Nitish Kumar's Gujarat Model

Nitish Kumar, CM Bihar, has finally adopted the Gujarat Model, although this model of Gujarat has nothing to do with growth or development but prohibition.  The chief minister is ready to lose 4000 cr of revenues to do away with the social evils associated with boozing.  It is entirely a different thing that during the elections, EC had seized more than 1 lakh liter of alcohol and perhaps alcohol played a great role in the state election.

Now the question remains if the state’s women population will have Ache Din (it is they who had complained to the CM and asked for prohibition) and their male counterparts stop boozing.  This leads to the question does prohibition work.  Well, I have seen Haryana in prohibition but liquor was found everywhere, people would smuggle in liquor from Delhi and/or locally make desi versions.  The women did not have Ache Din, but the government definitely had Bure Din (in terms of revenue).

In the 1920s even United States had prohibition for 13 long years and we had the “bathtub gins” and “moonshine gin” doing the rounds and the drinkers who needed to drink, drank at any cost.

In Gujrat, one can order liquors on the phone and get free home delivery of the choicest brands albeit at a much higher price than rest of India.

The major prohibition side effect in India is mushrooming of illicit liquor vends, which often turns to poison resulting in large scale deaths.  Consumption of cough syrups, which have high alcohol percentage, (Phensedyl and the like) as an alternative rises when alcohol is in short supply and have the potential to doom much more lives than liquor itself.

The ones who want to drink will always find a way to drink whatever might be the cost.  The greatest loser will be the state, not just in terms of the revenue lost from the taxes but also the increased cost in implementation of prohibition.  Another loser will be the restaurants and the travel industry (although Bihar is not a major tourist destination in any case).

The Ache Din finally will be coming for the illicit alcohol manufacturer; the state police, the corrupt ones, who will be more interested in catching liquor bottles and getting their palm’s oiled rather than look after law and order problems and the pharmaceutical companies who might see a spurt in demand for cough syrups, nitrogen pills, tranquilizers.

Finally over the last few months we had raging controversies with politicians asking us what to eat, what to read or what to watch.  While those bans grabbed the headlines and the “experts” debated for hours in the TV how unjust bans were and govt should not interfere with people’s personal choices, I guess the same “experts” will have no objection to this move when the same politicians are defining what we should drink (legal or illegal hooch).

Tata Motors --Turbulent weather ahead

Tata Motors Ltd’s September quarter performance was a huge disappointment even with the low expectation from the market.  After the results were announced, leading brokerage firms have cut price targets for Tata Motors.

On the domestic front, commercial vehicle market (medium and heavy) is still subdued.  A year or so back Tata Motors had poached Mayank Pareek from Maruti in the hopes of reviving the passenger vehicle business and regain market share, this too has not gone as anticipated.

While passenger vehicle sales rose 8.5% year-over-year in the April-October period in India, commercial vehicle sales increased 8%.  Although Tata registered an impressive 14% sales growth for its passenger vehicle portfolio in the seven month period, this growth is still less than anticipated.

Much was expected from the launch of the Genx Nano, Zest, and Bolt models.  Following the launch of the sub 4-meter compact sedan, Zest in August of last year, the automaker’s monthly car sales in the country rose (year on year) after many consecutive months of decline.

After more than a year after launch, Zest is selling one-tenth the volume of its chief competitor, Swift Dzire.

Tata Zica, which is scheduled a January 2016 launch, will come with two engine options – a 1.05-litre 3-cylinder diesel and a 1.2-litre petrol engine. While the former is an all-new unit, the latter is the same that powers the petrol versions of the Bolt and Zest.  The pricing is expected to be Rs 3 lakh – Rs 4 lakh (the buzz being 3.6 lakh).

Rising disposable incomes and low fuel cost and the upcoming 7th pay commission bonanza are supporting growth in the passenger vehicle segment in the country, Tata Motor with its poor quality products (passenger car segment) is not expected to catch much of the action even with its HorizonNext products.

Tata Motor’s passenger car sales are still far behind the market leader Maruti and even with the new launches (Tata Motors plan to launch 3-4 new car every year), new marketing campaign, new brand ambassador (only time will tell if a football superstar can pull customers in non-football countries like China and India) Tata Motors still has poor perception in the customer’s mind (truck like comfort in cars!!).

In fact Goldman Sachs has downgraded Tata Motors to sell from neutral as it believes the stock has priced in better H2FY16 volume growth and margin after H1FY16 slump.

Tata Motors has rallied 16 percent in past three months against a 10 percent fall in the BSE Sensex.  Goldman Sachs believes the stock is going to face headwinds of China’s moderation of growth and volume shift to lower-margin Jaguar brand.  The brokerage has slashed 12-month target price to Rs 363 from 369 and cut FY16-18 earnings per share estimate further by 21-26 percent driven by JLR  margin weakness and elevated depreciation & amortisation charges.

Tata Motors posted a loss of Rs 430 crore in Q2FY16 against profit of Rs 3,290.8 crore in year-ago period (impacted by Tianjin Port explosion).

JLR's operating profit dropped 36.9 percent to 589 million pound in September quarter compared to 933 million pound in same quarter previous year.

