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STOCK IDEA Jyothy Laboratories
Recommendation: Buy
Price target: Rs254
Current market price: Rs180 Shining bright Key points -
Chip off the old block: With the successful integration of Henkel, which it had acquired in early FY2012, and the induction of a new management team led by a professional chief executive office (CEO; S Raghunanadan, who successfully built brands like Moov among other notable achievements) Jyothy Laboratories Ltd (JLL) is transforming itself from a one-brand wonder to an aggressive fast moving consumer goods (FMCG) player focused on gaining market share in a wide range of categories (including premium detergents, household insecticides, dishwash and deodorants). The new team has taken bold decisions including the restructuring of the distribution network and the margins for the channel partners, the implementation of technological solutions to modernise the supply chain and the adoption of better manufacturing practices. -
Set to grow exponentially: Given the company's highly focused strategy to leverage on its strong brand portfolio, the management is confident of surpassing the industry growth rates and gaining significant market share in categories like detergents (Henko and Ujala) dishwash (Exo and Pril), household insecticides (Maxo coils and liquids) and personal care (Fa deodorants and talc; and Margo soap). We estimate JLL's top line would grow at a compounded annual growth rate (CAGR) of close to 25% over the next three years (FY2013-16). What's more, the strong revenue growth is likely to be accompanied by a considerable improvement in the operating profit margin (OPM; resulting from lower distribution margins and efficiency gains; margin improvement of over 300 basis points expected over the next three years) and a declining interest burden (through the repayment of the debt taken to acquire Henkel using internal accruals). This would result in an exponential growth in its earnings. -
Focus on improving balance sheet: JLL has taken steps to reduce its working capital requirements by revamping its supply chain network. It also plans to reduce the debt on the consolidated books by improving its profitability and selling some of its non-core assets. The company targets to achieve a debt/equity ratio of 0.5x by FY2015 as against 0.9x at present. With an improvement in the margin, the return ratios of the company are expected to get back in double digits by FY2014 and cross 20% by FY2016. -
Recommend Buy; price target of Rs254: For the company FY2013 was a year of integration and implementation of several initiatives that would reflect in its financial performance from FY2014. With a close to 25% growth in revenues and a potential for substantial improvement in the OPM, we expect JLL's consolidated bottom line to grow exponentially over the next three years. Hence, we are initiating coverage on the stock with a Buy recommendation. Our price target for the stock is Rs254 (we have valued the stock at a 25% discount to the average multiple of some of the large FMCG companies). Our price target is based on an investment horizon of 18 months. At the current market price the stock is trading at 21.7x FY2015E earnings per share (EPS) of Rs8.3 and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.8x.
STOCK UPDATE Sun Pharmaceutical Industries
Recommendation: Buy
Price target: RsUnder review
Current market price: Rs996 Q4FY2013 results-First cut analysis Result highlights -
Q4FY2013 profits better than expected: Sun Pharmaceuticals Industries (Sun Pharma) reported a 31.8% year-on-year (Y-o-Y) rise in the net sales to Rs3,071.5 crore in Q4FY2013, which is nearly 5% lower than our estimate. A lower than expected revenue is mainly attributable to the weak performance of Taro Pharmaceuticals (Taro) during this quarter. The operating profit margin (OPM) remained flat year on year (YoY) at 41% (in line with expectations) during the quarter. However, due to the lower than estimated interest costs and depreciation, the profit before tax jumped by 18.5% YoY to Rs1,281 crore. Moreover, the effective tax rate declined by 252 basis points YoY to 13.8% (vs our estimate of 19.7%), which helped the company to post an impressive 23.3% Y-o-Y rise in the net profit to Rs1,011.6 crore. The reported net profit during the quarter is 17% better than our estimate. -
US business drives growth; Indian market witnesses relatively slower growth: During the quarter, the US business grew by 77% YoY to Rs1,788 crore. The growth has been contributed by two months' revenues of the newly acquired generic business of URL Pharma and three months' revenues of Dusa Pharma. However, the revenues from the Indian formulation business witnessed an 11% Y-o-Y decline due to a high base effect. On normalised basis, the revenues from the Indian formulation business jumped by 16% YoY to Rs780 crore, which is below our estimate of Rs956 crore for the quarter. The company reported a 22% Y-o-Y rise in the revenues to Rs394 crore from the rest of the world (RoW) markets. The management is confident of maintaining growth momentum in the key geographies. -
Management guides for 18-20% growth for FY2014: The management has guided for an 18-20% revenue growth for FY2014 at a constant currency from the existing business. It also indicated that the company aims to surpass $3 billion mark in the next three years. The growth guidance for FY2014 is significantly higher than our estimate of a 14% growth from a high base in FY2013. The company targets 28 abbreviated new drug application (ANDA) filings for FY2014 and a capital expenditure of Rs800 crore.
