Analysts' corner

Hindustan Unilever
Reco price: Rs 225
Target price: Rs 243 

After the detergent category, Procter & Gamble (P&G) has extended its aggression to the shampoo segment. Recently, P&G increased the sachet content of Head and Shoulders and Pantene shampoos by 20 per cent without raising the price. Though Hindustan Unilever (HUL) has not responded yet, it may make similar offers on Clinic and Sunsilk sachets to protect its market share. While such offers are normally for a short period, continuing the same for an extended period will have repercussions for HUL. Shampoo sales contribute close to 7 per cent to HUL’s top line and any counter-move by the company will put further pressure on its already stressed profitability. The stock trades at 20.1x FY2011E estimated EPS (earnings per share) of 11.2. Maintain hold.

 

— Sharekhan

Adhunik Metaliks
Reco price: Rs 127 
Target price: NA 

Adhunik Metaliks (AML) plans captive mining of iron ore at a mine with 25 MT reserves and it is expected to increase the margins of its steel business from 17-18 per cent to 24 per cent by FY12E. Apart from commencing iron ore mining, the company plans to set up a 540-Mw merchant power plant through its 71 per cent subsidiary, Adhunik Power and Natural Resources. The company is expected to deliver an EPS of Rs 28.2 in FY11E and around Rs 34.7 in FY12E on a consolidated basis. The delay in start of captive mining remains a risk. The brokerage has arrived at a SoTP (sum-of-the parts) valuation of Rs 185/share, comprising Rs 41/share of steel business, Rs 91/share of mining business and Rs 53/share for the 540-Mw plant. Maintain buy.

— Emkay Research

Glenmark Pharmaceuticals
Reco price: Rs 274
Target price: Rs 284 

Glenmark announced the settlement of litigation with GSK over patent actions concerning the generic version of GSK’s Malarone tablets. Under the terms of the settlement, Glenmark will be able to market the tablets under a royalty bearing licence from GSK in Q3 CY11. Glenmark’s US sales are around $150 million, and it expects this settlement to provide meaningful upside over the medium term. Malarone, Tarka, Dovonex and Oxycodone are a few product opportunities for which clarity has started to emerge. Glenmark is currently trading at 16x its FY11 consensus earnings estimates against the sector average of around 20x. After a few setbacks on the innovation pipeline side, the street also seems to be assigning zero option value to its new chemical entity franchise. Not rated by the brokerage.

— Macquaire Research

Mahindra & Mahindra 
Reco price: Rs 503
Target price: Rs 635

Mahindra & Mahindra (M&M) announced the acquisition of Renault’s 49 per cent stake in Mahindra Renault (MRPL), the joint venture for manufacturing the sedan, Logan. Till December 2010, Logan will continue to sport the Renault logo, the car will be branded as a Mahindra vehicle afterwards. The company has not disclosed the exact amount paid to Renault for the stake buy.

However, it stated that Renault would pay a share of debt (which will amount to around Rs 170 crore as on March 2009). The valuation of Renault’s stake is on the impaired value of assets (after the impairments, the asset value including current assets was Rs 50 crore in March FY09). Hence, the actual acquisition cost for M&M is not likely to be substantial. While the company will face challenges in re-positioning the product, the risk return is favorable due to the minimal acquisition cost. In the near term, impact on M&M would be minimal. Maintain buy.

— Edelweiss Research