"Further, cyclical upturn in the India business remains sub-optimal with upcycle FY18 RoE (return on equity) of 11 percent even as we build-in in revival in the commercial vehicle (CV) market share," it says.

Moreover, the recent Volkswagen ‘Dieselgate’ may also weigh on JLR’s regulatory capex, Goldman feels.

The management in the conference call said that margin erosion was due to temporary challenges—adverse regional mix and product mix, along with high product launch costs, marketing spending and unfavorable forex revaluations.

Although developed countries like the UK and the US are showing higher sales growth, these are not sufficient to offset the fall in China’s sales.  While production in China through JLR’s local joint venture to cater to its domestic market is a positive as it will bring down the prices and help compete against other luxury brands.  This coupled with lower commodity prices might offset the lower sales in China if the company can achieve higher volume sales.

I expect little or no upside from this level (short term) and see the stock hovering around Rs 345-360 in the near term.  My view on Tata Motors remains reduce.  As for long term investing, I see better rates to start taking an investment call as there is a strong possibility of falling in a value trap at the current price level.

DISCLAIMER:  These are my views and I can change them at any time.  I plan to go short on Tata Motors at around Rs 428/- 432/- range but can change my view and even go long at any point of time.  Consult your advisor before going short on Tata Motors.

Black and White

Forest sofa

Life

There was a time when birds would flock to me and bees buzz around, now as I lay down in desolation, no one seems to care, but I dream to stand up once again.

Kurma

This is a photo blog on 2 tortoise in a Kali Temple in North East India where they are fed and loved. The temple has many tortoise in its pond. I succeeded in capturing two on my camera

The Sun will Shine and You will make hay

Sun Pharmaceutical Industries Limited is a Indian pharmaceutical company headquartered in Mumbai with global operations (Indian multinational).

Sun manufactures and markets pharmaceutical formulations and active pharmaceutical ingredients (APIs)

The company offers formulations in various therapeutic areas, such as Cardiology, Psychiatry, Neurology, Gastroenterology and Diabetes. It also provides APIs.

Sun Pharmaceuticals was established by Mr. Dilip Shanghvi in 1983 in Vapi with five products to treat psychiatric disorders.  Cardiology products were introduced in 1987 followed by Gastroenterology products in 1989.

Over the years, Sun has acquired multiple pharmaceutical companies, mostly in stress and successfully turned them around.

Sun Pharma has been under pressure for the past two quarters due to one-time charges due to merging Ranbaxy to itself along with compliance issues (USFDA) at its manufacturing unit (Halol) and the erstwhile Ranbaxy manufacturing units. However, the guidance for lower one-time expenses related to Ranbaxy merger indicates that the worst is probably over.

The con-call post the announcement of the Q2 indicated that Sun has already site transferred Gleevec from Halol to another US FDA approved plant and Ranbaxy merger synergy will be achieved ahead of schedule.  Sun has already sold a division of Ranbaxy (Solus and Solus Care) to Stride Arcolabs for Rs 165 Crore to consolidate the CNS division.

Earlier in September, Sun Pharma had announced plans to sell a manufacturing facility in Ireland (previously owned by Ranbaxy) as part of its consolidation process post the Ranbaxy merger

Post Ranbaxy, Sun through one of its subsidies has agreed to acquire US-based InSite Vision Inc. in a deal worth $48 million (about Rs.300 crore), benefits of which should start coming in the future quarters.  If media reports are to be believed, Sun is in advanced talks to buy a portion of Swiss drug maker Novartis' portfolio of old branded products in Japan in a deal estimated at $300 million (about Rs 2,000 crore).  Japan is the world’s second biggest market (by value) for pharmaceuticals.  The deal if consummated should open up a new market for Sun.

Sun Pharma also expects to get the phase 3 trial data for its novel molecule - MK3222, which was in licensed from Merck and is likely to be filed in CY 2017

Finally Sun is trading at Rs 742/- which is a 38% discount from the high of Rs 1200.7 it achieved a few month back.  Although Sun Pharma is not a cheap stock by any means with a forward PE of 36.2, but I think there is a lot of value in the stock as the earnings improve as the Ranbaxy merger slowly achieves synergy and the new acquisitions starts brining in more cash.

Sun's low-cost advantage, strong brand recognition, and proven capability in manufacturing complex products and turning around companies (Ranbaxy should be turned around pretty soon) supports sustainable long-term profitability.

As the news flow right now is negative for the company (USFDA warning to Halol plant), the price of the stock is down and as the saying goes either you get good news or good price.

I would be buying into the stock in every dips with a holding horizon of 3 years and my conviction is high that Sun will shine in the Indian Stock markets again pretty soon.  As the saying goes “make hay when sun shines” I hope to make hay as the Sun starts shining again but till then I will accumulate Sun Pharmaceuticals.

Disclaimer:  This is my current opinion.  I have a very small holding in Sun Pharma right now which I plan to increase.  I might change my opinion at any time, buy more or sell what I have or short sell.  Please consult your advisor before acting on my opinion.

Samvat 2072 Stock picks

Stocks which have the potential to give handsome returns

1.  Rural Electrification Corporation.
2.  ICICI Bank.
3.  HSIL LTD.
4.  Power Finance Corporation.
5.  Reliance Capital.
6.  L&T