For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. INDIA DAILY March 19, 2013 India 18-Mar 1-day1-mo 3-mo Sensex 19,293 (0.7) (1.7) (0.9) Nifty 5,835 (0.6) (1.8) (1.6) Global/Regional indices Dow Jones 14,452 (0.4) 3.0 9.1 Nasdaq Composite 3,238 (0.4) 0.7 6.3 FTSE 6,458 (0.5) 1.2 8.3 Nikkie 12,444 1.8 9.4 22.5 Hang Seng 22,158 0.3 (4.3) (2.1) KOSPI 1,981 0.7 (0.2) (0.6) Value traded – India Cash (NSE+BSE) 103 131 127 Derivatives (NSE) 1,303 810 1,926 Deri. open interest 1,494 1,475 1,634 Forex/money market Change, basis points 18-Mar 1-day 1-mo 3-mo Rs/US$ 54.1 (5) (27) (61) 10yr govt bond, % 8.0 - 2 (27) Net investment (US$mn) 14-Mar MTD CYTD FIIs 105 1,233 9,471 MFs (20) (250) (1,263) Top movers -3mo basis Change, % Best performers 18-Mar 1-day 1-mo 3-mo TCS IN Equity 1567.0 (0.2) 8.5 27.1 HCLT IN Equity 802.1 1.3 13.7 25.0 INFO IN Equity 2860.8 (0.6) 1.4 24.6 ONGC IN Equity 317.7 (0.5) (3.7) 20.0 DLFU IN Equity 270.1 (0.9) (0.0) 19.9 Worst performers MMTC IN Equity 288.9 (2.5) (51.6) (55.6) WLCO IN Equity 52.0 (1.0) (43.2) (51.6) EDSL IN Equity 78.1 (1.9) (31.2) (47.5) HDIL IN Equity 64.1 (2.2) (10.4) (45.3) IVRC IN Equity 24.8 (2.0) (20.9) (43.7) Contents Special Reports Theme Report Industrials: How to bell the CAD: Manufacturing exports Daily Alerts Company Lupin: FY2014 promises to be an eventful year for US generics Hexaware Technologies: Growth pangs Sector Utilities: Coal pooling: A status check Economy Economy: 1HFY14 borrowings lower, but we maintain caution
32
Embed
India Daily, March 19, 2013 - Kotak Securities...For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.
INDIA DAILYMarch 19, 2013 India 18-Mar 1-day1-mo 3-mo
Sensex 19,293 (0.7) (1.7) (0.9)
Nifty 5,835 (0.6) (1.8) (1.6)
Global/Regional indices
Dow Jones 14,452 (0.4) 3.0 9.1
Nasdaq Composite 3,238 (0.4) 0.7 6.3
FTSE 6,458 (0.5) 1.2 8.3
Nikkie 12,444 1.8 9.4 22.5
Hang Seng 22,158 0.3 (4.3) (2.1)
KOSPI 1,981 0.7 (0.2) (0.6)
Value traded – India
Cash (NSE+BSE) 103 131 127
Derivatives (NSE) 1,303 810 1,926
Deri. open interest 1,494 1,475 1,634
Forex/money market
Change, basis points
18-Mar 1-day 1-mo 3-mo
Rs/US$ 54.1 (5) (27) (61)
10yr govt bond, % 8.0 - 2 (27)
Net investment (US$mn)
14-Mar MTD CYTD
FIIs 105 1,233 9,471
MFs (20) (250) (1,263)
Top movers -3mo basis
Change, %
Best performers 18-Mar 1-day 1-mo 3-mo
TCS IN Equity 1567.0 (0.2) 8.5 27.1
HCLT IN Equity 802.1 1.3 13.7 25.0
INFO IN Equity 2860.8 (0.6) 1.4 24.6
ONGC IN Equity 317.7 (0.5) (3.7) 20.0
DLFU IN Equity 270.1 (0.9) (0.0) 19.9
Worst performers
MMTC IN Equity 288.9 (2.5) (51.6) (55.6)
WLCO IN Equity 52.0 (1.0) (43.2) (51.6)
EDSL IN Equity 78.1 (1.9) (31.2) (47.5)
HDIL IN Equity 64.1 (2.2) (10.4) (45.3)
IVRC IN Equity 24.8 (2.0) (20.9) (43.7)
Contents
Special Reports
Theme Report
Industrials: How to bell the CAD: Manufacturing exports
Daily Alerts
Company
Lupin: FY2014 promises to be an eventful year for US generics
Hexaware Technologies: Growth pangs
Sector
Utilities: Coal pooling: A status check
Economy
Economy: 1HFY14 borrowings lower, but we maintain caution
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
The manufacturing sector remains stunted with ensuing socio-economic consequences
The manufacturing sector accounts for a small portion of GDP, leading to over-dependence of a large part of the population on agriculture. The National Manufacturing Policy (NMP) 2011 intends to boost manufacturing growth so that the sector accounts for a quarter of GDP and generates employment for 100 mn more workers over 10 years. India’s manufacturing exports seem to have large potential when compared with countries like China and Thailand. However, manufacturing has actually slowed and lost share in GDP over the past two years.
All factors of production costlier/unreliable; business is difficult; competitiveness a long way off
The costs of all factors of production have been rising, compared with emerging economies, and their availability is uncertain, affecting India’s competitiveness. (1) Land (acquisition is tough and has stalled several infrastructure and industrial projects); (2) labor (wage costs are rising and skilled and unskilled labor is scarce); (3) material (key industrial raw materials like coal, gas and iron ore are scarce); (4) capital (costs are high and access for small enterprises is difficult). Infrastructure is not fully supportive and regulations are difficult for companies to comply with. While India is grappling with its issues, global manufacturing is shifting from outsourcing due to technology (less dependence on labor for scale-up), resources (shale gas in the US) and political attitudes (rising unemployment).
Currency depreciation and wage differential not enough; much hard work remains
The Rupee’s depreciation and wage growth in peer countries may improve competitiveness. However, much remains to be done. Areas that must be addressed include: (1) Labor – flexible laws, training in certain skills, and productivity, (2) infrastructure – momentum needs to be restored in roads (unviable bids), power (coal, distribution), telecom (spectrum), (3) taxation and trade policies (GST is crucial), (4) technology and depth – needs encouragement by leveraging domestic procurement, R&D incentives and getting PSUs to spearhead and open new vistas. Emphasis on clustering and regulatory framework (compliance costs) can lower costs and risks and encourage innovation and entrepreneurship.
India has attracted MNCs that focus on design and engineering and Indian companies have met quality requirements of global OEMs. India must leverage these strengths rather than emulate only a low labor-cost based strategy as the space is crowded and unsustainable. The relative success of sectors (pharmaceuticals and automobiles) in scaling up their global share and failure to capture a larger market in labor-intensive sectors (textiles) suggest the same. India must nurture sectors such as automobiles and pharmaceuticals, textiles, food and agriculture, which have large untapped potential, and build new sectors (shipbuilding, capital goods and electronics) that can scale up due to the advantage of similar skills.