We have Buy rating on the stock. We will revisit our estimates and price target shortly. PTC India
Recommendation: Buy
Price target: Rs88
Current market price: Rs58 Q4 results surprise positively; price target retained at Rs88 Result highlights -
Volume drove earnings growth in Q4FY2013: Driven by a significant volume growth (of 54% year on year [YoY] and 15% quarter on quarter [QoQ]), the sales of PTC India (PTC) grew by 52% YoY and 17% QoQ in Q4FY2013. The benefit of higher volume percolated to the operating and net profit levels as well. The operating profit grew by 59% YoY and 71% QoQ in the quarter. Sequentially, a higher volume of power trading through a tolling arrangement (up 34% QoQ) and a subdued price of imported coal helped the operating profit margin to expand by 73 basis points. The profit after tax (PAT) improved by 69% QoQ to Rs38 crore. However, on account of a lower other income, the PAT grew by 23% YoY despite a 59% growth at the operating level. On an annual basis also, the earnings were largely driven by the volume growth.
We attended the analyst meet of PTC recently. We present below the key takeaways from the event. -
Power trading business set to see a healthy volume growth: The management of PTC expects the power trading volume to increase to approximately 32 billion units (BU) in FY2014 and around 38BU in FY2015. This volume growth would be driven by an improving volume from short-term trading, incremental tolling capacity of 150MW once the Meenakshi project gets operational, incremental supply (of over 2000MW and over 4000MW in FY2014 and FY2015 respectively) from the upcoming projects in long term arrangement. -
Higher share of tolling and long-term volume to improve margin: Currently, the tolling business of PTC is the key margin kicker, being in a sweet spot (due to lower prices of imported coal and a healthy merchant price rate). With an incremental capacity of 150MW expected in Q1FY2014, the volume under tolling arrangement could go up in FY2014. Further, we sensed the management's emphasis on long-term capacity arrangement, which is expected to bring in higher volumes with an incremental capacity of about 6000MW in the next two years. Effectively, PTC expects a healthy volume growth for the next two to three years. The share of long-term volume and tolling volume should also move up which will help the margin to expand. -
Positive development in sticky receivable issue: Pending receivables to the tune of Rs1,800 crore cumulatively from the Tamil Nadu State Electricity Board (TNSEB) and Uttar Pradesh SEB (UPSEB) were a major hangover for the company. However, the combined outstanding receivable from the SEBs has come down to Rs1,142 crore (Rs 773 crore from UPSEB and Rs 368 crore from TNSEB) by the end of FY2013. Further, the management of PTC expects the dues from the TNSEB to be negligible in the next couple of months. The receivable in the balance sheet dropped by Rs439 crore YoY to Rs2,142 crore in FY2013. On account of this positive development, cash generation from the operations of the company turned positive to about Rs435 crore in FY2013 against negative cash flow operation of above Rs800 crore in FY2012. -
View-retain Buy with price target of Rs88: Currently, the stock is trading at 11x and 10x its FY2014 and FY2015 earnings estimates respectively. We expect PTC to have a healthy growth trajectory driven by volume growth, with incremental capacities arising from both tolling and long-term arrangements. Moreover, a favourable changing mix (a higher share of long-term and tolling volumes out of the total volume) should help PTC to notch a better margin. Further, we believe an improving outlook for the power sector (largely due to the measures taken by the government to fix the lingering issues) should help the company to exit from some of its long-term investments (in power projects). The management also shared healthy growth expectations for its subsidiary, PTC Financial Services (PFS), which contributes significantly to our sum-of-the-parts (SOTP) valuation. Hence, we retain our Buy rating on the stock with the existing price target of Rs88. Tata Chemicals
Recommendation: Buy
Price target: Rs380
Current market price: Rs305 Earnings hit by European write-off Result highlights -
Revenues in line with expectations; European write-off drags consolidated earnings: During the fourth quarter of FY2013 Tata Chemicals Ltd (TCL)'s consolidate revenues degrew by 2% to Rs3,391.5 crore, which was largely in line with our expectations. The consolidated earnings was negatively impacted by the European write-off (Rs97.14 crore goodwill + Rs386.7 crore assets write-down) during the quarter. The reported profit after tax (RPAT; after minority interest and share of associate) for the quarter stood at Rs(188.3) crore, which included an extraordinary income of Rs187.9 crore from the redemption of investment in subsidiaries, a foreign exchange loss of Rs31 crore and the UK write-off for assets and goodwill stood at Rs483.8. Adjusting for this the profit after tax (PAT) stood at Rs175.3 crore, which was in line with our estimate.
