Investor's Eye: Update - Cadila Healthcare, Aurobindo Pharma, CESC, Sun TV Network, Bajaj Corp

 

Investor's Eye [February 07, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Cadila Healthcare Recommendation: Buy Price target: Rs1,000 Current market price: Rs903 Price target revised to Rs1,000  Key points Cadila Healthcare reported a health performance in Q3FY2014 with the sales growing by 18.2% YoY to Rs1,883 crore and the net profit jumped by 159% to Rs224 crore on the back of a 330-basis-point rise in the OPM. The US and the emerging market businesses were the major growth drivers which grew by 81% and 30% respectively. However, the growth in most of the other business, including the domestic formulation business, remained muted. The revenues from its various joint ventures declined by 20%. We believe the performance exhibited in Q3 is sustainable with an upside coming from the launch of key products in the USA, an improvement in the India formulation business and an improvement in the joint-venture business. We marginally fine tuned our estimate to factor in the healthy performance and revise the price target up to Rs1,000. We maintain our Buy rating on the stock.   Aurobindo Pharma Recommendation: Buy Price target: Rs629 Current market price: Rs507 Price target revised up to Rs629  Key points Riding on the back of a launch of the generic Cymbalta under the limited competition and other generic products in the US market, Aurobindo Pharma reported a 36% rise in the net sales and a 1,357BPS rise in the OPM during Q3FY2014.  While the competition may not be limited in the long term in products like Cymbalta, the company has multiple growth drivers to supplement the revenue growth and the margin. Healthy cash-flows (over Rs1,100 crore) generated during 9MFY2014, comforts the company to significantly reduce the short-term debts and also to mitigate the strain due to the acquisition of the businesses of Actavis in seven European countries. We significantly revise our earnings estimate (up by 43% and 34% for FY2015 and FY2016) to factor in an incremental growth from the key business verticals in the USA and an improved profit margin scenario. We maintain our Buy rating on the stock with a revised price target of Rs629.    CESC Recommendation: Buy Price target: Rs494 Current market price: Rs447 A soft quarter; affected by a delayed tariff revision  Key points The Q3FY2014 results of CESC were softer than the Street's and our expectations, as the tariff revision that was to take place in this quarter would be effective from Q4FY2014 only. Though the revenues grew by 16% YoY, but the operating profit grew by 10% YoY due to a 45% jump in the other expenditure. This restricted the net profit growth to 6% YoY in Q3FY2014.  In terms of the performance of the subsidiaries, the store-level EBITDA of Spencer's remained around 5% in Q3FY2014 (vs 4% in Q3FY2013) and the progress on the profitability front was on expected lines. Firstsource Solutions reported stable earnings (PAT up 17% YoY) for a seasonally slow quarter and aims to cut down its debt substantially in FY2015. In power generation, CESC signed a power purchase agreement for 100MW and is negotiating the power purchase cost for the remaining 400MW of capacity in the Chandrapur plant. The execution of the Haldia power plant is also on schedule.  We retain our estimates and continue to be positively biased towards CESC in view of the gradual progress of its subsidiaries over and above the stable performance of its utility business. We retain our Buy rating with a price target of Rs494.   Sun TV Network Recommendation: Buy Price target: Rs515 Current market price: Rs363 A soft quarter, an encouraging outlook  Key points In Q3FY2014, the revenues of Sun TV stood at Rs508.3 crore, up 4.6% YoY. The EBITDA margin stood at 73.2% (down 430BPS YoY). The net profit fell by 2% YoY to Rs185.8 crore.  The advertisement revenues witnessed a rebound on a sequential basis after a 16.3% Q-o-Q fall in Q2FY2014-the same grew by 17% QoQ and dipped by 7% YoY to Rs272 crore in Q3FY2014. The advertisement revenues were affected primarily by the reduction in the inventory from 16 minutes per hour to 12 minutes per hour to comply with the TRAI's recommendation of 10+2 minutes per hour advertisement cap.  The growth in the subscription revenues remained strong, the domestic cable revenues grew by 46% YoY to Rs54 crore whereas the DTH revenues saw a growth of 20% YoY to Rs113 crore. The international subscription revenues rose by 27% YoY to Rs33 crore.  Sun TV will be among the prime beneficiaries of the ongoing digitisation theme in the next two years. We have marginally tweaked our earnings estimates for FY2015 and FY2016. We maintain our Buy rating on the stock with a price target of Rs515. Risk: a significant delay in the digitisation process in the key markets could pose an earnings risk to the company. Bajaj Corp Recommendation: Reduce Price target: Rs180 Current market price: Rs207 Q3 disappointing; sharp volume moderation to dent valuation multiple  Key points Bajaj Corp's dismal performance in Q3FY2014 can be attributed largely to a sudden drastic dip in the volume sales of Almond Drops Hair Oil (ADHO) brand, which declined by 1.5% (as against a sustained growth of 15-20% seen in the past many years and in H1FY2014). The negative surprise in the volume growth was a result of inventory correction undertaken by the company.  Given the weak volume growth and higher advertisement spending, the company recorded a 7.2% decline in the adjusted earnings to Rs39.4 crore in spite of a benign raw material cost and an improvement in the GPM. The reported net profit, which declined by 29.3%, includes an amortisation charge of Rs 9.4 crore (post-tax) towards NOMARKS, the brand it acquired recently.  We believe it will take some time (maybe two to three quarters) for the light hair oil category to pick up, as consumer sentiment (in both rural and urban areas) is unlikely to improve significantly in the coming quarters. Thus, on expectation of a lower sales volume over the next three quarters we are downgrading our earnings estimates for FY2014 and FY2015 by 4.5% and 9% respectively, after factoring in a lower volume growth in its ADHO brand (which contributes about 98% to the overall sales volume). We also believe the valuation multiple would get re-adjusted further to a much lower level. Consequently, we are downgrading the rating on the stock to Reduce with a revised price target of Rs180. 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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