Investor's Eye: Update - Sun Pharmaceutical Industries, Speciality Restaurants, Oil India, Max India, The Ramco Cements, Pratibha Industries, Unity Infraprojects; MF - Sharekhan's top equity mutual fund picks, Sharekhan's top SIP fund picks

 

Investor's Eye [February 13, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Sun Pharmaceutical Industries Recommendation: Buy Price target: Rs680 Current market price: Rs615 Price target revised to Rs680 Key points Sun Pharma reported a healthy performance in Q3FY2014 with the net sales growing by 50% to Rs4,287 crore and the net profit surged by 68% to Rs1,531 crore. The Q3FY2014 performance was boosted by a strong performance in the US market and the Indian business which grew at 79% (57% at constant-currency terms) and 20% respectively.  The management has revised the revenue growth guidance for FY2014 to 29% from 25% (in constant-currency terms), which implies that the growth would remain strong in the subsequent quarter. A strong products pipeline in the US market and the traction in the Indian market would continue to boost the performance in subsequent quarters.  We revise our estimate up by 10% and 2% for FY2014 and FY2015 respectively, to factor in a better than expected performance in the 9MFY2014 results. We revise our price target up by 4% to Rs680 (implies 25x FY2015E EPS). We maintain our Buy rating on the stock.    Speciality Restaurants Recommendation: Buy Price target: Rs160 Current market price: Rs113 Discounted valuations to peers; maintain Buy Key points In the prevailing scenario of slowing discretionary spending, Speciality Restaurants has performed much better than some of its listed peers like Jubilant FoodWorks in terms of sustaining a flattish same-store sales (as against a decline of 3-5% by comparable companies).  The persistent margin pressure has also been a concern since the company did not take the required price hikes in a bid to sustain footfalls. However, it has recently taken an average price hike of about 5% (the vegetable prices have also softened lately) and thus the margin pressure should ease out going ahead. Given the strong brand franchisee (Mainland China and Sigree), an improving outlook on the margin and a broadening of the valuation gap with comparable listed peers (Jubilant FoodWorks valuation premium has doubled in the past one year, despite a relatively higher adverse impact of the slowing discretionary spending), we maintain our Buy rating on the stock with a price target of Rs160 (18x FY2016 earnings).   Oil India Recommendation: Buy Price target: Rs605 Current market price: Rs454 Flattish performance but triggers ahead; price target revised down to Rs605 Key points For Q3FY2014 Oil India Ltd (OIL) reported a net sales growth of 9% largely driven by a depreciation of 14% in the rupee against the dollar which compensated for a decline in the volume. The gross realisation was at $108 per barrel while the subsidy burden was $56 per barrel which resulted in a net realisation of $52 per barrel. The subsidy burden was Rs2,173 crore, up 12% and largely in line with the expectations. In spite of the company's flattish performance and inability to ramp up its volume, we remain positive on OIL due to its inexpensive valuation. The current market price of the stock is factoring in a much lower net realisation and not factoring in the benefit from the expected hike in gas prices effective from April 1, 2014. We have fine-tuned our earnings estimates (down 6% for FY2015) to adjust for a potentially higher subsidy burden following the recent revision in the number of subsidised LPG cylinders from 9 to 12; consequently, we reduce our price target to Rs605. However, owning to the stock's low valuation and attractive dividend yield, and the upcoming gas price hike trigger, we retain our Buy rating on OIL.    Max India Recommendation: Buy Price target: Rs296 Current market price: Rs187 Strong performance in tough environment Key points In Q3FY2014 Max India's consolidated profit before tax grew by 71% YoY to Rs77 crore on account of a healthy growth in the operating revenues (up 13.6% YoY) and a strong performance at the EBITDA level (up 34.7% YoY).  On the other hand, MLI registered a healthy growth in the APE (up 19.5% YoY) and the AUM (up 15.2% YoY). The APE growth for 9MFY2014 is at 15%, which is in line with the management's guidance of achieving an over 10% growth in the APE in FY2014. The conservation ratio for MLI improved on a sequential basis to 80.9%, which is amongst the best in the industry. Max India continues to expand its market share in the insurance business while the healthcare business is showing a strong traction in the revenues. We are positive on Max India due to a strong positioning in the insurance business (Max Life) and a robust growth in healthcare segment (Max Healthcare). The stock is trading at an attractive valuation of 1.1x FY2014 embedded value. We maintain our Buy rating with a price target of Rs296.   