Investor's Eye: Update - Sun Pharma; Special - Q4FY2014 earnings preview, Q4FY2014 Pharma earnings preview, Q4FY2014 Retail earnings preview

 

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

Summary of Contents   STOCK UPDATE   Sun Pharma Recommendation: Buy Price target: Rs680 Current market price: Rs587   Gets bigger and better; retain Buy   Key points Sun Pharmaceutical Industries (Sun Pharma) is going to acquire Ranbaxy Laboratories (Ranbaxy) in a share-swap deal, where Ranbaxy's shareholders would get a 0.8% share of Sun Pharma for every share held. The deal would lead to a 16.4% dilution in the equity capital of Sun Pharma (the acquisition at 2.2x annualised revenues of Ranbaxy is not expensive at all). The deal is expected to be complete by December 2014. In addition to being a strategic fit, the acquisition catapults Sun Pharma into a coveted league of top five generic companies globally. Though initially the deal is likely to be earnings dilutive, but rough estimate shows incremental earnings of 10-12% from the third year of the consolidated operations (FY2018). In the near term, Sun Pharma would gain from early monetisation of the first-to-file opportunity in major products, like Diovan, Nexium and Valcyte (with Ranbaxy).  Sun Pharma has been one of the best wealth creators for investors owing to its high standards of corporate governance, research capabilities, strong organic growth and ability to turn around acquired entities (Taro Pharma and Caraco Pharma). Thus, we believe that Sun Pharma would be able to unlock the value in Ranbaxy. Thus, we retain our Buy rating with a one-year price target of Rs680. The stock can potentially generate average annual returns of 25-30% over the next 24-30 months (potential price of Rs1,000) depending on its ability to successfully turn around Ranbaxy's business and effectively accrue synergy benefits.   SHAREKHAN SPECIAL   Q4FY2014 earnings preview Another quarter of close to double-digit earnings growth is a healthy sign       Key points Aggregate earnings growth at 9% with broad-based contribution across sectors: For Q4FY2014, on an aggregate basis, the Sensex companies are expected to report a revenue growth of around 9% (ex energy companies the growth would be close to 7.2%), which is lower than the earnings growth recorded in Q3FY2014. However, the earnings are likely to be more broad-based with almost all sectors showing a double-digit earnings growth apart from the banking (especially the public sector banks) and capital goods sectors. Even at company level, we expect only 9 out of the 30 companies in the Sensex to report a decline in earnings which is an improvement over the previous quarters.  Margins to remain stable: The operating profit margin (OPM), which had shown an upward trend in Q3FY2014, is likely to remain stable at about 19% levels (ex banks) for the Sensex companies. From a sectoral perspective, capital goods, pharmaceutical (pharma) and metal companies are likely to report an improvement in the earnings before interest, tax, depreciation and amortisation (EBITDA) margin (on a sequential basis). However, sectors like fast moving consumer goods (FMCG), power and automobile could report margin pressure for the quarter. Earnings visibility improves for FY2015 and FY2016--election results, monetary easing remain key catalysts: The consensus earnings growth estimate for the Sensex has undergone a marginal upward revision to about 16%, which is higher than the long-term average growth estimate of ~14%. This partly factors in a gradual revival in the economy over FY2015. Currently, the Sensex is trading at a price/earnings ratio of ~14.5x FY2015E consensus earnings, which is close to its long-term mean. Going ahead, based on reforms expected post-general election or monetary easing by the Reserve Bank of India (RBI), there is a case for upgrade in the earnings of the cyclicals, which have been lagging behind. A fractured mandate for the election and weak monsoon rains remain the key risks to the earnings forecast.   Outperformers Underperformers HDFC Bank, ICICI Bank IDBI Bank, Union Bank ITC, GSK Consumers, Jyothy Lab Bajaj Corp, Zydus Wellness Wipro, HCL Tech, FSL, Persistent Systems Infosys, NIIT Tech Bajaj Electricals, V-Guard BHEL, Thermax Aurobindo Pharma, Cadila Health, Ipca Labs Cipla, Dishman Pharma Maruti, Apollo Tyres, Suprajit Eng. Ashok Leyland Relaxo, Page Ind. Titan, Pratibha Ind.     Q4FY2014 Pharma earnings preview     Key points We expect a robust growth of 28.1% in the aggregate revenues of the pharma companies in our universe in Q4FY2014. The revenues would be boosted by a slew of new launches and approvals in Q3FY2014 (Cymbalta, Trizivir, Trilipix etc) and Q4 (new launches like generic Niaspan [$1.2 billion] and Pristiq [$600 million] among others). Overall, the pharma companies under our coverage received the final approval for 23 ANDAs from the USFDA during the quarter. Healthy export revenues will more than make up for a marginal slowdown in the growth of the domestic sales (due to some tussle between distributors and pharma companies). However, a favourable revenue mix and cost optimisation would support an improvement in the margins and a fairly healthy growth of 34.0% in the aggregate earnings. We maintain our positive stance on the pharma sector and maintain a Buy rating on all the stocks in our pharma universe. However, Aurobindo Pharma, Cadila Healthcare, Ipca Laboratories and Torrent Pharma are our preferred picks from the Q4FY2014 results perspective.       Q4FY2014 Retail earnings preview      Key points Retailers continue to reel under a weak consumer demand environment; extended discount sales coupled with a low base are likely to aid a single-digit growth in the revenues of the retail companies in Q4FY2014. We expect our retail universe to grow at 7.7% on a Y-o-Y basis. V-Mart Retail followed by Page Industries is likely to lead the revenue growth while Raymond and TTK Prestige would lag the average growth. Footwear retailers, Relaxo Footwear and Bata India are expected to display consistency with a revenue growth of 13.4% and 10% YoY respectively.  Despite a lacklustre revenue performance, the operating profit margin is likely to display a mixed trend. The cost rationalisation efforts and premiumisation drive of players like Raymond, Arvind and V-Mart Retail would lead to margin expansion for these companies while raw material pricing benefit (leather, EVA and rubber) would aid margin improvement in Relaxo Footwear and Bata India. On the other hand, high rentals and fixed cost deleveraging would hurt the margins of Jubilant Foodworks, Shoppers Stop and Kewal Kiran Clothing.  The discretionary segments like apparels, jewellery and fast food continue to witness sluggish demand. Hence, we continue with our bottom-up approach for selecting stocks in the sector, focusing on market leaders with a strong balance sheet. We continue to like Relaxo Footwear and Raymond from our coverage universe. In our soft coverage universe, we have a positive view on Arvind, Bata India and Titan in that order.     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