Dishman Pharmaceuticals & Chemicals Ltd (CMP:Rs.97, FY10E - PE : 4x, )

New drug unit to improve CRAMS operations

Dishman Pharmaceuticals & Chemicals Ltd (Dishman), is setting up a Rs.350mn US

FDA and MHRA approvable drug formulation unit at the Bavla plant in Gujarat. In fact,

this facility will be designed to provide complete package of CRAM services, right from

Contract research to Dosage forms, satisfying the entire drug life cycle. The company

plans to finance this investment through internal cash accruals.

Following this arrangement, Dishman is in the process of finalizing a deal with a client

for orders which will account for 30% of the unit’s capacity from its inception. This unit

will however make drugs on a contract basis for its clients. The company has no plans

to enter the generic formulations market.

Multiple expansions to power earnings

Dishman, during FY09 commissioned 4 new plants at its Bavla facility, of which one

has been exclusively apportioned to manufacture Eprosartan API for Solvay that has

increased the Eprosartan capacity from 60tpa to 200tpa. On the similar lines, the

company has assigned one of its other plants to meet the requirements of AstraZeneca’s

14 API supply agreement. Another, two plants have been visited by large MNC pharma

companies like GSK, Pfizer, Novartis and have expressed their interest in entering into

manufacturing contracts going forward.

Alongside, the new Bavla Hi-Potency facility (which is under construction and will

manufacture cancer products for Carbogen-Amcis) is expected to start its operations

from June 2009 ensuring robust earning visibility. Further, additional traction is expected

out of the China facility which is likely to be commissioned from July 2009.

On top of the recent facility expansions (which is the prime indicator growth in CRAMS

business model), the new set up of Rs.350mn drug formulation unit at Bavla indicates

huge potential awaiting in the CRAMs segment for the company. Likewise the recent

agreement with Europe based - Polpharma for co-operative & joint API development

ensures additional contract research & manufacturing business flow for Dishmans’

new facilities.--- L.KANNAN

Kirloskar Oil Engines Ltd

(Rs.56, FY10E - P/E 9x)

Demerger of engines and auto component business from the

Company

Kirloskar Oil Engines Ltd (KOEL) has announced the demerger of Engine and Auto

Component business of the Company into Kirloskar Engines India Ltd (KEIL). After

the demerger KOEL would continue to hold investments in its books while KEIL would

represent core engines and auto component business. KOEL after Q3FY09 results

informed that it’s Board of Directors had constituted a Committee of Independent

Directors to examine merits of reorganizing the various businesses and investments

of the company, including by way of restructuring and /or demerger of the Company.

The effective date of demerger has been decided as 1st April 2009.

Existing shareholders to get 3 shares of KEIL for 4 shares in KOEL

KOEL has fixed demerger ratio at 3:4 which means existing shareholders of KOEL to

get 3 shares of KEIL for every 4 shares held in KOEL. The company has not disclosed

the method of valuation for demerger. But we believe it to be mainly based on book

value and potential value of unlisted investments. We believe the valuation has given

due consideration to potential of unlisted companies (Toyota Kirloskar, Toyota Kirloskar

Auto Parts, T G Kirloskar Automotive etc) which is reflected in demerger ratio.

KEIL ‘s equity capital after the demerger would be ~146mn equity shares of Rs.2 each

(~Rs.291mn). KOEL as on 31st March 2008 held book value investments of ~Rs.4.76bn

which includes strategic investments and investments in mutual funds. The current

market value of these investments is ~Rs.1.9bn and including the book value

investments of non-quoted investments and mutual fund investments, the investment

on the books are at Rs.4.93bn.

KOEL’s valuation has not been reflecting the value of investments it holds in the balance

sheet and because of which we believe the company has taken the decision to demerge

core business into separate company, KEIL.

KOEL has emerged as the flagship holding company for all the auto related businesses

of the Kirloskar group. KOEL also holds strategic investment in Kirloskar Brothers,

Kirloskar Ferrous, Swaraj Engines, Toyota Kirloskar Motors and Toyota Kirloskar Auto

Parts. Apart from strategic investments KOEL has invested in certain unquoted group

companies and mutual funds. KOEL’s listed companies and book value of unlisted

valued at Rs.4.93bn.

Further companies like Kirloskar Brothers, Toyota Kirloskar Motors and Toyota Kirloskar

Auto Parts have been registering impressive growth and would command higher

valuation in long term and would be beneficial to KOEL. We believe after the demerger

of engines and auto component business into KEIL, KOEL would reflect true value of

its investments.

