Investor's Eye: Update - Sun Pharmaceutical Industries, V-Guard Industries

 

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

Summary of Contents STOCK UPDATE     Sun Pharmaceutical Industries Recommendation: Buy Price target: Rs851 Current market price: Rs807   The USFDA issues Form 483 but concern not so grave; maintain Buy    Key points  Sun Pharma has received form 483 from USFDA as a result of a surprise inspection at the company's Halol manufacturing facility. The inspection has highlighted 23 adverse observations, mainly related to inadequate procedures and maintenance of records. However, the USFDA has not found any data-integrity issues which is a respite for Sun Pharma. We expect the overhang related to the USFDA inspection to recede now. A data integrity issue is considered serious and it has been the main reason for import alerts in the past cases. The Halol facility is a significant contributor, as it contributes 30-40% of revenues and 20-25% of profits. In the current scenario, the existing business is unlikely to get affected but the new ANDA approvals would be halted till the USFDA finds satisfactory resolution. It normally takes two to three months to arrive at a resolution, if the response of the company is satisfactory.  Although the latest USFDA action is set to delay product approvals from the Halol facility (at least for two to three months), yet we prefer to keep our estimates for FY2015 and FY2016 intact, considering that Sun Pharma's multiple growth drivers and vast production base are expected to partially mitigate the impact. We maintain our price target of Rs851 (implies 25x FY2016E EPS) with an upside potential on roll-over of valuation in the next few months. We maintain Buy rating on the stock.      V-Guard Industries Recommendation: Buy Price target: Rs950 Current market price: Rs892   Robust growth outlook; retain Buy with revised price target of Rs950   Key points  V-Guard Industries (V-Guard) is confident of growing its revenues at 20% over the next few years on the back of increasing penetration in the non-south markets and robust traction in the newly launched products. Within the non-south markets, the markets in the north and the east contribute revenues of 15% each but V-Guard is facing tougher competition in the west (which contributes 7% of the revenues; leaves a lot of scope for improvement and incremental gains). It expects to sustain its OPM with easing of raw material prices and reducing the need to give discounts to push its products in the non-south markets. It already sells cables at unified pan India prices and expects to narrow the gap in the other products especially consumer products. With expectations of a healthy earnings growth at a 17% CAGR over FY2014-17, we believe the company would continue to trade at premium valuations and is among one of our preferred stocks in the consumer discretionary space. Consequently, we retain our Buy rating with a revised price target of Rs950 (after rolling it over to FY2017 earnings estimate).  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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