Investor's Eye
[December 12, 2013] | | |
| Summary of Contents
PULSE TRACK October IIP dips by 1.8%, CPI rises sharply to 11.24% -
In October 2013 the index of industrial production (IIP) declined by 1.8%. The lower than expected numbers were attributed to a decline in both the manufacturing and mining sectors. Within the use-based category, the basic goods and consumer goods segments too witnessed a sharp decline. However, the key disappointment was from the consumer price Index (CPI) which climbed to 11.24% for November, mainly contributed by the food inflation (14.72% vs 12.56% in October). -
From the sectoral perspective, the manufacturing sector, which constitutes about 76% of the IIP, posted a decline of 2.0% year on year (YoY) in October 2013 as compared with a growth of 0.6% in September 2013. After witnessing an uptick in September 2013, the mining output declined by 3.5% in October 2013 (up 3.3% in September 2013). The growth in the electricity sector slowed down to 1.3% YoY in October 2013. In the use-based category, the capital goods segment grew by 2.3% YoY as against 6.8% YoY in September 2013. The growth in the consumer goods segment declined by 5.1% YoY. -
On a sequential (month-on-month [M-o-M]) basis, the IIP reading grew by 1.3% in October 2013, to an absolute figure of 168.5 (166.3 in September 2013). Barring the electricity and basic goods segments, all the other segments in the general and the use-based category grew on an M-o-M basis. Moreover, the capital goods segment grew by 6.5% MoM, as there was an aberration in its growth in September. Outlook -
Rise in inflation could contribute to rate hike by RBI: Both set of numbers (IIP, CPI Inflation) were disappointing and points to further weakness in the macro variables. IIP growth for the April to October period (FY2014) is nil, which belies the expectation of recovery in the industrial sector. While the markets largely digested to slower economic growth (at least for FY2014), the extent of surprises on the inflation side has emerged as a serious concern. The benchmark bond yield, which has touched about 8.9% levels, could rise further on expectation of rate hikes. Though, the RBI may keenly watch the WPI numbers next week, the market expects about 25bps hike in repo rates in the mid quarter monetary policy review on December 18, 2013.
STOCK UPDATE
Cadila Healthcare
Recommendation: Buy
Price target: Rs886
Current market price: Rs741 Prospects improve in US market Key points -
Cadila Healthcare settles patent suits on Asacol HD; may launch in Q3FY2016: Cadila Healthcare (Cadila) has settled a patent suit on Warner Chilcott's Asacol HD (mesalamine, delayed release tablets, 800mg), which is used to treat stomach pain. As per the agreement, Cadila will receive a royalty-bearing licence from Warner Chilcott to market a generic version of the drug from November 15, 2015 provided that Cadila receives the final abbreviated new drug applications (ANDA) approval from the US Food and Drug Administration (USFDA). However, if the company fails to get the USFDA approval for the generic version, it will be permitted to launch an authorised version of the generic from July 1, 2016. The patent on Asacol HD is going to expire on November 15, 2021. Cadila (Zydus Cadila in the USA) seems to be the only litigant for Asacol HD (800mg, delayed release tablets) at this point of time. The brand market size of Asacol HD is estimated near US$150 million. If we assume 30% to 40% market share with moderate price erosion, Cadila's revenue potential stands near US$40-55 million from this product. -
Short-term pressure to continue in the US; multiple long-term triggers instill confidence: Tills date, the company has got final approvals for only two products during this fiscal. Although, we expect the pace of approvals to speed up in the subsequent quarters, the short-term pressure is unlikely to ease in the US business. However, currently the company has near 100 ANDA pending approvals out of over 150 ANDA's filed with the USFDA. A significant proportion of ANDA's pending belong to the differentiated category, which have a better margin profile, and that will help achieve better growth in the long run. Apart from Asacol HD, Cadila has a number of other filings in the USA through the Para-IV route, which may either lead to a limited period exclusivity or patent settlements with innovators. Therefore, we expect a strong bounce back in the US business of the company in the two to three years horizon. -
