Investor's Eye: Update - Aurobindo Pharma; Viewpoint - Gulf Oil Lubricants India

 

Investor's Eye [December 16, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE     Aurobindo Pharma Recommendation: Buy Price target: Rs1,272 Current market price: Rs1,097   Expanding wings to foray into nutraceutical business; maintain Buy    Key points  Acquisition of Natrol to expand horizon: Having strengthened its positioning in generic injectables, controlled substances and other niche prescriptions and institutional business, Aurobindo Pharma (Aurobindo) is set to expand its presence in nutraceutical and health supplement markets through the acquisition of Natrol LLC. The company emerged as the highest bidder at a consideration of $132.5 million for Natrol, which was seeking bankruptcy in a US court. Natrol has seven key brands, an extensive distribution network in the USA, Europe and some other Asian countries, an e-commerce platform and manufacturing assets in California (USA). The acquisition will provide a readymade launchpad for Aurobindo to play in the fast growing nutraceutical and health supplement markets (market size estimated to be $30 billion in USA). Natrol is currently a profitable company (thus earning accretive for the company from day one) and has immense potential to grow. QIP to back up balance sheet: The company has taken requisite approvals to raise funds upto $350 million through issue of securities (mainly through Qualified Institutional Placements [QIPs]). The funds raised would be invested in strengthening the manufacturing capabilities and other growth opportunities. Currently, the company has approximately $447 million (till the end of Q2FY2015) of debts and has planned a capital expenditure of Rs1,150 crore in the next two years. The equity expansions would comfort the balance sheet, while the operating leverage will continue to be stronger.  We continue to recommend Buy on the stock with a price target of Rs1,272 and potential upside from Natrol: We consider the acquisition of Natrol a positive development for the company. However, we prefer to wait for more clarity on the revenue potential and the margin profile of Natrol (which faced business disturbances before going bankrupt and therefore the current revenue and margin profile has a potential to see a material change in the couple of years), before adjusting the event in our revenue model. We maintain our Buy rating on the stock with a price target of Rs1,272 (implies 16x FY2017E EPS).   VIEWPOINT       Gulf Oil Lubricants India   Current market price: Rs541     Sweet gain in short time; take home a part of it    Key points During the first week of September 2014 (at CMP of Rs313), we had initiated our viewpoint on Gulf Oil Lubricants India, with a positive stance envisaging healthy earnings growth and re-rating post demerger. Further, we reviewed and retained our positive stance in our follow up on update (report dated on November 28, 2014) on the stock given the apparent weakness in global crude oil prices. Since our initial viewpoint (dated September 3, 2014), the stock has appreciated sharply by 73% and moved up by 18% after our follow up on the update.  We believe the sharp fall in crude oil prices was one of the key near-term triggers to stem such appreciation in the stock price, but the current market price is largely pricing in the continued weakness in the crude oil prices. In the mean while, the crude oil prices have almost halved in the last six months to $60 per barrel (brent crude oil), which is the lowest since global financial crisis in 2009 (it touched $40 during the crisis).  We believe positives like above industry average growth led by capacity and market expansion, margin improvement and re-rating triggers post demerger will remain supportive for the stock in the long run. However, a sharp run-up in the stock price in short time (up by 73% in 100 odd days) is largely priced in the near-term positives and the current valuation also hovers above 20x to our rough estimate of FY2016 earnings. Hence, we advise our investors to partially take home some quick profits and hold partially for long-term gains. 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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