Investor's Eye: Update - Sun Pharmaceutical Industries, Bharat Electronics

 

Investor's Eye [July 01, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE     Sun Pharmaceutical Industries Recommendation: Buy Price target: Rs750 Current market price: Rs679   Prospects improve; price target revised to Rs750   Key points  The prospects for Sun Pharma have improved on the back of (a) an increase in prices of the key products in its dermatology portfolio of Taro Pharma (a 65.89% Israeli subsidiary); and (b) the merger deal with Ranbaxy Labs getting sweetened with the approval of Valsartan (a generic version of Diovan) in the US market. We estimate the GPM of Taro Pharma would expand by over 200BPS in FY2015 as a result of the price increases in the dermatological segment and price erosion in a couple of other products. For every 100-BPS improvement in the margin of Taro Pharma, Sun Pharma will see a 30-BPS improvement in the consolidated margin. Though we have not included the numbers of Ranbaxy Labs in our earnings estimates for now, but as the deal is progressing well, we are confident of the deal closing as per schedule. The recent USFDA approval for Diovan is set to ease off the pressure on the margin after the integration with Sun Pharma. Ranbaxy Labs holds the exclusivity right for Diovan (market size = $2.3 billion) for 180 days. We have revised our earnings estimates by 2.2% and 5.2% for FY2015 and FY2016 respectively mainly on considering a 70-BPS and 120-BPS expansion in the margin in FY2015 and FY2016 respectively. We have also assigned a higher multiple (of 24x FY2016E earnings vs 23x earlier) to set a new price target of Rs750.       Bharat Electronics Recommendation: Buy Price target: Rs2,650 Current market price: Rs2,193   Best defence play, upgraded to Buy   Key points  In its first Union Budget the new government is likely to increase the defence allocation by 20% to Rs2.45 lakh crore which is considered a big positive for the defence sector. Higher spending on defence will increase the order flow from the government for the sector. Bharat Electronics Ltd (BEL), being one of the largest manufacturers of defence equipment in India, will be the main beneficiary of the higher order flows and the increased focus of the government on manufacturing more defence equipment locally (it is implementing Defence Procurement Procedure 2013). Looking at the aggressive stance of the Bharatiya Janata Party led government on the Line of Control and the country's growing tension with China (which has been showing Arunachal Pradesh as its own territory), we believe the government is bound to increase the defence spending over the next three to five years for modernisation and upgradation of equipment along with the purchase of the latest and advanced defence equipment. The government's aim to expedite decisions and clearance of orders will also provide a boost to the sector (order inflow will increase due to fast and timely clearance of orders). BEL has got significantly re-rated in recent months (being the market leader in the defence space) owing to positive news flow and improving sector dynamics for the coming years. Considering the significant improvement in order flows and execution in the next two to three years, we expect material room for further upgrades in the earnings over FY2015-17. Though on valuation front (at 14.4x FY2016E earnings) the stock is not cheap anymore, but the easing of FDI norms coupled with a lack of investment alternatives in the high growth defence space would continue to drive investors' interest and re-rating of the stock. We recommend a "Buy" on BEL with a 12-15-month price target of Rs2,650. 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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