Investor's Eye
[February 06, 2013] | | |
| Summary of Contents STOCK UPDATE Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Rs775
Current market price: Rs747 Taro to boost Sun Pharma Result highlights -
Taro Pharma reports bumper Q3: Taro Pharmaceuticals (Taro), which is 66.3% subsidiary of Sun Pharmaceuticals (Sun Pharma), reported a bumper performance for Q3FY2013. It reported a 25.4% year-on-year (Y-o-Y) rise in the net revenues to $185.7 million, mainly driven by an increase in the prices of select products (though the volume declined marginally). The gross profit margin (GPM) expanded by 375 basis points year on year (YoY) to 75.4% during the quarter on a better product mix. It recorded a 575-basis-point Y-o-Y expansion in the operating profit margin (OPM) to 56%, which is the highest ever margin achieved in recent history. Despite a higher effective tax rate of 17.4% (vs 6.8% in Q3FY2012), the net profit jumped by 42.3% to $89.2 million in Q3FY2013. The Q3 performance came substantially better than the Street's as well as our expectations. -
Sun Pharma is set to get strong boost from Taro and Doxil: Sun Pharma is likely to post a better than expected performance in Q3FY2013 on the back of the strong results of Taro. Though, Taro's performance in the subsequent quarters may not be comparable, but Sun Pharma is set to conclude FY2013 on a strong note, mainly driven by some key approvals like generic Doxil (approved recently), generic Maxalt (brand size $333 million) Lexapro (launched in the last quarter, but facing stiff competition) and the contribution from the newly acquired entities. The approval of generic Doxil is especially a key achievement for Sun Pharma and we expect the company to rake in $70-80 million in revenues from this product in a year with a high level of margin (40%+ margin). -
We will revisit Sun Pharma's earnings estimates post-Q3FY2013 results (on February 8, 2013): We expect Sun Pharma to report a 33% Y-o-Y rise in revenues to Rs2,850 crore while its net profit is likely to expand by 34% YoY to Rs896 crore without considering the translational foreign exchange (forex) gains or loss. Taro's revenues and profits represent 34% and 52.5% of our Q3FY2013 estimates for Sun Pharma respectively. We will revisit our earnings estimates for FY2013 and FY2014 after the announcement of the Q3FY2013 results and interaction with the company's management. -
Valuation: We have a Buy rating on the stock with a price target of Rs775, which implies 23x FY2014E earnings per share (EPS). The stock is currently trading at 22x FY2014E EPS. Speciality Restaurants
Recommendation: Buy
Price target: Rs240
Current market price: Rs173 Price target revised to Rs240 Result highlights -
Results in line with expectation: Speciality Restaurants Ltd (Speciality)'s Q3FY2013 operating performance was in line with our expectation with the reported profit after tax (PAT) standing at Rs6.7 crore. Despite the pressure on the discretionary spends, the company managed to post a decent performance with ~12% year-on-year (Y-o-Y) increase in the revenues. The cover turnaround ratio of Mainland China (Speciality's core brand) stood in the range of 1.5-1.65x in Q3FY2013 as against 1.53x in Q3FY2012. The management has indicated that it intends to undertake a price increase of around 4-5% by March-April 2013. The company has maintained its restaurant target rollout plans at 15-16 restaurants per annum under the company owned and operated model. -
Performance snapshot: In Q3FY2013, Speciality's total revenues (including the income from operations) grew by 14.2% year on year (YoY) to Rs61.2 crore (which was in line with our expectation of Rs61.3 crore). The growth was predominantly due to addition of new restaurants in the recent past while the cover turnaround ratio and footfalls (per restaurant) remained under pressure due to inflationary and uncertain macro environment. The increase in operational cost due to addition of new restaurants coupled with additional cost incurred towards operationalisation of Mizuna brand led to a 281-basis-points Y-o-Y decline in the operating profit margin (OPM) to 16.8%. However, the same has improved on a sequential basis by 255 basis points during the quarter. Hence, the operating profit stood flat on a Y-o-Y basis to Rs10.3 crore (slightly better than our expectation of Rs9.8 crore). However, on account of a higher other income and lower incidence of tax, the reported profit after tax (PAT) grew by 38.7% YoY to Rs6.7 crore in Q3FY2013 (which was in line with our expectation of Rs6.6 crore). Outlook and valuation