The Ramco Cements Recommendation: Hold Price target: Rs175 Current market price: Rs165 Weak Q3 with immediate outlook muted; retain Hold due to inexpensive valuation  Key points The earnings of The Ramco Cements (Ramco) plunged by 70% in Q3FY2014 led by a lower realisation (down 5% YoY but up 8% sequentially; though the volume grew by 2%) and cost inflation, which hurt the margin. Consequently, the EBITDA per tonne declined to Rs786 (down 35%) which clearly reflects the lacklustre demand and oversupply situation in south India. Though the situation is unlikely to improve in the immediate quarters, we expect Ramco to leverage on its strong brand and cost efficiencies to gain market share. For the first nine months of FY2014 also Ramco has reported a 4% growth in the volume as compared with a 4-5% decline in the overall demand in the southern region. Thus, Ramco continues to be our preferred south-based cement company and a play on the revival is expected in the cement demand with an economic recovery in the next fiscal. The stock's valuations are inexpensive at 7x EV/EBITA per tonne and 0.6x replacement value ($80 per tonne). Our Hold rating is purely driven by the expectations of a weak performance in the immediate few quarters. Ramco is a stock for value buyers with a long-term perspective.   Pratibha Industries Recommendation: Reduce Price target: Rs26 Current market price: Rs27 Rising working capital cycle and debt/equity ratio concerning; downgrade to Reduce Key points Like most mid-sized construction companies, Pratibha Industries Ltd (PIL) is facing the challenges of slowing execution, rising cost inflation and delayed payment cycles. The bloating account receivables (government agencies delaying payments in a bid to meet their fiscal deficit targets) is pushing up the debt burden and the interest charges are eating into a large part of the operating profit. This is clearly reflected in close to a 60% decline in the net profit of PIL in spite of a 7.8% growth in its operating profit.  On the positive side, PIL has reported a healthy inflow of new orders to tune of Rs3,332 crore (of which Rs590 crore were added in January 2014). The company's current order book stands at about Rs8,000 crore (3.8x its trailing twelve-month revenues).  However, we are concerned about the elongated working capital cycle and the alarming rise in the debt/equity ratio. Thus, we have revised our estimates for FY2014 and FY2015 downwards and our sum-of-the-parts-based price target to Rs26. We downgrade the stock to Reduce.    Unity Infraprojects Recommendation: Book out Current market price: Rs21 Slipping into a debt spiral; Book out Key points The Q3FY2014 results of Unity Infraprojects reflected the extent of deterioration in the company's debt/equity ratio. The rising working capital cycle (over 300 days now) is eating into its operating profit and the debt level is reaching an alarming level resulting in a drop of over 90% in the earnings in spite of a marginal decline in the revenues during Q3FY2014. Unfortunately, the macro environment is not supportive with payment delays and rising interest rates. Thus, we expect the company's financial performance to deteriorate. We also expect a sharp cut in the earnings estimates for FY2014 and FY2015. Given the severe balance sheet issues, challenging macro environment and expectation of significant erosion in the company's earnings, it is advisable to exit the stock. We believe that larger players with a strong parentage, like Larsen & Toubro and IL&FS Transportation Networks, are better placed to tide through the difficult business conditions. MUTUAL GAINS Sharekhan's top equity mutual fund picks Large-cap funds Mid-cap funds Multi-cap funds SBI Magnum Bluechip Fund Mirae Asset Emerging Bluechip Fund SBI Magnum Global Fund 94 Birla Sun Life Top 100 Fund SBI Magnum Midcap Fund Tata Ethical Fund - Plan A Birla Sun Life Frontline Equity Fund - Plan A HDFC Mid-Cap Opportunities Fund Tata Mid Cap Growth Fund - Plan A Tata Pure Equity Fund - Plan A Franklin India Prima Fund Tata Equity Opportunities Fund - Plan A Reliance Focused Large Cap Fund Reliance Long Term Equity Fund Principal Growth Fund Indices Indices Indices BSE Sensex BSE Mid-cap BSE 500 Tax-saving funds Thematic funds Balanced funds IDFC Tax Advantage (ELSS) Fund - Reg ICICI Prudential Exports and Other Services Fund HDFC Balanced Fund Franklin India Taxshield Birla Sun Life India GenNext Fund Tata Balanced Fund - Plan A Principal Tax Savings Fund Reliance Media & Entet Fund SBI Magnum Balanced Fund ICICI Prudential Taxplan UTI India Lifestyle Fund Canara Robeco Balance HDFC Taxsaver L&T India Special Situations Fund Reliance RSF - Balanced Indices Indices Indices CNX500 S&P Nifty (CNX Nifty) Crisil Balanced Fund Index Fund focus Franklin India Taxshield Fund-growth Sharekhan's top SIP fund picks Large-cap funds Multi-cap funds SBI Magnum Bluechip Fund Tata Ethical Fund - Plan A Reliance Focused Large Cap Fund SBI Magnum Global Fund 94 Birla Sun Life Top 100 Fund Principal Growth Fund Birla Sun Life Frontline Equity Fund - Plan A Tata Mid Cap Growth Fund - Plan A Tata Pure Equity Fund - Plan A Tata Equity Opportunities Fund - Plan A BSE Sensex BSE 500 Mid-cap funds Tax saving funds SBI Magnum Midcap Fund IDFC Tax Advantage (ELSS) Fund - Reg HDFC Mid-Cap Opportunities Fund Principal Tax Savings Fund Franklin India Prima Fund ICICI Prudential Taxplan ICICI Prudential MidCap Fund Reliance Tax Saver (ELSS) Fund Reliance Long Term Equity Fund HDFC Taxsaver BSE Midcap CNX Nifty Fund focus Reliance Long Term Equity Fund-growth 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