Non-US business to see a steady growth; pressure on JV business to continue: The company's business in India (including Zydus Wellness), in emerging markets and exports of bulk drugs, are likely to see a steady growth. However, revenue from the joint venture (JV) is unlikely to come out of the margin pressure due to intensified competition. -
Maintained with a price target of Rs886: We have fine tuned our earnings estimates of FY2014 and FY2015, keeping in view the continued pressure on operating margins. Accordingly, our earnings per share (EPS) estimates stand decreased by 12.5% and 13.3% to Rs36.1 and Rs51.2 for FY2014 and FY2015, respectively. We also introduce our estimates for FY2016 and rollover our valuation to an average earnings for FY2015 and FY2016. We maintain a price target of Rs886, which implies 15x average earnings for FY2015E and FY2016E. Eros International
Recommendation: Buy
Price target: Rs220
Current market price: Rs165 Improved business visibility, better days ahead Key points -
Back to basics, acquiring 'A' category movies to improve business visibility: After a lean phase of going slow on content acquisitions, the management has now turned the tide and upped the ante for acquiring 'A' category movies (movies with big budgets above Rs60 crore), with efforts to release at least seven 'A' category movies in FY2015E as compared to five to six 'A' category movies in the earlier years. The concentrated effort of management for content acquisitions is reflected in some of the recent movie acquisitions like, Jai Ho (Salman Khan starrer), '1' (Telugu - Mahesh Babu starrer) and 2 States (Dharma Production). -
HBO alliance, expect some meaningful contribution in FY2016E: In the EIML-HBO alliance, the company is making inroads with further participation from the direct to home (DTH), multiple-system operators (MSO) and local cable operators (LCO). Since its launch, the company has added around 1.8 lakh subscribers with an average revenue per user (ARPU) of Rs70-80. The channel has already secured the platform of two DTH players and six cable operators. In addition it has already signed an MoU with most of the remaining operators and expects to launch it in their platform in the coming months. The management is targeting 3-4 million subscribers by FY2016E, which gives a potential net income of Rs73 crore in our FY2016 (our earnings estimates), translating into an EPS of Rs7.9 per share, with a potential upside of 28% to our current FY2016E estimates (we have not incorporated earnings from the HBO alliance in our estimates). -
Success of recent movies and strong movie slate, allays concerns of revenue de-growth in FY2014E: As the big budget movie, Ranjikanth starrer 'Kochadaiyaan', has been pushed to FY2015E and will now be released by end of March to early April 2014, there were concerns on the de-growth in the revenues for FY2014E. However with the success of recent releases and Q4FY2014 releases of 'Jai Ho' (Salman Khan starrer) and '1' (Telugu - Mahesh Babu starrer), it seems like EIML will manage to post a decent growth in revenue for FY2014E. The management has indicated at Rs1,200 crore revenues for FY2014E (which is a 12% year on year [YoY] growth). -
Valuation: We appreciate EIML's intent and efforts on getting back to the 'A' category movie acquisitions and ramping up the number of big-budget movies in the slates, which improves the business visibility significantly. Further, investors fears of the renewal of the relationship agreement between EIML and its parent (39% cost recovery of movies rights), which is set to expire in October 2014 is likely to phase out, as the management has assured that the relationship will continue in the present condition beyond 2014. Given the improved visibility and success of recent releases, we have tweaked our estimates for FY2014E and FY2015E, and introduced our FY2016E estimates. At CMP of Rs165, the stock trades at 8x, 6.8x and 5.8x FY2014/15/16 earnings estimates. We have rolled over our target multiple to December 2014, and consequently increase our price target to Rs220 (based on 8x target multiple). We maintain our positive stance on EIML and maintain our Buy rating on the stock.
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Regards,
The Sharekhan Research Team | |
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