We identify a few leaders that can manufacture for global demand
How to bell the CAD: Manufacturing exports. India’s manufacturing sector accounts for a small portion of its GDP, compared with other countries, with socio-economic consequences of inadequate jobs and rising import dependence. While the National Manufacturing Policy lists the right goals and intentions, fundamental improvements in labor, infrastructure, tax and encouragement of indigenized technology are needed. India must leverage engineering talent and reliable quality along with lower labor costs to boost its global share of targeted industries.
CAUTIOUS
MARCH 19, 2013
THEME
BSE-30: 19,293
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Pipeline visibility in generics offers comfort in US growth
We estimate core US sales of US$738 mn for Lupin in FY2014 (12% yoy). Growth will be driven by generics – we estimate an addition of US$102 mn (20% yoy). The branded business is expected to decline 15% (to US$128 mn) due to generic Antara launch by Mylan. The generics business is likely to sustain growth momentum over the next few years – visible pipeline offers comfort in generic launches. Life-cycle management of Suprax may provide near-term support—Lupin has an acquisition driven growth strategy for US branded business. Generic Suprax is the key risk factor.
Niaspan may provide near-term upside
We expect generic launches to gain momentum in 2HFY14: Niaspan will be the key launch, expected in September 2013. We estimate US$30 mn in generic Niaspan sales for Lupin in FY2014—there are nine filers but generic entry may be phased and may provide near-term upside.
We highlight US patent lawsuits in which litigation outcome is expected over the next 12 months:
Zymar/Zymaxid (US$100 mn). We expect the district trial verdict: Trial was held in January 2013. We expect the generics to prevail and assume US$13 mn in sales for Lupin.
Nuvigil (US$200 mn). The district trial was held in July 2012 and the verdict is expected in the near term. With five filers, we expect the Nuvigil opportunity to be limited for Lupin.
Trizivir (US$100 mn). District trial is expected to be held in September 2013. We estimate 6% upside to FY2015E EPS from Trizivir in the event of a favorable ruling/launch.
Ranexa (US$370 mn). District trial date set for April 2013. In March 2013, the district court rejected Lupin’s summary judgment motion on invalidity.
Except Zymar/Zymaxid, we do not factor the launch of products under litigation. In the OC segment, the appeals verdict in Yaz will be of interest.
Lupin (LPC)
Pharmaceuticals
FY2014 promises to be an eventful year for US generics. We expect FY2014 to be eventful for Lupin with improved momentum in US launches and pending patent litigation outcomes. We expect Lupin’s US performance in FY2014 to be driven by (1) the launch of Niaspan, (2) ramp-up in the OC portfolio and (3) the launch of ophthalmic products. We do not factor sales from products under litigation (except Zymar) which provides favorable risk-reward, given multiple litigation outcomes in FY2014. We also factor the full impact of generic Antara launch. Higher visibility in the US pipeline and stable branded markets will drive stock returns. We maintain our ADD rating with TP of Rs655 (Rs645 earlier) – 22X FY2014E EPS (no change to estimates).
LupinStock data Forecasts/Valuations 2013 2014E 2015E
• Addition of US$102 mn in generics partly offset by US$22 mn decline in brands
• Maintain ADD with TP of Rs655 (from Rs645 due to roll forward).
Lupin Pharmaceuticals
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5
US launches expected to gain momentum in 2HFY14
We expect a busy US launch calendar for Lupin in FY2014. It is expected to gain momentum in 2HFY14, driven by (1) date-certain settlements: Niaspan, Cymbalta, Trilipix and Renagel; (2) ramp-up in the oral contraceptive portfolio and (3) launch of ophthalmic products: Zymar/Zymaxid.
We estimate ~US$80 mn in addition to core US sales in FY2014—this excludes US$35 mn in Ziprasidone sales in FY2013 during the180-day period. We factor US$100 mn in addition to the US generics business, partly offset by a US$22 mn decline in US brands (generic entry of Antara). We present segment-wise US sales in Exhibit 1.
Our estimate is based on the following assumptions:
Marginal increase in the base business. Higher base effect given FY2013E benefited from a strong flu season.
Limited competition portfolio, driven mainly by the launch of Niaspan. We expect US$60 mn in generic Tricor sales in FY2014 (versus US$50 mn in FY2013E). We assume incremental competition in Tricor (launch of Mylan, Wockhardt) over the next 12 months. There may be upside to our Tricor estimates depending on the entry of competition.
Ramp-up in the OC portfolio. US$68 mn in sales in FY2014E and peak sales of US$100 mn in FY2015E.
Launch of ophthalmic products. The launch of Zymar/Zymaxid is expected to contribute US$13 mn in FY2014E.
Lower Antara sales. We expect Antara sales to decline to US$10 mn in FY2014 (from US$39mn in FY2013E) due to the launch of generic by Mylan.
We do not build in estimates for the potential launch of filings under litigation, Ranexa, Trizivir and Nuvigil. We expect the outcome of litigation in these products in FY2014.
Our estimates do not include the authorized generic launch of Asacol (mesalamine). Generic Asacol approval timeline is uncertain (given that the draft bioequivalence was issued by the FDA in September 2012) with patent expiry in July 2013. Even in the event of a generic launch, we expect the AG launch to be a low-margin opportunity. Lupin received AG rights for Asacol as part of the settlement agreement with Warner Chilcott for Femcon Fe/Loestrin 24 Fe.
Competitive dynamics in Tricor and Niaspan are key assumptions. The FDA warning letter issue for Impax is likely to be favorable for Lupin in certain products (Tricor, Trilipix, Renvela and Renagel) with full impact in FY2015E.
While we do not explicitly provide estimates, we account for the launch of limited-competition modified release products. We believe Lupin may be able to launch a few of these opportunities in FY2014 (Ambien CR, Invega, Glucotrol XL).
Pharmaceuticals Lupin
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: Lupin: US sales, summary 2010-15E, March fiscal year ends, (Rs mn)
Exhibit 3: Lupin: US litigations for oral solids (excluding OC products)
Molecule Name Brand Name Innovator
US brand size
(US$ mn) FTF statusTentative
launch Tentative approval
Final approval
Litigation status Competition Comments
Valsartan; HCTZ Diovan HCTZ Novartis 1,000 No 20-Mar-13 No No Settled Expect multiple players.Mylan is the sole FTF, launched on September 21, 2012. We expect other generics on day 181.
Niacin Niaspan Abbott 920 No Sep-13 No No SettledTeva, Sun, Sandoz, Cadila, Amneal, Mylan, Kremers Urban and Watson are other known filers.
Teva is the FTF and has settled for a launch on September 20, 2013. Lupin has also settled but the terms have not been disclosed. Teva (Barr) may not have the 180-day exclusivity, given the settlement agreement also includes Niaspan co-promotion revenues for Barr.
Duloxetine Cymbalta Eli Lilly 2,900Joint (with 7 more filers)
Dec-13 8-Dec-11 No SettledWe expect competition to be intense during the 180-day period and beyond.
District court ruled in favor of the innovator and upheld the '269 patent, which expires in June 2013 (December 2013 incl the pediatric excl).
Repaglinide; metformin
Prandimet Novo Nordisk 70 No FY2014 12-Mar-12 No Appeals
Actavis and Sandoz are early filers: May have lost exclusivity given no tentative approval within 30 months. Lupin is the only other known filer.
