Investor's Eye: Update - Lupin, Ashok Leyland

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Investor's Eye [March 27, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Lupin Recommendation: Buy Price target: Rs1,075 Current market price: Rs934 Adopting inorganic strategy to build capabilities in niche space; Buy maintained Key points Given the growing competitive intensity in the branded and generic formulation segments, Lupin has been realigning its strategy around building a strong foothold in the oral contraceptives (40 ANDAs filed, 13 approved in the US), dermatology (two ANDAs filed and no approvals received so far), ophthalmic (seven ANDAs filed and one approved) and respiratory segments which are niche segments with relatively low competition.  In line with its strategy, Lupin has acquired 100% stake in a Mexico-based ophthalmic company, Laboratorios Grin, which has an annual turnover of $28 million and has been profitable. Recently, it also acquired Netherlands-based Nanomi BV, which is engaged in producing complex injectibles.  We are not revising our estimate since the details related to the acquisitions (including the consideration paid) have not been disclosed. However, we are positive on the company's strategy that would enable the company to stay ahead of its competition. We maintain our Buy rating on the stock with a price target of Rs1,075. We believe that the weakness in pharmaceutical stock driven by the rupee's appreciation and the churn towards high beta sectors are an opportunity to buy into quality pharmaceutical names, like Lupin, Cadila Healthcare and Sun Pharma.   Ashok Leyland Recommendation: Hold Price target: Rs23 Current market price: Rs22 Surging ahead of fundamentals; retain Hold with price target of Rs23 Key points Ashok Leyland Ltd (ALL) has appreciated by close to 40% in the past few weeks on the back of three reasons: (1) selling of non-core assets (land and stake in IndusInd Bank) to reduce its soaring debt; (2) expectations of bottoming out of the slowdown in the commercial vehicle (CV) market and that of a pick-up from H2FY2015; and (3) unconfirmed reports related to the strengthening of the relationship with Nissan (ALL already manufacturers light commercial vehicles in a joint venture with Nissan, the venture could extend in some form to the parent company). We believe the first two factors are largely discounted after the recent run-up in the stock price. Even after taking into account a swing of more than Rs1,000 crore in the earnings (from a loss of Rs583 crore in FY2014 to a profit of Rs447 crore in FY2016), the current valuations are at a premium to its long-term average multiple on FY2016 earnings estimate. Consequently, we retain our Hold rating on the stock with a revised price target of Rs23. The key risk to our call could be any positive corporate development (as mentioned above) or a better than expected pick-up in the CV segment (at least pruning of the high discounts offered currently). 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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