Dalal Street

Sharekhan Equity Research is bullish on the prospects of Unichem Laboratoriess and Orchid Pharma. Sharekhan has a BUY recommendation with a price target of Rs 360 and Rs 375 respectively.

Unichem Laboratories:
For Q1FY2008 Unichem Labor atories (Unichem) has reported a sales growth of 12.1% to Rs153.5 crore, which is lower than expectation of Rs165 crore. The growth was subdued largely due to a sharp 18.8% decline in the company’s exports on account of the appreciation of the rupee.

Unichem’s strong brand building efforts, the continued momentum in its power brands and therapy focused marketing initiatives have caused the domestic formulation business to perform in the quarter. The revenues from this segment grew by an impressive 20.9% to Rs126.8 crore.

Unichem’s operating profit margin (OPM) expanded by 80 basis points to 22.4% in the quarter. The management has also indicated that such a high growth rate for this business might not be sustainable going forward. The company expects the growth to moderate in Q2FY2008, due to DPCO-related price cuts imposed on its largest brand Ampoxin towards the end of Q1FY2008. However, a conservative 11.5% growth in this business in FY2008E is doable and remain optimistic about the company’s ability to beat estimates.

At the current market price of Rs245, Unichem is trading at 8.6x its estimated FY2008 earnings. BuyUnichem, with a price target of Rs 360.

Orchid Pharmaceuticals:
Orchid’s top line grew by 18.1% year on year (yoy) to Rs238.2 crore in Q1FY2008. The top line growth was above estimates of Rs223.2 crore. Orchid’s operating profit margin (OPM) expanded by 110 basis points to 29.9% in Q1FY2008. On the other hand, the rising R&D costs (due to FTF filings) and increasing staff costs adversely impacted the margins. On a like-to-like basis (excluding the Rs10 crore incremental cost incurred on FTF filings), the margin expansion would have been even more robust at 530 basis points to 34.1%. Consequently, the operating profit grew by 22.8% to Rs71.2 crore in Q1FY2008.

At the current market price of Rs234, Orchid is quoting at 9.9x its estimated FY2009 earnings, on a fully diluted basis. In view of the bright prospects for the company, Sharekhan retains positive stance on the stock and maintain a Buy call with a price target of Rs 375.

Kotak has a price target of Rs 300 on Orchid Pharmaceuticals.

Breaking News:Citigroup Research has downgraded Ultratech Cement [ULTC] to a SELL with a Price Target of Rs 730 potential downside of 26% from current levels.

UltraTech reported net sales at Rs13.5bn (+17% yoy) on the back of higher domestic realizations (+11% yoy). Production costs rose 11% yoy, due to a 22% jump in coal prices. EBITDA margins were flat yoy (32%) but increased 250bps qoq. PAT came in higher than expected at Rs2.6bn.

Costs came in at Rs9.2bn, largely due to an increase in raw material expenses; +27% yoy on a per tonne basis. Freight costs per tonne increased 10% yoy. Other income doubled to Rs269m. While the sector enjoys pricing power in the near term, the company agrees with that FY09 is likely to see a supply surplus causing pricing pressures. Citi recommends selling into strength.

ULTC as Sell/Medium Risk (3M) with a target price of Rs730. ULTC has been hard hit by higher costs recently, particularly for coal and freight. ULTC should benefit from lower costs
due to the captive power capacity due by FY09, but this is unlikely to help compensate for the 8% yoy price decline. Citi expects a YoY profit decline in FY09. At target price of Rs730, ULTC would trade at an FY09E P/E of 11.4x.

Ambuja Cements:
Citi has also downgraded Ambuja Cements to a SELL. Ambuja Cements adjusted PAT was Rs4.04bn, 23% higher yoy but 5% below our expectations. Reported PAT was Rs8.8bn, including Rs2.2bn as profit from sale of stake in Ambuja Cement India Pvt Ltd and Rs2.6bn from sale of land.

Ambuja Cements [ACL] is a Sell/Medium Risk (3M) with a target price of Rs103. The stock is expensive for the following reasons: (1) limited visibility on cement pricing moving up as a result of uncertainties arising from unfavorable government measures in CY07; (2) a 20% yoy expected decline in CY08E earnings as large capacities are expected domestically, particularly in North India; and (3) the risk to exports, as substantial new cement capacity is coming up in the Middle East.

Target price at Rs103 based on a 10% discount to the historical seven-year average of 8.4x.