The '358 patent (expiry 2018) has been invalidated by the district court in the Prandin litigation. Novo has appealed the decision.
Choline fenofibrate
Trilipix Abbott 250 No Jan-14 No No SettledImpax, Actavis, Sandoz, Mylan, Anchen are other filers.
Impax settled Trilipix for launch on July 15, 2013 (under certain circumstances) or January 1, 2014. Impax has lost exclusivty, hence other generics may also enter at the same time. Except Sandoz the other generics have settled.
Sevelamer HCl Renagel Sanofi 200 No Mar-14 No No SettledSandoz, Impax and Endo are other known filers. We expect other generics to enter in September 2014, after patent expiry.
Lupin has not received the tentative approval within 30 months.
Sevelamer Carbonate
Renvela Sanofi 450Sole (on Susp); None on Tabs
Mar-14 (on suspension) / Sep-14 (tablet)
No No Settled
Impax is the FTF on tablets. Watson has filed for suspension; Watson, Endo and Sandoz have filed for tablets. We expect other generics to enter in September 2014 after patent expiry.
Impax/Lupin have not received the tentative approval within 30 months. Suspension market may be US$50 mn.
Eszopiclone Lunesta Sunovion 750Joint (with 11 more filers)
May-14 19-Mar-10 No SettledWe expect competition to be intense during the 180-day period and beyond.
Esomeprazole magnesium
Nexium AstraZeneca 2,700 No Nov-14 No No Settled
Ranbaxy is the FTF and has settled for a launch on May 27, 2014. Other filers such as DRL and Teva have settled for a launch in November 2014. Sandoz/Lupin have settled but terms have not been disclosed. Hetero, Torrent, Mylan have also filed.
Memantine Namenda Forest Labs 1,030 No 11-Jan-15 19-Jan-10 No Closed We expect competition to be intense. All the generics have settled the case.
CiprofloxacinCipro (Suspension)
Bayer NA Sole Jan-15 No No SettledOther players are likely to have filed a PIII and may enter after patent expiry, in June 2015.
Lupin settlement terms are unknown: May be six months ahead of the '784 patent expiry (in June 2015). Lupin has not received the tentative approval within 30 months.
Colesevelam WelcholDaiichi Sankyo
350Sole (on
suspension); None on Tabs
Jun-15 No No Settled
Impax is the FTF on tablets: May have lost exclusivity. Impax, Watson and Glenmark have filed for suspension; Glenmark settled for suspension launch in April 2015. Watson and Lupin have filed for tablets.
Suspension sales: US$50 mn; rest comes from tablets. We expect more generics to enter after patent expiry in June 2015. Lupin has not received tentative approval within 30 months.
Lanthanum carbonate
Fosrenol Shire 100Joint (with 2 more filers)
FY2015 No No DistrictLupin/Natco, Teva and Mylan are joint FTFs. Alkem is the other known filer.
Teva and Mylan case settled. Lupin partnered Natco.
Metformin Glumetza Santarus 45 Sole Feb-16 27-Jan-12 No Settled Sun/Watson are other known filers. Lupin has settled for a launch in February 2016.Tenofovir disoproxil fumarate; emtricitabine
Truvada Gilead 1,600 No > Dec-17 No No District Teva is the FTF. Earliest launch in December 2017.
Tenofovir disoproxil fumarate
Viread Gilead 370 No 15-Jan-18 No No District Teva is the FTF.Teva has settled for a launch on December 15, 2017.
Pregabalin Lyrica Pfizer 1,500Joint (with 7 more filers)
Dec-18 Jun-11 3-Jul-12 AppealsWe expect competition to be intense during the 180-day period and beyond.
The district court has upheld the patent expiring in December 2018.
Doxycycline Oracea Galderma 100 No Dec-27 No No AppealsMylan is the FTF. Impax, Amneal and Sandoz are other filers.
532 patent has been held valid in Mylan's case; expires in December 2027.
Valsartan; HCTZ; amlodipine
Exforge HCTZ Novartis 50 No Not known No No Settled Expect multiple players.Marginal opportunity. Teva has received final approval but it is unclear whether it has launched.
Carvedilol Phosphate
Coreg CR GSK 250 No Not Known No No SettledSun Pharma (URL) is the FTF. Anchen is the only other known filer.
All generics have settled, terms unknown. No tentative approvals so far.
Calcium acetate PhosLo Fresenius 50 No Not Known No No SettledRoxane is FTF and has launched. Paddock has also launched. Amneal, Invagen, Nostrum and Cadila are other filers.
Ranolazine Ranexa XR Gilead 370 Sole Not Known No No District Other players may have a para-III filing.Patents expire in May 2019. District trial scheduled for April 2013.
Armodafinil Nuvigil Teva 200 No Not Known No No DistrictActavis and Mylan are FTFs. Watson, Sandoz and Apotex are other filers.
Mylan settled for launch in June 2016. District trial held in July 2012, we expect veridict in the near term.
Abacavir sulfate; Lamivudine; Zidovudine
Trizivir ViiV 100 Sole Not Known No No District No other known filers so far.The litigation in consolidated with Teva (filed for Epzicom). District trial due in September 2013.
Naproxen + Esomeprazole
Vimovo AstraZeneca 250 No Not Known No No DistrictDRL is the FTF. Anchen is the other known filer.
Darunavir Prezista J&J 400Joint (with
Mylan) - only on higher strengths
Not Known No No DistrictTeva and Hetero are other filers. We expect more filers.
Desvenlafaxine Succinate
Pristiq Pfizer 470Shared with 10
filers.Not Known No No District
We expect competition to be intense during the 180-day period and beyond.
We expect generics to file for alternative salt - patent covers only the succinate salt. Alembic launched a 505(b)(2), which is desvenlafaxine-based and hence non-infringing.
Diclofenac sodium Pennsaid Mallinckrodt 50 No Not Known No No District Apotex is the other filer and has settled.
Mesalamine Apriso Salix 50 Sole Not Known No No District No other known filers so far.
Quetiapine fumarate
Seroquel XR AstraZeneca 800 No Not Known No No District Multiple filers.437 patent (expires in 2017) has been upheld by the district court.
LansoprazolePrevacid Solutab
Takeda 400 No Not Known No No District Cadila and Mylan are other known filers.
Celecoxib Celebrex Pfizer 1,600 No Not Known No No District
US brand sizeMolecule name Brand name Innovator (US$ mn) Tentative launch Comments
Rabeprazole 25-Oct-06 Aciphex Eisai 400Launch on patent expiry (on November 08, 2013)
Delayed release tablet. We expect multiple players.
Rifaximin 31-Mar-07 Xifaxan Salix 370 Patents extend until 2029. Tablet. No para-IV filer till date.
Glipizide 3-Jan-08 Glucotrol XL Pfizer 100The last patent ('454) expires on January 07, 2014.
Extended release tablet. Watson is the only generic in the market; launched in 2003 under a settlement with Alza/Pfizer.
Doxercalciferol 7-Apr-10 Hectorol Sanofi 100
The only patent in issue ('116) has been upheld by the district court; expires on February 11, 2014. Lupin may enter after Roxane exclusivity.
Soft gelatin capsule. Roxane (FTF) is a known filer and has received final approval.
