Ranbaxy Labs, HDFC, NDTV

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs500
Current market price: Rs423

Strong triggers for an upgrade

Key points

• The management of Ranbaxy Laboratories (Ranbaxy) has been emphatic in stating that going forward, they will avail of atleast one exclusive product opportunity in the USA every year. While the opportunities for CY2009 and CY2010 have already been lined up, the management plans to announce the CY2008 opportunity in January 2008. The announcement of a product launch under exclusivity in CY2008 could lead to a significant earnings upgrade to Ranbaxy's current CY2008E earnings.
• While Ranbaxy has already announced its intention to de-merge and subsequently list its Novel Drug Discovery Research (NDDR) operations into a separate entity effective from January 1, 2008, the specific framework and other details of the de-merger are yet awaited. While the de-merger will unlock value of the discovery R&D assets, it will also enable the parent company to save about $20-25 million in expenses, which are incurred on NDDR projects annually from CY2008 onwards. This will boost the overall profitability of the core business.
• In a recent media interview, Malvinder Singh, Managing Director and CEO of Ranbaxy has indicated that 2008 will be a stronger year for Ranbaxy as compared with 2007, as the company will strive to focus on more profitable growth through expansion of margins. This would basically come with a more optimum geographic and product mix including niche product opportunities. In light of this, we look forward to a strong vision and guidance given by the management for CY2008 post the announcement of the CY2007 results in January 2008.
• With the acquisition of a significant stake in Zenotech Laboratories (Zenotech), Ranbaxy plans to market Zenotech's oncology and biopharmaceutical pipeline across emerging markets immediately and developed markets over the next two-three years using its strong global reach and regulatory expertise. We may see some revenues from these avenues to flow in from the second/third quarter of 2008.
• At the current market price of Rs423, Ranbaxy is available at 23.9x its CY2008E earnings. However, the announcement of the exclusive opportunity for 2008, the strong guidance provided by the management post CY2007 results and the disclosure of the NDDR de-merger details could lead to significant earnings upgrades and hence generate strong buying interest from investors in the near-term. For now, we reiterate our Buy recommendation on the stock with a price target of Rs500.

Housing Development Finance Corporation
Cluster: Evergreen
Recommendation: Buy
Price target: Rs3,362
Current market price: Rs2,919

Value unlocking to continue

Key points

• Housing Development Finance Corporation (HDFC) has agreed to sell 8.1 crore equity shares representing 7.2% of the paid-up equity capital of HDFC Standard Life Insurance Company (HDFC SLIC) to Standard Life of the UK. Consequent to the sale, Standard Life would hold 26% stake in HDFC SLIC, while HDFC will hold around 72.4% stake and the employees of HDFC and other group companies would hold the remaining 1.6% stake.
• The main highlight of the deal has been that both the parties, HDFC and Standard Life, have officially agreed that any further stake sale in HDFC SLIC between the two entities would be at a fair market value. This is a big positive for HDFC as current pricing methodology restricted HDFC from realising current market valuation for its stake sales in its insurance venture so far.
• HDFC SLIC has also unveiled plans of coming out with an initial public offer (IPO) before 2009 end, which we feel would further help HDFC in unlocking value in its subsidiaries.

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VIEWPOINT

New Delhi Television

Promoters make open offer
With a slew of new channel launches in the second quarter of FY2008, NDTV stepped in the execution phase of its mega plans in the broadcasting space. It has recently launched four channels, the lifestyle channel NDTV Good Times, NDTV Arabia that caters to the news and infotainment market in the Middle East and north Africa, NDTV MetroNation, an English channel catering to Delhi and the national capital region (NCR) and Astro Awani Malaysia, a Bahasa language channel launched through its joint venture with Astro. These ventures are a testimony to NDTV's intention to be a major player not only in the Indian broadcasting arena but also other countries of Asian region.