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Lower profitability in stand-alone business and heavy operating losses in Kenyan business dent overall margin: The stand-alone performance of TCL for Q4FY2013 was lower than expected on account of a sluggish volume growth and a high margin pressure in the fertiliser segment because of higher discounts and a one-time write-off of Rs28 crore (for reducing the price of complex fertilisers in FY2014 as per the government notification). The total revenues for the stand-alone business degrew by 4% to Rs1,998 crore and the EBIDTA margin stood at 9%, which was marginally lower than our expectations. In Q4FY2013, the Kenyan business posted heavy losses as the sales were impacted due to heavy rains. Also, its margin was under pressure due to a lower realisation of soda ash in the Middle East and the anti-dumping duty in India on import of Kenyan soda ash. The total fertiliser subsidy pending with the government stood at Rs1,753 crore at the end of Q4FY2013. -
Outlook: fertiliser demand and European business key concerns: The demand environment for the non-urea fertilisers remains soft even though a normal monsoon is expected as the inventories are at a very high level. On the chemical front, the business environment in Europe is challenging, which is putting pressure on the revenues and earnings, whereas in Kenya, the margin may remain under pressure till the next quarter. However, the company believes that the demand for soda ash and salt will remain firm in India and North America. On the pricing front, the price of soda ash has bottomed out at the current level and may rise as the Chinese players have started to increase the price of soda ash. -
Valuation: We have broadly maintained our revenue estimates, but on the earnings front we have reduced our margin estimates for FY2014 and FY2015 on account of a soft margin in the fertiliser segment and European business (business environment for soda ash remains sluggish for the next two to three years). Consequently, we have lowered our earnings estimates for FY2014 and FY2015 by 13% each and arrived at the earnings per share (EPS) of Rs30.5 and 33.5 respectively. At the current market price, the stock trades at 10x its FY2014E earnings and 9.1x its FY2015E earnings. On the valuation front, we value TCL at 10x FY2015E EPS and investment value of Rs45 per share and arrive at a fair price of Rs380. We maintain Buy recommendation on the stock. Dishman Pharmaceuticals & Chemicals
Recommendation: Buy
Price target: Rs130
Current market price: Rs69 Margin improves Result highlights -
Q4FY2013 results in line with expectations: Dishman Pharmaceutical & Chemicals (Dishman) reported a nearly flat year-on-year (Y-o-Y) growth to Rs345.5 crore in Q4FY2014, which is 2% lower than our estimate. However, the operating profit margin (OPM) expanded by 270 basis points year on year (YoY) to 26.2% (better than our estimate of 18.5%). On account of a 45% Y-o-Y jump in the other income to Rs13.7 crore and lower than expected interest costs of Rs17.2 crore (Y-o-Y decline of 20.8%), the profit before tax (PBT) recorded a decline of 17.1% YoY to Rs61 crore (before foreign exchange [forex] loss). However, the net profit dropped by 40.6% YoY to Rs18.6 crore on account of a higher effective tax rate of 43.9% (vs 40% in Q4FY2013) and a forex loss of Rs15.6 crore. However, the adjusted net profit jumped by 9.5% YoY to Rs34.2 crore, which is better than our estimate. -
High debts remain a concern; deal for SEZ land still alluding: The company has a gross outstanding debt of nearly Rs818 crore (Rs21 crore of cash in hand), of which nearly Rs105 crore is payable in FY2014. The company continues to look for buyers to sell-off the special economic zone (SEZ) land in a couple of months (which could generate nearly Rs100 crore) and also expects to pay off nearly Rs100 crore through internal accruals. With the company having no major capital expenditure (capex) plans for this year and FY2014 (only maintenance capex of Rs30-40 crore), the debt equity ratio is expected to decline substantially if the deal for the SEZ land goes through as per plan. -
We maintain our estimates, price target and recommendation: We broadly maintain our estimates for FY2014 and FY2015, given that the results for Q4FY2014 are in line with our expectations and the management's guidance is falling in line with our estimate. We believe the traction in Carbogen Amcis and the vitamin D3 business would be a major growth driver going forward. We maintain Buy rating on the stock with a price target of Rs130, which implies 7x average earnings for FY2014E and FY2015E. The stock is currently trading at 3.7x average earnings for FY2014E and FY2015E.
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