Ezetimibe 7-Apr-10 Vytorin /Zetia Merck 770/1,300
Glenmark/Par is the sole FTF and settled for a launch in December 2016. In Mylan case for both Vytorin/Zetia, appeals have upheld the validity of the '721 patent (expires April 2017). We expect other generics to launch in April 2017 for Zetia and after Mylan.
Tablet. We expect multiple players.
Atazanavir sulfate 12-Apr-10 ReyatazBristol Myers
Squibb760
Teva (FTF) settled for a launch in July 2017. We expect other generics after the 180-day period.
Capsule.
Abacavir sulfate / Lamivudine
4/8/2010 / 10-Jan-2008
Epzicom ViiV 400
Teva is the only known filer and has challenged patents expiring in 2016 ('082, '191). ViiV did not sue generics on the patent expiring in 2018 ('540). Teva trial is scheduled for September 2013.
Tablet.
Paliperidone 31-Mar-11 Invega J&J 400No patent protection. Launch on FDA approval.
Extended release tablet. A revised draft guidance for bioequivalence was issued in March 2012.
Telmisartan31-Mar-11
Micardis/Micardis HCTZ/Twynsta
Boehringer Ingelheim
400 Patent expires in January 2014. Tablet. We expect multiple players.
Brimonidine tartrate
11-Oct-11Alphagan P / Combigan
Allergan 200 / 100
No generic entry until January 2022; patent upheld in Apotex case by appeals. Watson filed for Combigan, litigation is ongoing.
Opthalmic solution. Combigan is a combination of brimonidine and timolol maleate.
Fosamprenavir calcium
24-Feb-12 Lexiva ViiV 110
Ranbaxy is the FTF: Filed para-IV against the 2020 expiring patent ('953) but did not challenge the compound patent (expires in 2018). Mylan challenged both and a litigation has been initiated. Lupin may not have challenged the 2018 patent.
Tablet. We expect multiple players.
Raltegravir 2-Apr-12 Isentress Merck 820No litigation is seen; generics may not have challenged the compound patent, which expires in 2023.
Tablet/chewable tablet. Para-IV for Isentress was received in October 2011 (NCE-1).
Fesoterodine fumarate
31-Oct-12 Toviaz Pfizer 100Earliest launch in April 2016 (expiry of 30-month stay). Earliest patent expiry in May 2019.
NCE-1 date on October 2012. We expect multiple generic filers. The filing is not yet reflected on the para-IV update.
Rufinamide 9-Oct-12 Banzel Eisai naEarliest launch in May 2016 (expiry of 30-month stay). Patents expire between 2018 and 2022.
NCE-1 date on November 18, 2012. We expect multiple generic filers. The filing is not yet reflected on the para-IV update.
Date of DMF filing
Source: US FDA, Kotak Institutional Equities
Lupin Pharmaceuticals
KOTAK INSTITUTIONAL EQUITIES RESEARCH 9
Niaspan: Phased generic entry can provide near-term upside
Niaspan (generic name: Niacin; extended release tablet; Abbott) is used to control cholesterol and has annual US sales of US$920 mn. Teva (Barr) was the sole FTF on all strengths (500, 750 and 1,000 mg) and the product is due to be launched on September 20, 2013. Teva has also received FDA final approval for all strengths.
In April 2005, Barr entered into a settlement agreement with the innovator for Niaspan. As part of the settlement, Barr received co-promotion rights for Niaspan, Advicor (Niacin + Lovastatin) in the US (Barr received royalty on sales). In addition, Barr received upfront/quarterly payments for being an alternative supplier of Niaspan for the innovator. Finally, Barr will be allowed to launch the generic version of Niaspan on September 20, 2013 and will need to pay a part of the profits as royalty to the innovator.
Lupin was the second generic to file in January 2009 and has settled the patent litigation. However, the terms of the settlement have not been disclosed. It is unclear whether Teva will still hold 180-day exclusivity as part of the settlement agreement. It appears Teva may have relinquished FTF rights in return for the co-promotion/upfront payments.
We expect Lupin to launch generic Niaspan on September 20, 2013, assuming it gets FDA final approval. There are nine generic filers for the product, but we expect staggered generic entry. We expect 3-4 generics to launch in September 2013 assuming a 24-month approval timeline. In case of a launch in March 2014 (post Teva’s 180-day exclusivity), the upside for Lupin is likely to be limited, given additional generic competition.
We estimate US$30 mn in FY2014 generic Niaspan sales for Lupin: 75% price erosion, 30% share for six months. We expect the margin profile to be superior, given limited competition in FY2014. However, we expect additional competition in CY2014. We estimate FY2015 generic Niaspan sales to erode to US$15 mn with sharp price erosion (we expect the market to erode by over 90%). The entry of additional generic competition is a key risk to FY2014 Niaspan estimates for Lupin.
Exhibit 5: Generic competition for Niaspan
Generic filer Filing period Litigation statusTeva (Barr) Oct-01 Settled
Lupin sales in the US oral contraceptive (OC) portfolio have been less than expected, driven by stretched approval timelines, delayed launches (Yasmin) and litigation setbacks in large brands (Yaz, Ortho Tri-cyclen Lo). The number of competitors/filers has also turned out to be higher than initially expected.
Pharmaceuticals Lupin
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH
There has been some action on the OC front in 2HFY13: Six approvals have been received. Lupin received nine approvals so far—the company launched eight OC products. Generic Yasmin launch is under evaluation, given the ongoing product liability lawsuit against the innovator. Lupin launched the AG for Femcon Fe (in October 2011).
We moderate our estimates for the US OC segment. We estimate sales of US$68 mn in FY2014 (from US$90 mn). We expect the launch of Seasonique and Yasmin in FY2014 and the full-year impact of recent approvals. Timely approvals are crucial and there could be upside to our estimate with the launch of larger opportunities (Ortho tri-Cyclen, Ortho Cyclen, Mircette). There is limited litigation-related news flow expected in the OC segment—appeals verdict on Yaz may be the key event (the district court has ruled in the innovators’ favor).
In our view, delayed launches reduce the opportunity for Lupin given that the company has been an early filer for most of the products. We believe Lupin holds a one-year advantage in filing over its competitors such as Mylan. Lupin filed for the complete portfolio of OC products. However, for key products the market does not seem to reflect a limited-competition opportunity.
Lupin Pharmaceuticals
KOTAK INSTITUTIONAL EQUITIES RESEARCH 11
Exhibit 6: Lupin’s US OC portfolio
Molecule Brand Innovator
US market size
(US$ mn)Litigation
statusApproval
status Launch detailsCompeititors (launched/final approval) Other known filers Comments
Norethindrone Nor-QD Watson 40 None YesLupin launched in September 2011.
Teva (October 2002), Glenmark (April 2010)
Ethinyl estradiol; norethindrone
Femcon FeWarner Chilcott
50 Settled NoLupin launched the AG version in October 2011 under the settlement.
Teva (launched: March 2011), Watson (launched: September 2011)
Mylan (filed: August 2010)
Patent expires in April 2019.
Ethinyl estradiol; levonorgestrel
Lo-seasonique Teva 28 Active YesLupin launched at-risk in December 2011 (shared FTF with Watson).