Company Background

KOEL incorporated in 1946 is a part of the Pune based Kirloskar group and is headed

by Mr. Atul Kirloskar. KOEL is one of the leaders in manufacturing of Diesel Engines,

Engine Bearings, Engine Valves & Diesel Generating Sets. These engines find

application in agriculture, material handling, mining machinery, construction equipments

and marine and defence applications. KOEL has manufacturing facilities at six locations

- Pune, Ahmednagar, Nasik, Solapur, Kagal and Hospet( with a proposed facility at

Silvassa coming up). During FY08 KOEL earned 93% of its total revenues from engines

(5HP-11000HP), 5% from auto components (Bearings and Valves) and 2% from other

strategic business unit (Fuel Oil Trading). KOEL also exports its engines and auto

components.----L.Kannan

Mylan to pay $133 mn for rest of Matrix Labs-
The drugmaker said it plans to acquire the remaining 29% stake in Matrix Laboratories Ltd for about $133 mn
Generic drugmaker Mylan Inc said on Thursday it plans to acquire the remaining 29% stake in Matrix Laboratories Ltd of India for about $133 million in a transaction that would add to its 2009 earnings.
Pittsburgh-based Mylan, which already owns 71.2% of Matrix, said buying the remainder and delisting the company from Indian stock exchanges would give it more flexibility and efficiencies.
Mylan said it plans to acquire all remaining 45 million shares for Rs150 ($2.97) a share, 27% above Matrix’s closing share price on 26 March, the last trading day before the announcement.
The delisting from the Bombay Stock Exchange and the National Stock Exchange of India is expected to take about 12 weeks, subject to obtaining regulatory approvals, Mylan said.
Earlier this month Mylan said Matrix received tentative approval from the US Food and Drug Administration for its generic version of Abbott Laboratories Inc’s Kaletra HIV tablets.--- L.Kannan

Markets on 25th march'09 --- Kannan

Capital goods carry the day
Selling pressure saw most of the stocks slip from higher levels, bar realty stocks that held on to their gains and ended firm.
Market recovered most of the day’s losses towards the close of the session, after shedding 41 points in early trades from the day's high of 9706. Tracking weak global
indices, Sensex opened marginally below its previous close. The mood remained bearish and the market slipped on profit booking in index pivotals, public sector units and health care stocks. The market once again witnessed selling pressure and Sensex touched the day's low of 9430 by afternoon amid a choppy session. However, the index recovered, shrugging off weakness on substantial buying in realty and oil stocks towards the close and ended the session at 9668, up 197 points. Nifty gained by 46 points to close at 2984.

The market breadth was positive. Of the 2,586 stocks traded on the BSE, 1,263 stocks advanced, 1,219 stocks declined and 104 stocks ended unchanged. Of the 13 sectoral indices, BSE Realty (index of realty shares) flared up by 6.32% followed by BSE Oil & Gas (up 3.66%), BSE Metal (up 3.31%) and BSE Bankex (up 3%). Other indices were up 0.18-1% each.

Among Sensex stocks, JP Associates was the leading gainer and its stock price soared by 7.51% at Rs84.45. Among other stocks, Tata Power advanced 7.12% at Rs740.20, Sterlite Industries jumped 6.48% at Rs347.35, while DLF, Reliance Infrastructure, Reliance Industries, Tata Steel, Reliance Communications, HDFC Bank and ICICI Bank closed with sharp gains of 3-6%. Among laggards, National Thermal Power Corporation slipped 2.77% at Rs179.95, Bharti Airtel shed 2.05% at Rs591.05, ONGC by 2.02% at Rs763.70, Hindustan Unilever fell by 1.88% at Rs234.70 and Tata Motors lost 1.27% at Rs160.

Over 3.66 crore Unitech shares changed hands on the BSE followed by Cals Refineries (2.62 crore shares), Crompton Greaves (1.27 crore shares), Reliance Natural Resources (1.14 crore shares) and Suzlon Energy (1.12 crore shares). ----- L.Kannan

BIOCON LTD --- Kannan

BIOCON LTD.

Contd..

Biocon starts commercial operations under BMS pact

Biocon has commenced a fully dedicated research and development facility for Bristol-

Myers Squibb (BMS), one of the leading global innovator in Biocon Park, Bangalore.

This which was in line with Biocon’s collaborative research pact with BMS during March

2007. In fact, Syngene – the CRO arm of Biocon, entered into an R&D partnership with

Bristol Myers Squibb (BMS) for providing services for discovery and NCE development.

The initiation of the research and development activity will expand the span of the drug

discovery and development process. Syngene would facilitate contract research

services right from the initial stage of lead optimization to early stages of clinical studies

to Phase I and Phase II trials.

The 200,000 square-foot facility at Biocon Park is dedicated to helping advance Bristol-

Myers Squibb’s work in discovery and early drug development, and is currently occupied

by 270 researchers. The facility will house 360 researchers by the end of the year and

could accommodate as many as 450 employees in the future.

