ShareKhan Investor's Eye April 5th, 07

Inflation above market estimates
The inflation data for the week ended March 24, 2007 stood at 6.39%, much above the market and our estimates of 6.25% and 6.17% respectively. Again the inflation data for the week ended January 27, 2007 has been finally revised upwards by 11 basis points to 6.69% on account of higher manufacturing and primary article inflation. After three weeks where the inflation hovered around the 6.46% level the latest 7-basis-point decline is mainly due to a higher base effect. We expect the inflation to decline further as the base becomes higher and higher from the current levels
going forward. However, the inflation in the food articles and manufacturing segments does warrant some caution, as the government’s measures so far have not provided
the desired results.
Primary articles and manufacturing keep inflation higher
The prices of primary articles continue to remain firm with the prices of food articles and non-food articles contributing to the higher inflation from this segment. Among the food articles mention may be made of the pulses, fruits and vegetables while in the non-food articles it is mainly the prices of oil seeds and minerals that have shot up. The fuel and power index has remained stable while the
manufacturing index, which has a 63.75% weightage, has shown a persistent increase and contributed to the higher inflation. Among the manufactured products food products edible oils and grain mills oil cakes top the chart in terms of the price increases. The basic metal steel has shown a 15% increase in the prices, which has spread across to other products as steel in some form or the other is used as a
raw material for many manufacturing industries. To prevent further contribution to the inflation from the steel prices the government has asked the steel companies to hold back the price increases.

Outlook
The increase in the prices of food articles is mainly due to the supply constraint pressures that cannot be resolved overnight. The large scale imports of wheat and the pulses could be a temporary solution but for a more durable solution we need to increase our agricultural produce, for which measures have already been announced in this year’s budget. The Reserve Bank of India (RBI) has also played its part by sucking out liquidity from the market to the tune of almost Rs42,500 crore by increasing the cash reserve ratio three times (50 basis points each time) in a span of three months. Since the demand push factors are in full swing to contribute to the higher inflation the RBI has made sure that less and less cash is available in the system to fuel this demand until the new supply hits the market. We feel the higher base effect will provide the leeway for the inflation to slowly but surely head downwards and settle below the RBI’s comfort zone of 5-5.5% assuming that the
current inflation trend continues. Our inflation estimate for the week ended March 31, 2007 is at 5.83%.



STOCK UPDATE

Orchid Chemicals & Pharmaceuticals
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs390
Current market price: Rs265

Orchid enters Canada

Key points

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Orchid Chemicals & Pharmaceuticals (Orchid) has received the approval from the Canadian Therapeutic Product Directorate for two of its abbreviated new drug submission (ANDS)—Cefoxitin and Ceftriaxone.
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These approvals mark Orchid's foray into the Canadian formulation market.
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Both Cefoxitin and Ceftriaxone are niche injectable products and have been generic for a couple of years. The size of the Canadian market for Cefoxitin is $5 million and that for Ceftriaxone is $30 million.
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As per company sources, Ceftriaxone has five competitors (Roche, Mayne Pharma, Sandoz, Nova Pharma and Pharmaceutical Partners of Canada Inc) while there is no generic competition for Cefoxitin.
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As per our back-of-the-envelop calculation, the product approval would add Rs0.4 per share to the FY2008 earnings.
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At the current market price of Rs265, Orchid is trading at 10.2x its FY2008E earnings. In view of the company's strong fundamentals and an improving balance sheet we remain positive on the stock and maintain our Buy call with a price target of Rs390.

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,715
Current market price: Rs1,650

Exceeding expectations

Bharat Electronics (BEL) has announced its provisional results for FY2007. The gross sales have grown by 12% to Rs3,960.4 crore in FY2007, lower than our estimates of Rs4,191 crore. However, the improvement in its margins and a surge in the other income component have resulted in a relatively much higher growth of 21.8% in the profit before tax (PBT) to Rs1,041.6 crore (ahead of our estimates of Rs996 crore) during FY2007. This essentially implies that the PBT has shown a robust growth of 27.8% during the fourth quarter.