Watson (launched: December 2011)
Mylan (filed: January 2010)
Patent expires in June 2023. Watson/Mylan settled litigation.
Ethinyl estradiol; norgestimate
Ortho Tri-cyclen Lo
J&J 420 Appeals Yes
Received approval in July 2012; we expect Lupin launch 180-days after Teva's entry in December 2015.
Teva, WatsonSandoz, Mylan, Sun, Ranbaxy, Glenmark
The patent ('819) has been upheld by the district court. Lupin has appealed, we expect a settlement.
Ethinyl estradiol; levonorgestrel
Seasonale Teva 70 Settled Yes Launched in Ocober 2012.Watson (launched: September 2006), Sandoz (launched: January 2011)
No more P-IV filers.Patent expires in June 2017. All generics have settled the litigation.
Ethinyl estradiol; levonorgestrel
Nordette-28 Teva 60 None YesLupin launched in October 2012
Lupin received approval in December 2012, yet to be launched. The company is awaiting ruling in the product-liability case for Bayer; still evaluating the launch.
Teva (launched: July 2008), Watson (launched: September 2010), Sandoz (launched: June 2011)
In April 2012, the appeals court ruled that generics were non-infringing on the '652 patent. More competition is expected in October 2013 on expiry of the '652 patent.
Ethinyl estradiol; levonorgestrel
Alesse Wyeth 100 None YesLupin launched in January 2013
Lupin is expected to launch at-risk on approval (FY2014), filed in December 2009. We expect few more filers to convert from PIII to PIV given that the patent has been invalidated.
Watson (launched: July 2011)Mylan (filed: January 2010)
969 patent expires in January 2024; was held invalid by the district court in June 2012.
Ethinyl estradiol; drospirenone
Yaz Bayer 500 Appeals NoLupin launch expected on expiry of '564 patent (June 2014)
Teva (launched: June 2010), Sandoz (launched: May 2011), Watson (launched: January 2012).
Sun (filed: November 2010), Mylan (filed: March 2011).
In March 2012, the district court upheld the '564 patent as valid.
Ethinyl estradiol; norethindrone
Loestrin 24FeWarner Chilcott
300 Settled NoLupin has settled for a launch in July 2014 (after expiry of the '394 patent).
Watson is the FTF and has settled for a launch in January 2014.
We expect other players to have filed a PIII and to launch along with Lupin in July 2014.
Generic Zymar/Zymaxid likely to be first ophthalmic launch for Lupin
Lupin initiated filings in the US ophthalmic segment from CY2011 and has eight ANDAs pending approval. We expect the launch of the first ophthalmic product for Lupin in FY2014—the launch of generic Zymar and Zymaxid.
Zymar (molecule: Gatifloxacin; 0.3%; Allergan) is an ophthalmic solution to treat anti-bacterial infections. Apotex was the sole FTF on Zymar and received final approval in August 2011. The district court has ruled in favor of Apotex and the appeals verdict is awaited.
Lupin is the FTF for Zymaxid and the earliest launch can be in May 2013 (expiry of three-year exclusivity). Lupin is yet to receive tentative approval for Zymaxid.
In the Lupin litigation for Zymar/Zymaxid (consolidated), the bench trial was held in the district court in January 2013. We expect Lupin to launch generic Zymar following the 180-day exclusivity for Apotex.
Zymaxid was approved in May 2010 and Allergan discontinued sales of Zymar in February 2011. The US market size is US$100 mn. We estimate US$13 mn in FY2014 sales from Zymar/Zymaxid for Lupin: We assume a litigation win for generics and potential launch in mid-CY2013.
Exhibit 10: Zymar/Zymaxid: Product details
US brand size Molecule Brand Strength (US$ mn) Approval date Para-IV submission Patent no ExpiryGatifloxacin Zymar 0.30% 0 28-Mar-03 19-Jul-07 5880283*PED 5-Jun-16
Source: US FDA, US PTO, Kotak Institutional Equities
Exhibit 11: Zymar/Zymaxid: Litigation details
Brand Generic filers Filing date Current statusZymar Apotex Oct-07 District court has ruled in Apotex's favor; awaiting appeals verdict.
Zymaxid Apotex Jan-12 District court trial scheduled for January 2014.
Zymar/Zymaxid Lupin Apr-11/Feb-11
Zymar/Zymaxid Hi-Tech Pharmacal Sep-11/Aug-11
Zymar/Zymaxid litigations in Lupin/Hi-Tech case have been consolidated. The district court held a bench trial in January 2013; verdict awaited.
Source: Bloomberg, Kotak Institutional Equities
Pharmaceuticals Lupin
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 12: Zymar: Litigation timeline
Date Litigation - event detailsNov-07 Allergan initiates patent litigation for Zymar versus Apotex on the '045 patent.
Jan-10 Bench trial held in district court of Delaware.
Jun-10 District court rules claims 1-3 and 6-9 of '045 patent are invalid due to obviousness.
Allergan files motion for new trial on claim 7 of '045 patent.
Oct-11Allergan receives re-examination certificate for the '045 patent from the USPTO; cancels claims 1-3 and 8-11 and issues amended claim 6 and new claims 12-16.Allergan does not request re-examination of claims 4, 5 and 7.
Dec-11 US district court invalidates claim 7 of the '045 patent. Allergan appeals the verdict.
Sep-12 District court dismisses Allergan litigation based on re-examined patent claims. Allergan appeals verdict.
Nov-12 Appeals court upholds the district court verdict issued in December 2011; holds '045 patent invalid.
Jan-13Bench trial in district court of Delaware in the Lupin/Hi-Tech Pharmacal filing for Zymar/Zymaxid litigation (has been consolidated).
Source: Bloomberg, Kotak Institutional Equities
Exhibit 13: Lupin: US ophthalmic filings
Molecule Brand InnovatorUS market
size StrengthTentative
launch Competition CommentsKetorolac tromethamine
Acular LS Allergan NA 0.40% FY2014Akorn, Alcon, Apotex, Sandoz
US district court upholds '819 and '649 patents (expire in August 2014). Lupin has been sued on the '504 patent, which expires in June 2027. Bench trial in Lupin case has been set for July 2013. Earliest launch in August 2014.
The '830 patent (expires in March 2020) upheld by the district court. Currently in appeal.
Moxifloxacin Moxeza Alcon 50 0.50% > Mar'20 LupinThe '830 patent (expires in March 2020) upheld by the district court. Currently in appeal.
Source: US FDA, Bloomberg, Kotak Institutional Equities
Trizivir: District trial scheduled for September 2013
Lupin was the first filer for Trizivir and was sued on the ‘191 patent (expires on March 28, 2016). There have been no other known generic filers for Trizivir. Teva was the FTF on Epzicom (filed in September 2007) and did not challenge the 2016-expiring patents. In June 2011, Teva converted the filing to para-IV on the 2016-expiring patents with a 30-month stay, expiring in December 2013.
Trizivir and Epzicom are combination products of molecules belonging to a class of anti-HIV drugs called NRTI and covered by common patents. The patents on the individual molecules have already expired with only the combination patent (‘191) still in force.
The Epzicom and Trizivir cases have been consolidated. Lupin has not received tentative approval with 30 months expiring in November 2013. The generics have not been sued on the other patents (‘082 and ‘540).
