Investor's Eye: Update - Sun Pharmaceutical Industries, Automobiles, Telecommunications

 

Investor's Eye [March 08, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Sun Pharmaceutical Industries Recommendation: Buy Price target: Rs858 Current market price: Rs818 Price target revised to Rs858 Key points Sun Pharma maintains better traction in US business: Sun Pharmaceutical Industries (Sun Pharma) is set to post a strong performance for Q4FY2013 driven by (a) the consolidation of the newly acquired entities, namely Dusa Pharmaceuticals (Dusa Pharma) and the generic business of URL Pharma (b) a better than expected contribution from Lipodox; and (c) a stronger performance by Taro Pharmaceutical Industries (Taro). Our anticipation is based on the retail sales data gathered from different sources in the USA which shows a fast recovery in the market share of Lipodox despite competition from Janssen Pharmaceuticals (Janssen Pharma). Moreover, the key products of Taro which had recorded an increase in prices in Q3FY2013 continued to maintain the pace of growth in the subsequent months. Earlier, we had anticipated that an increase in the prices of the key products might not sustain in the subsequent quarters and Lipodox may lose a substantial portion of the market share to Janssen Pharma. We increase earnings estimates and price target: We have revised our earnings estimates for Sun Pharma mainly to factor in (a) the better than expected contribution from Lipodox; (b) the first-to-file opportunity on Prandin; (c) the stronger than expected performance of Taro; and (d) the better growth prospects for the newly acquired entities in the USA. Accordingly, we increase our earnings estimates for FY2013, FY2014 and FY2015 by 4%, 5% and 7.5% respectively. As a result, our price target gets revised up by 6% to Rs858, which is 23x average estimated earnings for FY2014 and FY2015. We maintain our Buy rating on the stock.    SECTOR UPDATE Automobiles LCVs defying slowdown Key points LCV segment exhibits strong growth in sluggish market The light commercial vehicle (LCV) segment has shown a strong double-digit growth in an otherwise sluggish automotive market. The LCV segment is the second fastest growing segment recording a growth of 15% year on year (YoY) in YTDFY2013 (April 2012-January 2013). This is in sharp contrast of a double-digit decline in the medium and heavy commercial vehicle (MHCV) sales. The LCV segment with its steady double-digit growth has provided respite to the commercial vehicle players who are currently witnessing a sharp decline in the MHCV volume. The share of LCV in the overall commercial vehicles is steadily rising. The share increased from 53% in FY2011 to more than 60% in YTDFY2013. Proliferation of hub-and-spoke model driving LCV growth The logistics industry is increasingly adopting the hub-and-spoke model, wherein the heavy vehicles ply on highways (hub) while the LCVs ply in cities (spoke), where the movement of heavy vehicles is restricted. The LCVs act as a last mile connectivity delivering products to the end consumers. With the proliferation of the hub-and-spoke model on account of an improved infrastructure, we expect the LCV growth to sustain in double digits. Increased consumption expenditure driving demand for LCV Unlike the MHCV demand, which is directly related to the capital creation and broader industrial activity, the LCV demand is derived from increased consumption expenditure. An increase in the population and a growth in the organised retail sector have fuelled the consumption demand. Apart from the major cities, an increase in the consumption from the tier 1 and tier 2 cities is leading to an increase in the demand for LCV. Also, a strong rural consumption is keeping the demand for LCV in the high trajectory.  M&M and Ashok Leyland to be the key beneficiaries M&M derives 30% of the automotive volumes from the LCV segment. It has broadly maintained its market share in the LCV space. With the strong presence in the pick-up segment, we expect the LCV volumes to remain robust for M&M. Ashok Leyland has successfully ventured into the LCV space with Dost. It plans to come up with a passenger variant of Dost, which would further bolster volumes. Presence in the steadily growing LCV segment has enabled it to mitigate risks in the event of a downturn in the cyclical MHCV industry.     Telecommunications Quarterly revenue market share performance Key points The Telecom Regulatory Authority of India (TRAI) has released the revenue data of the domestic telecommunication (telecom) companies for Q3FY2013. Broadly, the data reveals a muted growth for the sector coupled with a gain in the market share by the incumbents at the cost of new players. We believe the competitive and the regulatory environment is turning favourable for the incumbents. Hence, we maintain a cautiously optimistic stance on the sector, with our penchant for the industry leader, Bharti Airtel (Bharti). We believe that the fundamentals are gradually turning favourable for the top three incumbent players. Hence, we maintain our cautiously optimistic stance on the sector, with our preference for the industry leader, Bharti. Currently, we have a Hold rating for Bharti with a price target of Rs372. Click here to read report: Investor's Eye     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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