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| Summary of Contents STOCK UPDATE Dishman Pharmaceuticals & Chemicals
Recommendation: Book out
Current market price: Rs188 Book out Key points - The rally of close to 50% in Dishman Pharmaceuticals & Chemicals in the past few months has pushed the stock's valuation to the higher end of its historical range at 9x one-year forward earnings. It is now trading at a significant premium to the average multiple of the last three years, ie 5.5x. Thus, the stock is not cheap anymore. Moreover, we do not expect any significant re-rating from here, given the company's track record of inconsistent financial performance.
- We reckon that there could be further upside if the company delivers on the much awaited event of de-leveraging its balance sheet through the sale of assets (especially the Ahmedabad SEZ land) and that is a risk to our call. However, the company has failed to deliver the same in the last two years despite repeated assurances.
- Consequently, we recommend booking out of the stock at this level (with close to 90% gains since our initiation two years ago on August 31, 2012).
VIEWPOINT Essel Propack
Current market price: Rs126 Healthy returns in short time; book profit Key points - Essel Propack Ltd (EPL), a leading packaging company, has demonstrated a decent rally in recent times because of an improving financial performance, turnaround of the European operations and improvement in the working capital. It has rallied by a strong 31% since our Viewpoint report on the company was published on June 3, 2014. In Q1FY2015, the company's revenues grew by 14% and earnings increased by 19% year on year (YoY). However, the operating profit margin (OPM) contracted due to a higher raw material cost.
- The company's management is expecting strong traction in the European and American operations in FY2015 on account of better capacity utilisation, cost reduction initiatives and improving business outlook. In China, the company has tied up with two local manufacturers for the supply of its products. However, its German and Russian operations shall remain depressed in the next few quarters due to local issues and lower capacity utilisation.
- The company is now in expansion mode and is setting up new facilities in East China and India. It is increasing its foothold in the non-oral care category (where the margins are high) by leveraging its strong brand equity and product mix, and offering cosmetic laminated tubes for various categories. The capital expenditure for FY2015 is estimated at Rs140 crore while the debt level would gradually decline in the upcoming years. The company is targeting a 15% revenue growth and an OPM of 18% in FY2015.
- A decent balance sheet, improving fundamentals and pick-up in volumes along with a turnaround in most of the depressed units (in Poland, Mexico) will enhance the overall financial performance of EPL. We expect the company to report revenues and earnings CAGR of 14% and 30% in FY2014-16 respectively. At the current market price, the stock is trading at a price/earnings ratio of 10.6x its FY2016E earnings, indicating that it is fairly valued. Hence, we recommend investors to book full profit at the current market price and wait for a re-entry opportunity (a 10-15% correction would be good entry level).
| | | 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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