Lupin Pharmaceuticals
KOTAK INSTITUTIONAL EQUITIES RESEARCH 15
Exhibit 14: Trizivir/Epzicom: Product details
US brand size Molecule Brand (US$ mn) Approval date Para-IV submission Patent no Expiry Coverage
5905082*PED 18-Nov-16 Bipyramidal crystalline form
6294540*PED 14-Nov-18 Hemisulfate salt
Abacavir sulfate; lamivudine; zidovudine
Abacavir sulfate; lamivudine
Source: US FDA, USPTO, Kotak Institutional Equities
We do not estimate generic Trizivir sales for Lupin. We expect the patent to be upheld and a generic launch in March 2016 (on ‘191 patent expiry).
The district court trial in the ‘191 patent litigation is scheduled for September 2013. A positive ruling for the generic may provide a limited-competition opportunity for Lupin (assuming FDA approval and at-risk-launch). We would expect a few more generic filers—Mylan has tentative approval under the PEPFAR program.
We estimate peak EPS upside of 6% (net profit of US$16 mn) from the generic Trizivir launch in FY2015. We assume sole generic, 50% erosion, 50% share, 95% EBITDA margin and 30% tax rate.
Claim construction ruling in favor of innovator
The Delaware district court held a joint-claim construction in the Teva/Lupin case. In November 2012, the Delaware district court provided the claim-construction ruling for the ‘191 patent.
The key terms construed were as follows.
Synergism. Synergism is not mentioned in the patent but several claims are related to the synergistic benefit from the combination. Generics claim that synergism is an essential part of the invention and that non-synergistic drug combinations have been disclaimed by the inventor. GSK argues that the synergy was an unexpected result, which was used to overcome obviousness rejections during the patent prosecution.
The ‘191 patent was rejected several times for obviousness given that it was a combination of known molecules that were anyway being used to suppress ant-viral activity. GSK had to repeatedly emphasize the unexpected synergistic action of the combination to overcome the obviousness challenge by the patent examiner – the combination of similar drugs may at best be expected to be additive but may not be synergistic and hence not obvious to one skilled in the art to combine the three drugs to achieve a synergistic result.
Generics argue that the prosecution history provides evidence that GSK did not claim the non-synergistic combinations. The court believes there was never an anticipation rejection for the patent due to previous patents (prior art) but was due to obviousness. Hence there was no need for GSK to start with a narrow claim and then widen the scope at a later point during the prosecution. The court concluded that the innovator had not disclaimed non-synergistic combinations.
A single combined formulation. The dispute in this term is whether “combined” requires the drug compounds to be mixed together within the same mixture (as claimed by Lupin) or to be just part of the same formulation (as claimed by GSK). The court ruled in favor of the innovator.
Following the claim construction ruling, Teva stipulated that its ANDA would be infringing certain claims of the ‘191 patent. The Teva challenge is now only on grounds of patent validity.
Pharmaceuticals Lupin
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 15: Patent details for 6417191
Title Synergistic combinations of zidovudine, abacavir and lamivudine
DetailsThe present invention relates to therapeutic combinations of zidovudine, abacavir and lamivudine, which have anti-HIV activity. The present invention is also concerned with pharmaceutical compositions containing the said combinations and their use in the treatment of HIV infections including infections with HIV mutants bearing resistance to nucleoside and/or non-nucleoside inhibitors.
Inventor GlaxoSmithKline
Issued 9-Jul-02
Expiry 28-Mar-16
Source: USPTO, Kotak Institutional Equities
Ranexa XR
Ranexa (molecule: Ranolazine; Gilead/Roche) is an extended release tablet used to treat angina with US sales of US$370 mn. Lupin is the only known generic filer and it filed in May 2010. Lupin has not received tentative approval within the 30-month period. Lupin has been sued on the following patents, all of which expire in May 2019: ‘607, ‘496, ‘911, ‘057, ‘826, ‘328, ‘814, ‘724, ‘258, ‘062.
The claim-construction hearing was held in January 2012 with ruling provided by the court in March 2012.
In March 2013, the district court of New Jersey rejected the summary judgment motion of invalidity from Lupin.
The district court trial in the patent litigation is scheduled for April 22, 2013.
We do not build generic Ranexa estimates for Lupin. We believe there may be other generic filers that may not have challenged the patents.
Nuvigil: Awaiting district court ruling; limited upside for Lupin
Nuvigil (molecule: Armodafinil from Teva) is a US$200 mn brand, used to treat sleep disorders. Mylan and Watson are the sole FTFs—Mylan on 50,150 and 250 mg tablets and Watson on 100 and 200 mg tablets. There are three other generic filers: Lupin, Sandoz and Apotex.
In July 2011, the Delaware district court issued claim construction ruling on the ‘570 patent (expires in June 2024).
In March 2012, Apotex settled the patent litigation.
In April 2012, Mylan settled for a launch in June 2016.
In July 2012, the trial in the Watson case was held in the district court.
Even in the event of a positive ruling for generics, generic Nuvigil may not be a large opportunity for Lupin.
Exhibit 16: Nuvigil: Product details
US brand size Molecule Brand (US$ mn) Approval date Patent no ExpiryArmodafinil Nuvigil 200 15-Jun-07 24-Jul-09 RE37516*PED 6-Apr-15
7297346*PED 29-May-24
7132570*PED 18-Jun-24
Para-IV submission
Source: US FDA, US PTO, Kotak Institutional Equities
Lupin Pharmaceuticals
KOTAK INSTITUTIONAL EQUITIES RESEARCH 17
Exhibit 17: ANDA filings summary, March fiscal year-ends, 2005-3QFY13
>2005 2005 2006 2007 2008 2009 2010 2011 2012 1QFY13 2QFY13 3QFY13No of ANDAs filed during the period 5 14 17 15 11 28 37 21 25 3 2 8ANDA filings 19 36 51 62 90 127 148 173 176 178 168ANDA approvals so far 10 18 27 34 40 48 64 65 65 68Pending ANDA approvals so far 14 26 33 35 56 87 100 109 111 113 100 - of which para-IV filings 77 86 - of which FTF filings 12 20 22
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Near-term revenue growth challenge to be high on management priority list
The most pressing issue for Hexaware is regaining lost growth momentum. After growing revenues at an impressive 6.7% CQGR from Mar 2010 to Sep 2012, growth has slowed down considerably with 4QCY12 seeing qoq revenue decline of 0.4%. The impact of project restructuring at its top client will continue to have an impact in 1QCY13 as well. Management’s guidance of ‘at least 10%’ revenue growth in CY2013E could be challenging. Growth in the past couple of years was led largely by strong deal wins and improved account mining at some of the top existing accounts. Hexaware needs to win large deals to even grow in line with its mid-cap peers, challenging in our view in a hypercompetitive market.
Competition and high account mortality beyond Top-20 could hurt Hexaware
Hexaware’s growth phase for the past two years was aided by a more rational competitive environment and in many cases uncontested revenues from the Top-10. However, slowdown in outsourcing is driving large companies to chase even small-sized deals which were considered outside the sweet spot for many. As a result, competition has increased and had a direct impact on deal wins for Hexaware, and could continue to hurt its revenue growth prospects if demand environments stay subdued.