This initiative is to add incremental revenues of about Rs

800mn in FY10

With the commissioning of the new research facility and anticipated ramp up in

researchers count to about 360 (since most of the revenues for Biocon are on Full

Time Equivalent (FTE) basis), we estimate Biocon’s BMS pact would add incremental

revenue of Rs 800mn during FY10E. We expect the peak revenue potential from the

pact will be materialised during FY11E with 450 FTEs and revenue worth Rs 1200mn.

Initially the core research activity would earn revenue for Biocon but subsequently the

additional support activities and possible supply opportunities (like supply of sample

batches during the advance development of molecule) would further boost the earning

potential of the BMS pact FY11 onwards.

Certainly going ahead, the commercial commencement of long awaited BMS research

contract would emerge as a money spinner for Biocon, it also projects the research

capabilities of the company in Global pharma industry. Apart from this, Biocon has few

more medium-term revenue triggers that would maintain growth momentum. In fact,

the commencement of Tacrolimus and mycophenolate mofetil (patent expires in May

2009) API supply to US during Q1FY10 and launching of Glargine (a basal insulin

having market potential of Rs 400mn and only cometitor Sanofi-Aventis) in domestic

market Q1FY10 onwards would power the earnings growth of the company. Biocon

has already got the Drug Controller General of India (DGCI) approval for Glargine.

However, looking at the revenue triggers in the pipeline we maintain our positive stance

on Biocon ---- L.Kannan

MLL is second largest private sector shipping company in India with a
diversified business model. The company primarily focuses on international
seaborne bulk transportation and tanker shipping operations. However,
strategically in order to reduce dependence on the volatile shipping
segment the company has ventured into dredging, offshore and coal mining.
Considering the eternal fact that volatility in freight rates and
cyclicality is a given for the shipping industry, we believe MLL's strategy
to diversify revenue sources is very positive. For FY10, we expect
company's non-shipping businesses, namely, dredging, offshore operations
and coal mining to contribute 26% to its revenues and over 35% to its
EBITDA. In this manner, MLL is expected to arrest the impact of cyclicality
to a large extent. We initiate coverage on the stock with an 'Accumulate'
rating.

Key Investment Highlights
.. Addition of a Rig to augment revenues: MLL has recently received
delivery of it's maiden jack up rig from Keppel's and the same shall fetch
$92,700 per day for 3 years as per its contract with Great Ship. Since no
operating costs are involved, MLL shall earn about $34m directly at EBITDA
level every year.

.. Baltic Dry Index appears to have bottomed: Since the beginning of the
Chinese New Year, the Chinese EXIM trade has picked up gradually and
helped the Baltic Dry Index (BDI) recover from its lows. Also with the
Chinese Stimulus packages, the commodity shipments are likely to rebound
in coming months and further boost the BDI. This bodes well for the dry
bulk business of MLL as it has 30% exposure to spot markets.

.. Coal mines and Dredging provides the hedge: Gaining from experience MLL
has been able to improve it's charter yields continuously by managing its
cost of operating dredgers. Dredging business and coal mines which formed
7% and 3% of the revenues in Q3FY09 respectively is expected to double
their share in revenues in FY10, given the full year operations of all 4
dredgers and mines. This shall help MLL to hedge revenues against the
cyclicality of pure vanilla shipping business.

Valuations
We would have liked to adopt a sum of parts valuation basis, wherein
ideally the offshore business would earn higher PE multiples, but in
current market scenario we conservatively stick to vanilla valuations.
Assigning target PE of 3x on FY9e EPS, which is about 0.4x its FY09
estimated book, our target price of Rs 32.5 provides an upside of over 27%
from current market price of Rs25.6.

---- L.kannan

Markets on March 24: Hourly averages intact--Kannan

After a gap-up opening, Indian markets went down due
to selling at higher end and could not hold the opening
gap. Finally, Sensex closed 47 points up, while Nifty ended
flat. However, mid-cap and small-cap indices posted losses
for the day. On the daily chart, Nifty failed in clearing the
upper boundary of the triangle. Further, on the hourly
charts, after kissing the upper boundary of the rising
channel, Nifty slipped back, in the corner of bears. On
the downside, Nifty has good support of 20- and 40-hourly
moving averages, which are nailed at 2883 and 2843
respectively. The daily KST is still in buy mode, which
points today’s fall as a small dip in the current rally. The
market breadth was in favour of bears with 748 declines
and 470 advances.
The hourly KST gave a negative crossover. Our short-term
bias is up for the target of 3050 with reversal pegged at
2815. However, our mid-term bias is still down for the
target of 2450 with reversal at 3111.
Selling was witnessed across sectors, though some stocks
from banking and realty space found favour. From the 30
stocks of Sensex, HDFC Bank (up 6%), ICICI Bank (up 2%)
and HDFC (up 2%) led the pack of gainers, while Jaiprakash
Associates (down 7%) and Hindalco Industries (down 5%)
led the clutch of losers.

---L. Kannan