Speciality remains a leading player in the Indian fine-dining space. Its Mainland China brand remains a market leader for Chinese cuisine. The fine-dining segment is currently under penetrated with plenty of growth potential in tier 2 and tier 3 cities. We remain positive about the company's prospects on account of a potential for margin improvement due to implementation of cost saving measures and the management's intention to focus on its flagship Mainland China brand, which has higher margins. The company has healthy growth prospects and a strong balance sheet with high return ratios. At the current market price, the stock trades at 34.5x its FY2013E earnings per share (EPS) of Rs5.0, 24x its FY2014E EPs of Rs7.2 and 14.5x its FY2015E EPS of Rs11.9. We have tweaked our earning estimates to factor in lower cover turnaround ratio for Mainland China (than earlier estimated) and higher than estimated OPM during the quarter. In line with tweaking of estimates, we have revised our price target to Rs240. We continue to maintain Buy rating on the stock. Apollo Tyres
Recommendation: Hold
Price target: Rs99
Current market price: Rs85 Price target revised to Rs99 Result highlights Revenues below expectations
Apollo Tyres Ltd (ATL)'s Q3FY2013 revenues at Rs3,217.3 crore were below our estimate. Its revenues were impacted due to a sluggish demand in the stand-alone operations. The original equipment manufacturer (OEM) segment for truck tyres in particular has been witnessing pressure with a 40-50% year-on-year (Y-o-Y) drop in volumes. The European volumes also remained flat due to a weak economic scenario. The capacity utilisation levels dropped to 70% in the domestic market and 80% for the European operations. Raw material softening improves margin, but increase in other expenditure limits benefit
ATL realised margin improvement on back of softening of material prices. The company's margin improved by 160 basis points year on year (YoY) and 100 basis points sequentially. However, an increase in other expenditure limited the overall improvement in the margin. Though the margin of the European operations was better than expected, the stand-alone margin was below our estimate. The material prices are expected to remain stable in the near term, thereby supporting the margin. Demand to remain subdued in the near term
The demand in the stand-alone operations is likely to remain subdued in the near term due to weak OEM volumes. The OEM demand for medium and heavy commercial vehicle (MHCV) tyres is declining in double digits. Though the replacement segment is growing in single digit, the overall demand is subdued. Further, the demand in the European market is also expected to remain sluggish in the near term. Outlook and valuation
We have reduced our FY2013 and FY2014 earnings on back of a subdued demand. However, we are maintaining our margin assumptions on back of stable raw material prices. Our revised FY2013 and FY2014 earnings per share (EPS) stand at Rs12.6 and Rs14 per share respectively. We have introduced FY2015 estimate in this note. Our FY2015 EPS stands at Rs15.3 per share. The proposed qualified institutional placement (QIP) would lead to an equity dilution of 20% and is likely to remain a key overhang. We have maintained our Hold recommendation with a revised price target of Rs99. IRB Infrastructure Developers
Recommendation: Buy
Price target: Rs175
Current market price: Rs124 Strong performance continues Result highlights -
Results in line with estimate: For Q3FY2013, IRB Infrastructure Developers (IRB)'s consolidated revenues grew by 22.6% year on year (YoY) to Rs914 crore (in line with our estimate) led by a strong execution in the construction segment and a consistent toll collection across projects. The operating profit margin (OPM) declined to 44.6% as against 45.8% in Q3FY2012. The contraction is mainly on account of a margin contraction in the build-operate-transfer (BOT) segment. Subsequently, the EBITDA is up by 19.4% YoY. The depreciation for the quarter increased by 55.9% YoY (amortisation of Surat - Dahisar project from the current year), partially offset by a lower effective tax rate (deferred tax benefit of Rs16.7 crore due to MVR Infrastructure for the quarter) at 16.1% as against 18.0% for Q3FY2012. Consequently, the net profit grew by 8.6% to Rs143 crore. -
Strong performance by the construction segment: The construction vertical posted a growth of ~29% YoY in revenues to Rs644 crore led by a robust execution in the Talegaon - Amravati, Jaipur - Deoli, Amritsar - Pathankot and Tumkur - Chitradurga projects. Further, the quarter also witnessed a stable/range bound movement in the input raw material prices as a result of which the margin expanded to 27.2% vis-a-vis 24.2% in Q3FY2012. -