Having seen reasonable success in mining large accounts for incremental revenues, Hexaware now needs to extend the same to accounts beyond its Top-20. High account mortality rate among its non-Top-20 clients and low scalability of some of the new accounts acquired in CY2011 and early CY2012 are concerns for Hexaware.
Revenue growth versus profitability: Challenges on both fronts
While revenue growth will be management’s priority in the near term, it needs to do so profitably. Margins had risen to unsustainable levels due to (1) flow-through benefits of Rupee depreciation and (2) under-investment in S&M in CY2012. Correction in 4QCY12 has brought margins to manageable levels and could take longer to recover given the investment in strengthening its sales and account management teams. We stay cautious on Hexaware with a REDUCE rating and an unchanged target price of Rs90/share.
Hexaware Technologies (HEXW)
Technology
Growth pangs. After two-and-a-half years of excellent performance, Hexaware has lost momentum on growth and is dealing with the typical challenge of mid-sized companies, i.e. striking a right balance between growth and profitability. Building momentum, investing in domain and reducing mortality rate of clients outside Top-20 are the top priorities for the company. The company may achieve its next quarter guidance but will struggle to keep pace with the industry in CY2013E. We maintain our REDUCE rating.
Hexaware TechnologiesStock data Forecasts/Valuations 2013 2014E 2015E
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Still working out the modalities, but full price-pooling does not appear to be forthcoming
Full price-pooling, wherein the incremental cost of imports is borne by all power utilities (old and new), does not seem to be forthcoming, thereby substantially diluting the benefits of the process. Industry sources are talking about supplying imported coal at a pre-determined price to actual users of coal, while distributing the deficit (between actual price and supplied price) among the others (old alone or old+new).
In our view, price pooling restricted to new capacities will result in an increase in blended costs of coal by Rs500/ton (Rs0.35/kWh), while distributing the burden over the entire base would yield a more nominal Rs130/ton increase in coal prices (Rs0.09/kWh).
Regulators do not have favorable views on pooling; tariff hikes may meet with stiff resistance
Ten out of 15 state distribution utilities are supposed to have opposed price pooling of coal on the pretext that their finances do not allow them to bear any cost incidence meant to subsidize generation companies. Regulators are of the opinion that it is unfair to pass the burden of higher imports to the consumer due to the inability of Coal India to honor LoAs and generation companies to source alternative fuel.
Physical pooling may be more plausible; logistics may improve
The proposal further seeks to optimize the logistics chain for coal supplies, so that linkage coal, supplied to coastal plants (old and new), is now substituted with imported coal and vice-versa for inland plants. It is estimated that the correspondent savings in logistics costs would be more than Rs10 bn.
We highlight that the actual implementation would be dependent on technical viability and skewed distribution of capacities. According to CEA, up to 20% blending is viable for power plants with some old plants unlikely to run on imported coal at all.
Utilities with no pass-through to benefit from full-price pooling
Coal price pooling (and probably full-price pooling) would be beneficial to private power utilities with no pass-through arrangements (as they save potential import costs). Lanco Infratech and Adani Power, among companies in our coverage universe, rank high among utilities dependent on Coal India, with long-term sale arrangements that do not allow for a fuel cost pass-through.
NTPC and Tata Power may be subjected to lower fuel availability from Coal India, which may be offset through higher fuel-saving incentives (as operational efficiencies will be priced at higher coal prices).
Utilities India
Coal pooling: A status check. A recent directive from the Coal Ministry suggests that coal will be supplied to old power plants (pre-2009 FSAs) at notified prices only—suggesting that the benefit (or absence) of price pooling will be restricted to new power plants. However, physical pooling will be more plausible with coastal power plants likely to receive a higher quantum of imported coal than inland plants, optimizing logistics availability and costs. We see the current proposals as negative for private utilities that have been hopeful of some concessions on import costs.
ATTRACTIVE
MARCH 19, 2013
UPDATE
BSE-30: 19,293
India Utilities
22 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Potential of the pooling scheme
The pooling scheme is proposed to bridge the shortfall in expected coal demand from power plants commissioned over 2009-2015 and supplies from Coal India (CIL). Since CIL is expected to be able to meet just 65% of coal requirement as per letters of assurance (LoAs), the shortfall would be met through expensive imports.
Capacities. We estimate ~47 GW of capacities are likely to be commissioned by FY2015, with potential contracted quantity of 227 mn tons. At 80% of annual contracted quantity (ACQ) the demand for coal works out to ~181 mtpa against coal availability of 104 mtpa. We estimate ~20 mtpa of imports to plug the deficit, meeting ~60% of contracted quantity.
Prices. We factor notified prices of coal at Rs1,398 in FY2015 and price of imported coal at Rs6,000/ton (US$110/ton @ Rs55/US$). The blended price of domestic coal works out to ~Rs1,900/ton assuming only new plants share the burden of imports (35% premium), while the premium is muted (10%) if all utilities share the burden of imports.
Exhibit 1: CIL would need to import 26 mn tons to meet demand from the pooling scheme Projections of imports if CIL were to meet demand from new FSAs eligible under the pooling scheme
2013E 2014E 2015E[A] Production [KIE estimates] 461 471 490[B] Demand from extant FSAsCommitted quantity under pre 2009 FSAs (mtpa) 306 306 306Committed supply (%) 90 90 90Actual supply (mtpa) 275 275 275Committed quantity for non power sector (mtpa) 102 102 102Committed supply (%) 60 60 60Actual supply (mtpa) 61 61 61[B] Demand from extant FSAs (mtpa) 337 337 337[C] Demand from e-auction[C] Assumed e-auction quantity (mtpa) 47 48 50[D] Coal available for new FSAs [A-B-C] 78 87 104[E] Demand from new FSAsLinkage based capacity post-2009 (MW) 27,007 37,350 46,858PLF of new plants (%) 80 80 80[E] Demand from new FSAs 131 181 227
Scenario I (New Plants share the burden)Old Plants 1,292 1,338 1,398 New Plants 1,716 1,828 1,893 Increase over notified 33 37 35 Scenario II (Old and New Share the burden)Old+New 1,387 1,462 1,541 Increase over notified 7 9 10
Notes:(1) We have assumed a scenario wherein CIL cuts supply of its extant power-FSA to 90% and non-power-FSA to 60% and capacities are delayed
Source: Kotak Institutional Equities, Company
Utilities India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 23
Exhibit 2: 48 GW of capacities slated for commissioning post 2009 are eligible for the pooling scheme Details of power-plant capacities commissioned after 2009 and under construction (MW)
Plants commissioned (Post 2009) Under construction (Upto 2015)
Source: Kotak Institutional Equities, Company
Exhibit 3: Pre-2009 capacities would be assured 90% of ACQ supplies Proposed blending of domestic and imported coal (as a percentage of ACQ/LOA quantity)
Exhibit 4: Adani Power and Lanco Infratech are likely to benefit more from the pooling scheme Company-wise break-up of capacities by fuel mix and sales mix (MW)
1HFY14 borrowing front-loaded, albeit less than in 1HFY13
The Central Government will borrow Rs3.49 tn on a gross basis in 1HFY14, completing 60% of its gross borrowing program for FY2014BE. As in most other years, FY2014 borrowing remains front-loaded, but the extent of borrowing is lower than the 66% borrowed in 1HFY13. Given the redemptions in 1HFY14, net borrowing will be Rs2.74 tn, ~4% lower than in 1HFY13. The Government also plans to issue Rs120-200 bn of inflation-indexed bonds, likely to be indexed with WPI inflation.
