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| Summary of Contents STOCK UPDATE Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Rs851
Current market price: Rs800 One-offs affect Q1 results; maintain Buy with revised price target of Rs851 Key points - Sun Pharma has reported a moderate performance for Q1FY2015, as reflected in a 12.8% growth in the net sales, a nearly flat OPM and a 12% growth in the net profit. The moderate growth during the quarter can mainly be attributed to a weaker performance of its Israeli subsidiary, Taro, which reported a 26.5% decline in revenues and a 44% drop in the net profit. However, the ex Taro sales in the US market grew by 48% during the quarter.
- The results of Q1FY2015 included certain one-off adjustments in the US sales (including a deduction of $79 million of revenues from Taro due to a contractual obligation with clients). However, the subsequent quarters are likely to see a better performance. The management maintained its guidance of a 13-15% revenue growth in FY2015.
- We have fine-tuned our estimates mainly to adjust for the lower taxation and minority interest and revised our price target to Rs851 (25x FY2016E EPS) without factoring in the merger of Ranbaxy. However, despite a limited upside over the current market price, we maintain a Buy rating on the stock keeping in view the synergies from the merger and the potential upside from Ranbaxy's exclusivity pipelines in the US market.
Oil India
Recommendation: Buy
Price target: Rs670
Current market price: Rs570 Strong Q1 performance; lower subsidy and better production Key points - For Q1FY2015 Oil India Ltd (OIL) reported a very strong earnings growth on the back of a healthy growth in the production volumes (of both oil and gas) and a lower than expected subsidy burden (as reflected in a surge in the net realisation). Additionally, the lower depreciation also aided its performance resulting in a 40% jump in the net profit to Rs852 crore.
- The key positive of the quarter's performance was a recovery in production sequentially as the disturbance in Assam subsided. The management also retains its guidance of a production target of 3.7 MMT for crude oil and 2.8BCM of natural gas in FY2015. During the post-results conference call, the management shared that it is taking steps to improve the productivity of the wells which would boost the monthly production rate from 9,600BPD currently to around 11,000BPD in Q4FY2015. The management expects positive policy action related to gas price revision and clarity on the subsidy sharing formula in future, given ONGC's divestment plan (a follow-on public offer) ahead.
- We have fine-tuned our earnings estimates for the company to adjust for the new depreciation policy and additional interest cost (as the domestic business will bear the interest cost of the funds raised to acquire the asset in Mozambique). Nevertheless, we retain our positive stance on the stock, given the efforts initiated by the management to improve the production and the expected positive policy actions. We continue to recommend Buy on the stock and retain our price target of Rs670.
Max India
Recommendation: Buy
Price target: Rs376
Current market price: Rs300 Market share gains continues in life insurance business Key points - Max India reported a strong performance for Q1FY2015 as its operating revenues (consolidated) grew by 15% YoY to Rs1,974 crore largely contributed by the life insurance (up 10% YoY) and healthcare (up 30% YoY) segments. The reported profit before tax increased by 83% YoY to Rs77 crore (consolidated).
- From segmental perspective, the life insurance segment continued to grow ahead of the industry rate (APE up 21% YoY) leading to an expansion in the market share (up 75BPS to 12.3%, ranked third among private players). The persistency ratio was among the best in the industry at 80%. The healthcare business' OPM improved leading to an uptick in the profit.
- Led by a healthy growth in the earnings Max Life Insurance paid a dividend of Rs96.7 crore to Max India during the quarter. We remain positive on Max India due to the strong performance of its life insurance business and an improving contribution from its other businesses. Going ahead, an increase in the FDI limit for the insurance sector will also be positive for the company. Currently, the stock trades at 1.6x FY2015E embedded value. We maintain our Buy rating on the stock with a price target of Rs376.
Jyothy Laboratories
Recommendation: Buy
Price target: Rs250
Current market price: Rs188 Decent operating performance, maintain Buy Key points - Jyothy Laboratories Ltd (JLL)'s consolidated revenues grew by about 16% YoY to Rs354.9 crore driven by an 8% volume growth and an 8% price-led growth in Q1FY2015. All the focus segments posted a strong growth during the quarter with the fabric care, dishwashing and mosquito repellant segments growing by 19%, 24% and 19% (the mosquito repellent growth was way ahead of the category growth) respectively.
- The consolidated OPM stood at 13.5% and the management expects it to improve in the coming quarters on account of a better revenue mix and cost savings. The PAT growth of 61% was predominantly driven by a lower interest cost YoY.
- The management is confident of sustaining the strong revenue growth momentum in the coming quarters on the back of innovations, increased distribution reach and adequate promotional activities. The OPM is expected to remain at 13.5% to 14.0% in the near future. We have broadly maintained our earnings estimates. In view of better growth prospects and decent valuations, we maintain our Buy recommendation on the stock with a price target of Rs250. The stock is currently trading at 17.5x FY2016E earnings.
- Key risk to earnings: Any significant increase in the raw material prices or a significant increase in the advertisement spending remains the key risk to our earnings.
Jaiprakash Associates
Recommendation: Hold
Price target: Rs62
Current market price: Rs54 Weakness in construction and real estate businesses dents earnings; maintain Hold Key points - Jaiprakash Associates Ltd (JAL) reported weak stand-alone results for Q1FY2015 largely due to an 84% drop in the real estate revenues and a slowdown in the construction business coupled with a surge in the interest burden. Thus, it reported a net loss of Rs81 crore for the quarter in spite of a healthy jump in the margin of the construction business.
- JAL's re-rating hinges upon the deleveraging of its balance sheet through the sale of some of its cement and power assets. Asset sales across divisions are likely to help the management reach its target of reducing the consolidated debt to Rs35,000 crore from Rs58,000 crore currently. Additionally, the outlook for its core businesses of construction and real estate should improve with the expected revival in the economy.
- We have lowered our earnings estimates to factor in the lower execution in the construction division along with a higher interest burden. Consequently, we have revised our price target for JAL to Rs62 and maintained the Hold rating on the stock.
| | | 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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