BOT division continues its stable performance: The BOT division continued to put up a stable performance with revenues increasing by 10% YoY to Rs269 crore. The growth was largely led by toll revision in the Surat - Bharuch and Surat - Dahisar projects by 9% and 7.5% respectively during Q2FY2013. However, at the operating level, the segment witnessed a decline in the margin by about 363 basis points YoY to 86.2%. Overall, the traffic growth across the projects was 4-5% YoY. -
Earnings estimate revised upwards: We have revised our earnings estimate upwards by 15% for FY2014 to factor in an expansion in the margin as witnessed in the past two quarters on account of a strong execution in the construction vertical and reduction in the interest cost due to partial refinance of debt. We have introduced FY2015 earnings estimate at Rs18.3. -
Maintain Buy with price target of Rs175: We continue to like IRB given its vast portfolio, rich experience, strong financials and healthy cash flows from its operational toll-based projects, all of which provide comfort. However, given the recent string of news in connection to the investments related to Purti Group or the earlier case of one of the promoters being suspected in a murder case, the stock could underperform the broader market in the near term. However, from a long-term perspective, the company holds potential to deliver returns to the investors. Hence, we maintain our Buy recommendation on the stock with a price target of Rs175. At the current market price, the stock trades at 7.8x and 7.5x its FY2013E and FY2014E earnings respectively.
VIEWPOINT Cipla Zyprexa and Dymista elude Q3 Q3FY2013 results below expectation
Cipla reported an 18.7% rise in net sales to Rs2,031 crore on the back of a 38% year-on-year (Y-o-Y) rise in exports of formulations to Rs9,692 crore and a 10% rise in the Indian formulation business. However, the active pharmaceutical ingredient (API) business declined by 16% year on year (YoY) to Rs1,375 crore, mainly due to a high base effect (one-off in Q3FY2012). Though the operating profit margin (OPM) rose by 216 basis points YoY to 22.3%, it came below the Street's expectation of 24-25%, mainly due to a lower contribution from key products like Zyprexa and Dymista (shipment started in Q3). The potential milestone payment of $5-10 million due from Meda Pharmaceuticals (Meda; related to supply of Dymista) also kept eluding the market during the quarter. Moreover, the effective tax rate increased by 498 basis points YoY to 26.2%, which restricted the net profit growth by 25.5% YoY to Rs338.8 crore. The net profit during the quarter is 6-10% lower than the Street's estimate. Domestic formulation business to see muted growth in Q4
During 9MFY2013, the company reported a 17.4% Y-o-Y rise in revenues to Rs2,888 crore from the Indian formulation business. However, the management expects a full year growth from the Indian market at 15-16%, which implies that Q4FY2013 may continue to see a muted growth (7-9%). Dymista remains key growth driver
Cipla started shipment of Dymista during this quarter, which contributed to negligible amount of revenues. We expect a ramp-up in supplies of these products in the subsequent quarters. However, as this product is in launching phase, the real potential is yet to be assessed. Cipla has a manufacturing contract with Meda, which has discovered and developed the drug. Cipla is also the sole supplier for Dymista in the USA and other markets. Cipla has the potential to garner nearly $100 million in FY2013-14 from these products, including milestone payment of $15 million. Though the management has given an OPM guidance of 22% in FY2013 (that implies no impact of Dymista supplies in Q4), we expect these products to help improve the margin as well. Change in management to allow next generation
Dr Y K Hamied, the managing director (MD) and chairman of Cipla, has resigned from the post of MD with effect from March 31, 2013. MK Hamied (nephew of Dr Y K Hamied), who currently holds the position of joint MD, is the next generation entrepreneur and is expected to be in overall command for the day-to-day affairs. However. Dr Y K Hamied will continue as the chairman of the company. Outlook and valuation
Cipla is expected to register a revenue and profit compounded annual growth rate (CAGR) of 16% and 20% respectively over FY2012-14E, on the back of exports and niche products launches in the USA (backed by a ramp-up of Indore facility) and exports of inhalers in Europe. Though the new pricing policy is set to negatively impact Cipla's domestic performance, the performance in the international markets coupled with inorganic initiatives will fast track the growth. We have maintained a positive stance on the stock. The stock currently trades at 20x FY2014E earnings per share.
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