Investor's Eye
[December 20, 2012] | | |
| Summary of Contents STOCK IDEA Aurobindo Pharma
Recommendation: Buy
Price target: Rs247
Current market price: Rs188 A sweet pill Key points -
Looking beyond concerns: Aurobindo Pharma has been reeling under pressures from various quarters including (1) the US Food and Drug Administration (USFDA) scrutiny on some of its key manufacturing facilities; (2) fluctuation in foreign currency resulting in substantial marked-to-market (MTM) losses; and (3) an enquiry by the Central Bureau of Investigation (CBI) into the promoter's links with former chief minister of Andhra Pradesh, YSR Reddy. However, the situation is normalising now. The USFDA has cleared one of its manufacturing units and the management is awaiting USFDA clearance for another unit (Unit VI) that has already undergone USFDA inspection (a positive outcome could bring in incremental revenues of $25-30 million). -
Change in strategy to rejuvenate growth: The company envisages several changes in its business strategy to rejuvenate growth. These include (a) reduction of the dependence on partners in the developed markets (the USA and Europe) and focus on self-driven businesses (through wholly owned subsidiaries) to ensure predictable growth; (b) focus on niche segments like controlled substances in the USA; (c) focus on cost control and margin expansion; (d) investments in upgrading manufacturing units to avoid USFDA action in future; and (e) aggressive product filings in different countries. -
Margins and cash flows to improve going ahead: With the expected increase in the export-led business post-resolution of the USFDA issues, the favourable tilt in the revenue mix is likely to boost the margins, resulting in a relatively much better growth in earnings as compared with revenues. The company has also been able to successfully redeem its outstanding foreign currency convertible bonds (FCCBs) through external commercial borrowings in FY2012 and is well funded to meet its commitment of repaying its long-term debt (close to $80 million) in the current fiscal. Though the net debt level continues to be high (a debt-equity ratio at 1.1x) but we expect the improving operating performance and the consequent strong internal generation of cash flows to ease the stress on the balance sheet (the debt-equity ratio is likely to drop to 0.5x by FY2015E). -
Available at a discount to its peers; initiate coverage with a Buy call: Though the stock has run up recently, it is still trading at a 30% discount to its long-term average multiple (around 13.5x one-year forward earnings) and at close to an average discount of 20% to some of its peers (like Torrent Pharmaceuticals and Ipca Laboratories) despite the fact that it has a relatively much better product pipeline. Thus, we see scope for substantial re-rating of the stock, in line with a distinct improvement in its financial performance. Consequently, we recommend Buy on the stock with a price target of Rs247 (12x average of FY2014 and FY2015 estimated earnings). Any negative development on the nod from the USFDA or any enquiry related to the promoter's links with the politician is a potential risk to our prognosis.
STOCK UPDATE Provogue India
Recommendation: Book out
Current market price: Rs16 Discontinuing coverage Key points -
Value in real estate unlocked but performance of the core retail business much below expectation: We had initiated coverage on Provogue with Buy recommendation in July 2010 with two key reasons: (1) potential revival in branded apparel retail business; and (2) huge hidden value in its real estate subsidiary, Prozone. The value in Prozone was unlocked by hiving off Prozone into a separate listed entity. The stock has almost doubled to Rs40 per share in the past couple of months since listing Prozone in October 2012. However, Provogue's branded apparel business has disappointed with a sluggish growth in the volume offtake. The apparel industry itself has suffered due to implications of higher excise duty and slowdown in the discretionary spending in this segment. Moreover, Provogue has even lagged the industry performance and the growth exhibited by some of its peers like Kewal Kiran Clothing, which is under our active coverage. -
Exit Provogue, Hold on to Prozone: Given the weak performance of Provogue's branded apparel business and a muted outlook in the near term, we believe it would be advisable to exit Provogue. However, we are more optimistic on the real estate business, Prozone, due to its attractive and sizeable land bank, comfortable debt-equity ratio, reputed strategic investors and better outlook for the retail real estate players (post hike of foreign investment in retail). Investors do not stand to lose as the value unlocking in Prozone has largely made up for the weak performance of Provogue. However, note that Prozone is not under our active coverage, though we would endeavor to provide regular update in the viewpoint section of our investor's eye.
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| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | |
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