Sell while the going is good

Sell while the going is good
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First Published: Sat, Jun 02 2007. 12 11 AM IST

Analysts are advising clients to sell Air Deccan shares while the going is good. Once United Breweries Holdings’ open offer to Deccan shareholders closes, it could be a while before its share price returns to these levels. That’s because Deccan’s losses are expected to continue for some time and there would be little justification for a market valuation of Rs1,450 crore.
Deccan traded at Rs105 just a month ago, 28% lower than current levels, and it was only after rumours of the induction of financial investor hit the markets that the stock moved up to the Rs140-145 levels.
Analysts also argue that, based on the price UB has paid, Deccan’s enterprise value/sales ratio (after capitalizing operating leases) is at only at a small discount to what Jet Airways is trading at currently. UB hasn’t got Air Deccan cheap.
The consensus view seems that with three major airline groups—Jet/Sahara, Kingfisher/Deccan and Air India/Indian—emerging with a total market share of 80% or so, price competition should reduce and that can stem the bleeding in airline companies. But, depending on who’s making the estimate, Deccan would have to raise ticket prices by Rs400-700 to stem its losses.
Even after the consolidation in the industry, it’s unlikely that average prices can be raised that high. After all, capacity addition continues at a fast pace and until demand comes in line with supply, it would be impractical to raise prices. Based on the large number of firm aircraft orders placed by domestic operators, it will be a while before the oversupply situation is remedied.
Most analysts have also dismissed the synergy benefits being talked about by Deccan. While there will be some benefits on sharing facilities and on maintenance, that won’t be enough to change the bleak outlook on profitability.
In sum, it makes sense for shareholders to tender shares in the open offer. The only hitch is that minority shareholders account for 58% of the company’s capital, and if all shareholders exercise the option to sell in the offer, only 35% of each shareholder’s holding will be accepted on a pro-rata basis. It thus makes sense to even offload shares in the market at a slight discount of 6% to the open offer price.
The Cipla stock has been one of the major gainers in the past week, moving up 9.4%. But that’s only because it had been hammered badly after its March quarter results, with the stock falling more than 20%. All it has done is made up some lost ground.
For the March quarter, net sales increased by 6.3% compared to the year ago period, while net profits fell a huge 34%. Even if we exclude the extraordinary income of Rs20 crore arising out of an insurance claim in the fourth quarter of FY 2006, net profits are down 26%. That was below the lowest analyst estimates and it’s no wonder that the stock has been pummelled black and blue.
The problem lies in exports of APIs (active pharmaceutical ingredients, used for making bulk drugs), which declined by 27% year-on-year. As a result, even though formulations exports were up 16%, overall exports increased by a mere 0.5%. API sales were also down because of the higher base as exports in the fourth quarter of FY 2006 were inflated by exports of Sertraline API to Teva. The silver lining came from domestic sales, which have done well.
The product mix also turned adverse with higher volumes of low-margin anti-retrovirals. The upshot: an 18.5% decline in operating profits and a 5 percentage points decline in operating margins.
With analysts’ earnings estimates for FY08 at around Rs10, the recent bounce may not be sustainable.
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First Published: Sat, Jun 02 2007. 12 11 AM IST
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