Investor's Eye
[November 29, 2013] | | |
| Summary of Contents
PULSE TRACK Q2FY2014 GDP growth improves to 4.8% -
India's gross domestic product (GDP) for Q2FY2014 came in at Rs13,68,594 crore, registering a year-on-year (Y-o-Y) growth of 4.8%, broadly in line with the market estimates. While growth in agriculture and the other constituents like financing, insurance, etc was better than expected, growth in the services segment slumped to 5.9% in Q2FY2014 which is lowest since 2005. -
In Q2FY2014 the growth in the industrial sector revived to 2.4% after slumping down to its lowest in about 4.5 years at 0.2% in Q1FY2014. The pull back in the industrial sector is attributed to equitable growth from across the constituents. The growth in the agricultural sector improved to 4.6% from 2.7% in Q1FY2014. However, the growth in the services sector plummeted to 5.9% from 6.6% in Q1FY2014, mainly due to the decline in the community social services segment (4.2% vs 9.4% in Q1FY2014). -
From an expenditure perspective, consumption grew by a mere 1.7% YoY as the government consumption dipped by 1.1% YoY. Moreover, the private consumption was dismal at 2.2% in Q2FY2014. The gross fixed capital formation grew by 2.6% YoY as compared with a decline of 1.2% in Q1FY2014, indicating no major recovery on the investments side. -
No major surprise on GDP, as inflation remains the key monitorable from the monetary policy point of view: A better than expected performance from the agriculture segment and other sectors like financing, insurance and real estate contributed to a slightly better GDP growth in Q2FY2014. While the service sector growth could bottom out (5.9% in Q2FY2014), slower growth in the manufacturing sector remains an overhang on the overall economic revival. The recent trends indicate that the GDP growth could have bottomed out in Q1FY2014 (4.4% growth), though the pace of revival is likely to be sluggish due to a weak investment cycle. Since Q2FY2014 GDP numbers were broadly in line, the RBI's focus will shift to other macro-data like inflation and trade data to take an appropriate call on rates in its mid-quarter policy on December 18.
STOCK UPDATE Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Rs654
Current market price: Rs572 Taro's tender offer to sweeten valuation Key points -
Taro Pharma's buy-back offer favourable for Sun Pharma: Taro Pharmaceutical Industries (Taro Pharma), which is a 65.89% subsidiary of Sun Pharmaceutical Industries (Sun Pharma), has announced a tender offer to buy back up to $200 million of its ordinary shares from the open market at a price not exceeding $97.50 but not less than $84.50 per share. The buy-back, if fully subscribed, implies 5.5% and 6.2% increment in the annualised earnings per share (EPS) at the higher and the lower price band respectively. This also implies an increase in Sun Pharma's stake in Taro Pharma from 65.89% currently to 69.1% and 69.6% at the higher and the lower price band respectively, in case Sun Pharma does not participate in the tender offer. However, as per offer documents, Sun Pharma may or may not participate in the tender offer. Sun Pharma currently holds 79.7% of voting powers in Taro Pharma. -
Decent upside potential with scope of roll-over of valuation to FY2016E earnings in next few months: The stock of Sun Pharma has corrected by 11% from a peak of Rs651 since mid October this year, despite a strong performance in H1FY2014. The current market price implies 22.9x estimated earnings for FY2015, which is a 10% premium to the three-year average earnings (one-year forward earnings basis). We believe Sun Pharma would maintain its premium valuation as incremental earnings would continue to flow in from the newly acquired entities and cash-rich position will provide a premium related to merger and acquisition opportunities. Moreover, there is upside to our current price target once we introduce our FY2016 estimates and roll over the valuations to one-year forward estimates a couple of months down the line. Thus, the correction is an opportunity to buy into a quality pharmaceutical (pharma) company with a reasonably high scope for appreciation over the next 12 months. We maintain our Buy recommendation on the stock with a price target of Rs654 (implies 26x FY2015E EPS).
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Regards,
The Sharekhan Research Team | |
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