 

This e-mail message may contain information, which is confidential, proprietary, legally privileged or subject to copyright. It is intended for use only by the individual or entity to which it is addressed. If you are not the intended recipient or it appears that this mail has been forwarded to you without proper authority, you are not authorized to access, read, disclose, copy, use or otherwise deal with it and any such actions are prohibited and may be unlawful. The recipient acknowledges that Sharekhan Limited or its subsidiaries, (collectively "Sharekhan "), are unable to exercise control or ensure or guarantee the integrity of/over the contents of the information contained in e-mail transmissions and further acknowledges that any views expressed in this message are those of the individual sender and no binding nature of the message shall be implied or assumed unless the sender does so expressly with due authority of Sharekhan . Sharekhan does not accept liability for any errors, omissions, viruses or computer problems experienced as a result of this email. Before opening any attachments please check them for viruses and defects. If you have received this e-mail in error, please notify us immediately at mail to: mailadmin@sharekhan.com and delete this mail from your records.

This e-mail message may contain information, which is confidential,  proprietary, legally privileged or subject to copyright. It is intended  for use only by the individual or entity to which it is addressed. If you  are not the intended recipient or it appears that this mail has been  forwarded to you without proper authority, you are not authorized to  access, read, disclose, copy, use or otherwise deal with it and any such  actions are prohibited and may be unlawful. The recipient acknowledges  that Sharekhan Limited  or its subsidiaries, (collectively "Sharekhan "),  are unable to exercise control or ensure or guarantee the integrity  of/over the contents of the information contained in e-mail transmissions  and further acknowledges that any views expressed in this message are  those of the individual sender and no binding nature of the message shall  be implied or assumed unless the sender does so expressly with due  authority of Sharekhan . Sharekhan does not accept liability for any  errors, omissions, viruses or computer problems experienced as a result  of this email. Before opening any attachments please check them for  viruses and defects. If you have received this e-mail in error, please  notify us immediately at mail to: mailadmin@sharekhan.com and delete this  mail from your records.