Ranbaxy, SEAMEC, Crompton Greaves

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs412

Board clears proposal for hiving off discovery R&D

Key points

• The board of Ranbaxy Laboratories (Ranbaxy) has cleared a scheme of demerger of the company's New Drug Discovery Research (NDDR) unit into a subsidiary, Ranbaxy Life Science Research Ltd (RLSRL). The demerger scheme is subject to requisite approvals.
• Under the scheme of demerger, all assets, liabilities, research personnel and pipeline related to the NDDR unit will be transferred to RLSRL. In consideration, each shareholder of Ranbaxy will receive one equity share of Re1 each of RLSRL for every four equity shares of Rs5 each held in Ranbaxy.
• The demerged company will be an independent company, the equity shares of which will be listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), while global depositary receipts (GDR) will be listed at the Luxembourg Stock Exchange. All approvals required for the scheme to come into effect are expected in the 2nd half of 2008.
• The demerger will enable the company to explore various funding options for the NDDR projects as well as allow for enhanced focus and dedicated resources for long-term value creation.
• The demerger will also improve the profitability of the core manufacturing business. The management has indicated that the demerger will result in savings of approximately $25 million in CY2008. The savings have already been factored into our estimates.
• At the current market price of Rs412, Ranbaxy is trading at 19.3x its base CY2008E earnings and 16.8x its base CY2009E earnings. We maintain our Buy recommendation on the stock with the sum-of-the-parts price target of Rs558 (20x CY2009E earnings of base business plus Rs68 for exclusivity opportunities).

SEAMEC
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs273
Current market price: Rs165

Price target revised to Rs273

Result highlights

• Q4CY2007 results of SEAMEC have been quite disappointing. The revenues during the quarter declined by 64% year on year (yoy) to Rs22.3 crore from Rs61.6 crore due to lesser deployment of vessels. During the quarter, SEAMEC III was the only vessel that was fully deployed, while SEAMEC II and SEAMEC IV were not operational due to up-gradation or repair work for longer duration than expected. SEAMEC I was also under-utilised due to premature termination of contract.
• The company registered an operating loss of Rs11.6 crore as against the operating profit of Rs30.4 crore during the corresponding quarter last year (Q4CY2006). The company incurred dry docking expense of Rs10.3 crore during the quarter.
• The company suffered a net loss of Rs15.9 crore during the quarter as against the net profit of Rs25.9 crore during Q4CY2006 on account of lower revenue generation and higher dry docking expenses.
• On yearly basis, the revenues registered a modest growth of 7.1% to Rs170.4 crore, while the operating profit declined by 28.2% to Rs50.8 crore.
• With SEAMEC II to be out of operations for a minimum of six-month duration and delay in up-gradation of SEAMEC IV, we expect the company's performance to suffer during H1CY2008. Consequently, we are downgrading our CY2008 estimates to Rs23.1 per share from the earlier estimate of Rs33.5 per share.
• At the current market price, the stock trades at 7.2x CY2008 and 5.2x CY2009 estimated earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs273 (8.5x CY2009 earnings).

Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs423
Current market price: Rs313

Price target revised to Rs423

Key points

• The M9FY2008 performance of Crompton Greaves Ltd (CGL) has been below our expectations. The power system business of the company displayed sluggish growth in its revenues. While in Q2 the revenue growth saw a set back due to a fire in a transformer plant, the Q3 revenues grew by only 13.1% due to logistical problem and delay in the delivery of orders.
• In the recent conference call, the management of the company has guided for a revenue growth of 19% in the power business, 20% in the industrial business and 15% in the consumer business in FY2008. The guidance was below our earlier estimates, leading us to the downgrade our estimates.
• In this report, we are also introducing our FY2010 earning estimates and expect CGL revenues and profits to grow at a compounded annual growth rate (CAGR) of 21.6% and 33.7% respectively over FY2007-10E.
• The standalone order book of the company remained flat at Rs2,175 crore, while the consolidated order book of the group stood at USD1.3 billion. We expect the order inflow to pickup from Q4FY2008 onwards.
• On a consolidated basis, the company reported net sales of Rs1,713.5 crore, while the net profit was at Rs82.7crore. The consolidated operating profit margin (OPM) increased by 80 basis points quarter on quarter (qoq) to 10.9%. An year-on-year (y-o-y) comparison could not be made, as the quarterly consolidated numbers were not reported earlier.
• We have downgraded our earnings estimates by 8.8% and 4% respectively for FY2008 and FY2009. Our revised earning per share (EPS) estimates now stands at Rs10.6 and Rs14.4 for FY2008 and FY2009 respectively.
• We remain bullish on the stock and reiterate Buy recommendation with a revised price target of Rs423. We have valued CGL based on 23x FY2010E EPS, which is based at 15% premium to our target multiple of Thermax.
• CGL is one of the largest players in the power sector and with the acquisition of Pauwel, Ganz, and Microsol has plugged the gaps in its products and services offerings. We believe these valuations are attractive because of (a) Robust operating performance of the company on a standalone basis; (b) Higher geographical width and product depth of the company due to its subsidiaries and (c) Management's expertise in turning around the operations of the subsidiaries. At the current market price, the stock trades at 21.7x and 17x its FY2009E and FY2010E consolidated earnings.