Investor's Eye: Update - Cipla, Mcleod Russel India

 

Investor's Eye [February 26, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Cipla Recommendation: Buy Price target: Rs470 Current market price: Rs376 Underperformance offers an opportunity; Buy maintained Key points Q3 disappoints; recovery likely to be gradual: Given the disappointing results in Q3FY2014, Cipla has corrected by close to 17% from its 52-week high and has grossly underperformed the benchmark indices and some of its peers. It trades at close 14.3x FY2016 revised earnings estimate (a steep discount to its average historic multiples of 19-20x one-year forward earnings). Thus, we see little scope for a downside or a further de-rating of the stock. However, the improvement in the margin profile and the revenue growth momentum would be gradual and take a few quarters to reflect in the financial performance.  Long-term growth drivers in place: In addition to a potential upside from some of the products in the USA going out of patent (like generic Evista [$730 million], Nasonex [$1.1 billion] and Nexium [$5.5 billion]), the long-term growth drivers for the company includes: (1) the launch of a combination inhaler in FY2015 including a ramp-up in Dymista; (2) synergy from Cipla Medpro; (3) a focus on niche segments like inhalers, oncology and biosimilars in India; and (4) other generic launches in the US market (approvals pending for 35 ANDAs including 17 own ANDAs). Valuation-reduce target multiple in view of management transition risk and near-term challenges: Though the risk-reward profile has turned favourable, the stock could remain sluggish in the immediate future due to a pressure on the financial performance and a risk associated with the transition of the management (with YK Hamied likely to pass on the baton to the next generation). We retain our Buy rating on the stock with a price target of Rs470 (18x FY2016E EPS).    Mcleod Russel India Recommendation: Hold Price target: Rs305 Current market price: Rs281 Higher tea prices likely to boost profitability in new season Key points  Higher production of tea in Kenya and India (up 17% and 8% YoY respectively) in CY2013 led tea prices to correct by 15-20% in Kenya and remain almost stable in India because of a strong domestic demand. In CY2014, the tea prices are likely to firm up by 10-12% globally (and also in India) due to a likely drop in tea production in Kenya with a dry weather affecting the yield. Mcleod Russel India would be key the beneficiary of the firm tea prices and high production in India. We expect the revenues and OPM of the company to increase if the situation persists, though the confirmation would come in March 2014 with the beginning of the new tea season. (We would be able to upgrade the earnings estimates and price target only after the confirmation). In the meantime, we retain our Hold rating on the stock with a price target of Rs305 and suggest accumulating the stock on corrections. 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.

Regards, The Sharekhan Research Team

 

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