take compared with H1FY2008. The growth in advances was led by a strong growth in foreign advances (up 32.7%). Meanwhile the deposits grew by 27.4% yoy to Rs135,835 crore on the back of a 36% y-o-y growth in the term deposits and a 32.5% y-o-y growth in the current account deposits. However, due to the higher growth in the term deposits, the current account and saving account (CASA) ratio declined to 37% for the quarter from 40.7% a year ago.
• The non-interest income witnessed a whooping growth of 72% yoy to Rs554.1 crore. The growth in the non-interest income was primarily due to the surge in treasury gains, which were up 109% yoy. Meanwhile the fee income grew by a strong 39.5% yoy.
• Notably, the operating expenses were up by only 5.5% yoy, whereas it declined by ~2% qoq to Rs 662.2 crore. The lower operating expense growth can be traced to the decline in other operating expenses (down 13% yoy), whereas the staff expenses were up 17% yoy. As a result of lower operating expenses and strong income growth, the cost-income ratio for the quarter improved significantly to 40.5% compared with 50.6% for the year-ago period.
• Asset quality continued to improve yoy with a 10% y-o-y decline in the gross non-performing assets to Rs1,969.3 crore and a 29.5% decline in the net non-performing assets to Rs633.5 crore. Consequently, the provision coverage for the quarter improved significantly to 78% from 66% for the year-ago period.
• Capital adequacy remains healthy with the capital adequacy ratio (CAR) at 12.5% at the end of December 2007 compared with 11.7% at the end of December 2006.
• At the current market price of Rs391, BoI trades at 10.1x its 2009E earnings per share (EPS), 5x its 2009E pre-provisioning profit (PPP) and 2x its 2009E book value. In view of the higher-than-expected Q3FY2008 numbers, we intend to revisit our earnings model.