Rs800 bn of cash balance implies lower WMA of Rs300 bn
Additionally, the Government indicated it would likely carry forward a cash balance of Rs800 bn. Based on this, the WMA limit has been announced at Rs300 bn for 1HFY14 against Rs500 bn at the end of 1HFY13. The Government also announced that in 1QFY14 it would borrow Rs750 bn through the 91-day T-bill (~Rs10 bn less than the 4QFY13 weekly auction size), Rs300 bn through the 182-day T-bill and Rs350 bn through the 364-day T-bill.
Borrowing concentrated in the 10-14 year segment
As per the detailed borrowing calendar, issued by the RBI, the weekly dated securities auction size is Rs150 bn (except for two weeks in August, see Exhibits1 and 2). The borrowing has been spread over 23 weeks similar to 1HFY13 (24 weeks). The borrowing calendar has been spaced out to accommodate the RBI’s FY2014 credit policy and the two advance-tax payment weeks in June and September. The quantum of weekly borrowings has also been broadly maintained. The borrowing has been concentrated again in the 10-14 year bucket with 43.1% of gross borrowings being in this bucket (see Exhibit 3).
Yield movement could be restricted in FY2014
The 10-year benchmark (8.15% GS2022) yield ended on March 18 at 7.88% as the bond market was worried about the 1HFY13 borrowing program announcement. Broadly, the expectation was for 65-67% being scheduled in 1HFY14, as has generally been the norm. We believe this lower borrowing, scheduled for 1HFY14, should not readily be associated with a fall in the bond yield given the lack of clarity on the exact nature of debt-switch that is expected to be announced in mid-April. The debt-switch is likely to imply that the market needs to give up G-Secs maturing in FY2015-17 in lieu of longer-term securities (see Exhibit 4). In this case there is a likely elongation of the duration of the banks’ holdings of G-Secs—a negative for yields. On the other hand, we do not expect yields to rise sharply as the supplies, to a large extent, are likely to be neutralized by OMO auctions—the preferred route for RBI to infuse liquidity given the lack of adequate room on the CRR side. We expect the 10-year benchmark yield to be in the 7.5-8.0% range in FY2014.
Economy.dot
Economy Government Borrowing
1HFY14 borrowings lower, but we maintain caution. The 1HFY14 borrowing calendar was expectedly front-loaded, accounting for 60% of FY2014 budgeted gross borrowing. Even as gross and net borrowing in 1HFY14 is lower than in 1HFY13 it might not be prudent to expect yields to fall significantly in April as the nature of debt-switching strategy to be followed by the RBI/Government is unclear. With our expectation of a floor repo rate of 7.25% we expect the 10-year bond yield to be in the 7.5-8.0% range through most of the year, conditional on the RBI’s OMO schedule.
INDIA
MARCH 19, 2013
UPDATE
BSE-30: 19,293
QUICK NUMBERS
• 1HFY14 borrowing Rs3.49 tn, 60% of budgeted borrowing; net borrowing Rs2.74 tn
• Weekly auction size ~Rs150 bn
• Expect 10-year yield to be 7.5-8.0% in FY2014
India Economy
26 KOTAK ECONOMIC RESEARCH
Exhibit 1: On a gross as well as net basis, the issuance pressure… Monthly gross borrowing (Rs bn)
-
100
200
300
400
500
600
700
800
900
Apr
il
May
June July
Aug
ust
Sept
embe
r
FY2013 FY2014
Source: RBI, Kotak Economic Research
Exhibit 2: …is the highest in August Monthly net borrowing (Rs bn)
-100
0
100
200
300
400
500
600
700
800
Apr
il
May
June July
Aug
ust
Sept
embe
r
FY2013 FY2014
Source: RBI, Kotak Economic Research
Exhibit 3: The borrowing is concentrated in the 10-14 year segment Borrowing calendar for different tenures for 1HFY14, (Rs bn)
Borrowing 5-9 years 10-14 years 15-19 years 20 years+April 450 90-120 180-210 60-90 60-90
May 750 150-200 300-350 100-150 100-150
June 450 90-120 180-210 60-90 60-90
July 600 120-160 240-280 80-120 80-120
August 790 170-220 310-360 100-150 100-150
September 450 90-120 180-210 60-90 60-90
Source: RBI, Kotak Economic Research
Economy
KOTAK ECONOMIC RESEARCH 27
Exhibit 4: Redemption pressure will be high in the coming 5-9 years Maturity pattern of outstanding Government stock (Rs bn)
0
500
1,000
1,500
2,000
2,500
3,000
FY20
14FY
2015
FY20
16FY
2017
FY20
18FY
2019
FY20
20FY
2021
FY20
22FY
2023
FY20
24FY
2025
FY20
26FY
2027
FY20
28FY
2029
FY20
30FY
2031
FY20
32FY
2033
FY20
34FY
2035
FY20
36FY
2037
FY20
38FY
2039
FY20
40FY
2041
FY20
42FY
2043
G-sec redemptions
Source: RBI, Kotak Economic Research
KO
TAK INSTITUTIO
NAL EQ
UITIES RESEARCH 28
In
dia D
aily Sum
mary - M
arch 1
Ind
ia Daily Su
mm
ary - March
19, 2013
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships
Source: Kotak Institutional Equities As of December 31, 2012
Percentage of companies covered by Kotak Institutional Equities, within the specified category.
Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.
* The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over the next 12 months; Sell = We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 31/12/2012 Kotak Institutional Equities Investment Research had investment ratings on 173 equity securities.
19.7%22.0%
35.3%
23.1%
4.0% 4.6%1.7% 2.3%
0%
10%
20%
30%
40%
50%
60%
70%
BUY ADD REDUCE SELL
Ratings and other definitions/identifiers
Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
Corporate Office Overseas Offices
Kotak Securities Ltd.
Bakhtawar, 1st Floor
229, Nariman Point
Mumbai 400 021, India
Tel: +91-22-6634-1100
Kotak Mahindra (UK) Ltd
8th Floor, Portsoken House
155-157 Minories
London EC3N 1LS
Tel: +44-20-7977-6900
Kotak Mahindra Inc
50 Main Street, Ste. 890
Westchester Financial Centre
White Plains, New York 10606
Tel:+1-914-997-6120
Copyright 2013 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein.
This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.
Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have “long” or “short” positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. For the purpose of calculating whether Kotak Securities Limited and its affiliates holds beneficially owns or controls, including the right to vote for directors, 1% of more of the equity shares of the subject issuer of a research report, the holdings does not include accounts managed by Kotak Mahindra Mutual Fund. Kotak Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume currency risk. In addition options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before entering into any derivative transactions.
This report has not been prepared by Kotak Mahindra Inc. (KMInc). However KMInc has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Any reference to Kotak Securities Limited shall also be deemed to mean and include Kotak Mahindra Inc.