Investor's Eye
[December 23, 2013] | | |
| Summary of Contents
STOCK IDEA JB Chemicals & Pharmaceuticals
Recommendation: Buy
Price target: Rs189
Current market price: Rs132 Returns rejuvenated After the company had announced its plan to sell its over the counter (OTC) business in Russia and the Commonwealth of Independent States (CIS) to Cilag GmbH International in May 2011, we had temporarily dropped our coverage on JB Chemicals and Pharmaceuticals Ltd (JBCPL). At that point we believed that there were no immediate triggers and the remaining business needed time to re-organise and rejuvenate. After we discontinued coverage on JBCPL the stock price went on to correct by nearly 64% to reach a low of Rs59 on December 27, 2012. However, two years after selling the OTC business in Russia and the CIS, the company has re-established itself in the export market while retaining leadership in the domestic branded formulation market. A major chunk of the proceeds from the sale of the OTC business has stayed in its balance sheet while the operating performance of the company has improved in recent quarters. We re-initiate coverage on JBCPL with a Buy recommendation and a price target of Rs189. Key points -
Focus on US market to add momentum: JBCPL recently started eyeing the US generic market, which is set to generate sustainable business for the company. Currently, the company markets four generic products in the USA which earned it revenues of Rs59 crore ($10 million) in FY2013. Though the revenues from the US operations contribute a meager 7% of the total revenues, but we expect the contribution to improve to 14% in the next three years. The company plans to file three to four ANDAs every year to supplement the growth. -
Strong brand equity in domestic formulation market to beat impact of DPCO 2013: For JBCPL the incremental impact of the new price control order (Drug Prices Control Order 2013 [DPCO 2013]) is not material, given that a substantial portion of its products were already under price control before the implementation of the new pricing policy. In fact, the new policy would give scope to increase the price of a few products that are now being priced under the new market-based pricing formula under DPCO 2013. The strong brand equity that the company enjoys in brands like Metrogyl, Rantac and Nicardia Retard is set to help improve the volume. -
Strong balance sheet; prospects of cash deployment to reduce valuation discount: Out of the total proceeds of Rs939 crore arising from the sale of the OTC business in Russia and the CIS, the company had received Rs738 crore in cash after paying tax and keeping a small sum in an escrow account (which was recently liquidated with a downward revision of the purchase price down Rs64.50 crore). As of September 30, 2013, the company has total investments of Rs469 crore and cash balance of Rs13 crore (against short-term borrowings of Rs75.6 crore). Though the management has yet to decide on the deployment of the cash (including the short-term investments), but it has indicated that it may acquire some key brands either in India and or abroad. We believe the valuation discount would materially reduce in case the management comes up with a firm plan to deploy the cash. -
We recommend Buy with price target of Rs189: JBCPL is currently trading at 9x estimated earnings for FY2015, which is nearly in line with its average price/earnings ratio (PER) over the last five years. We value the stock at Rs189 per share which includes the core business (valued at Rs124 per share, 10x FY2015E earnings) and the cash (valued at Rs65 per share). We recommend a Buy on the stock with price target of Rs189.
STOCK UPDATE Persistent Systems
Recommendation: Hold
Price target: Under review
Current market price: Rs984 Impressive growth visibility, Hold maintained We attended the Annual Investors Day 2013 hosted by Persistent Systems Ltd (PSL) whereby the management touched upon its core business strategy and future growth drivers, which revolves around SMAC (social, mobile, analytics and cloud; accounts for 50% of revenues) and intellectual property (IP; accounts for 20% of revenues). The company continues to be fairly confident of its continued traction, business visibility and indicated at a better H2FY2014 than H1FY2014 and of a fairly strong FY2015 as well. Following are the key takeaways of the Annual Investors Day: Key points -
H2FY2014 to better than H1FY2014; NASSCOM's guidance to be easily surpassed: The company is fairly confident of bettering its industry leading performance in H1FY2014 of 14.4% revenue growth in H2FY2014. Though, Q3FY2014 is expected to be soft given the seasonal weaknesses and also coming off from a high base of 8.6% quarter on quarter (QoQ) growth in Q2FY2014. The management expects to deliver a strong Q4FY2014 which will reflect in surpassing the growth of H1FY2014 (14.4%). The incremental growth would be driven by a strong traction in the SMAC space, coupled with improved traction in the IP led revenues (accounts for 19% of the revenue; incremental contribution from HP Client Automation revenues to be seen in H2FY2014). -
Management confident of delivering strong growth in FY2015: In our earlier interactions, the company management has already indicated at more than 60% revenue visibility for FY2015. Further, the growing acceptability of SMAC offering together with momentum in the IPs led revenues, gives confidence of delivering strong numbers for FY2015. -
SMAC focus remains, extending offerings to enterprise customers to be the next growth driver: PSL being an early starter in the SMAC and already having build a niche in these areas, gives it an upper hand to penetrate the market further. Till now, PSL was mostly offering the services to the independent software vendor (ISV) clients, however the company is gearing up to extend the offering to the enterprise clients and is already seeing some early signs of success. The management has highlighted that, mining the existing enterprise clients could be the next growth driver for the company along with focusing on the SMAC space. -
Valuation: positive stance intact, Hold maintained: Since our initiation report on PSL dated September 28, 2012 at Rs414, the stock has already appreciated by close to 138%, and 13% since our last update on (November 27, 2013 at Rs872). In the last one year, the one-year forward PER multiple has got re-rated from 8.6x to 13.8x currently, which almost captures the positives for the medium term. Nevertheless, with 24% earnings CAGR over FY2013-16E, strong cash balance (Rs131 per share) and lack of high quality investment options in the IT mid-cap space, barring a few, we believe PSL will continue to enjoy the patronage among the long-term investors. Our conviction in the stock remains intact and we also admire the long-term growth potential of the company, driven by its strong domain expertise and quality management bandwidth. At CMP of Rs984, the stock trades at 13x and 11x FY2015E and FY2016E earning estimates. Given the strong run in the stock and the current unfavorable risk-reward ratio, we maintain our Hold rating on the stock with the price target under review.
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Regards,
The Sharekhan Research Team | |
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