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| Analysts' corner |
| S I Team / New Delhi Oct 12, 2009, 00:39 IST |
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DR REDDY'S LABRATORIES
Reco price: Rs 937
Current market price: Rs 956.55
Target price: Rs 1,180
Upside: 23.4%
Brokerage: Citi Investment Research
In the next 18-24 months, Dr Reddy's could see news flow from a series of key products in the US – 'one off' (Starlix, Lotrel) as well as 'multi-year' (Prilosec OTC, Arixtra, Allegra D) limited competition opportunities. Some of these may manifest in the form of launches or settlements and exact timelines. However, there is visibility that these will add value over the medium term.
Amongst its markets, Russia has recovered after a tepid first quarter on normalised inventory levels, easing liquidity, higher volumes and a stable currency. The US business also remains strong with core business growth and some imminent competition launches. India's recovery is on course. However, Germany has turned for the worse with sales likely to dip sharply in FY10. GSK alliance is expected to contribute materially from end-FY11.
The strong growth in emerging markets and growing traction in the US market is expected to drive earnings growth and capital efficiency in future. These along with greater visibility on the US patent challenge pipeline are likely to support higher valuations going ahead. The brokerage raised FY11 EPS estimate by 8 per cent, with a higher multiple of 18 on the back of a re-rating.
PLETHICO PHARMACEUTICALS
Reco price: Rs 261
Current market price: Rs 281.40
Target price: Rs 440
Upside: 56.36%
Brokerage: IIFL Research
Plethico Pharmaceuticals is a major nutraceuticals and OTC player. The company after 4-5 quarters of lacklustre performance is expected to show accelerated growth as recessionary pressures ease and consumer spends recover globally. The brokerage estimates 63 per cent growth in core earnings in CY09, followed by annual growth of about 20 per cent during CY09-11.The brokerage also mention further upsides to its estimates which could come from better operating leverage, faster penetration of foreign markets and higher offtake by Russian pharmacies through the Tricon deal. Its subsidiary Natrol's US business also seems to be stabilising and expected to record modest growth over the next 2-3 quarters.
Considering the highly fragmented structure of the market, the company has low-single-digit market share in the geographies in which it operates. Plethico is trading at less than nine times its CY09 estimated core earnings. The brokerage believes that the turnaround in business growth in 2HCY09 will drive a re-rating of the stock in line with peer mid-cap pharma companies that are trading at 12-15 times forward earnings. The brokerage puts target price of Rs 440, which is 12 times its CY10 estimated core earnings.
RELIANCE INDUSRTRIES
Reco price: Rs 2,120
Current market price: Rs 2,100
Target price: Rs 1,750
Downside:16.7%
Brokerage: Kotak Institutional
Reliance Industries' (RIL) FY10E and FY11E is below consensus estimates as it faces significant risk from recent developments like collapse in chemical and refining margins and a sharp appreciation in the value of the Indian rupee against the dollar. RIL's Q1 FY10 blended margin of $6.8/bbl and extremely weak margins of the past few months show that $7.8/bbl refining margin estimate for FY10E may be optimistic.
The positive developments in the E&P segment are critical to support RIL's stock price in light of the low scope for positive surprises in the chemical and refining segment. However, the wide gap between the current stock price (which reflects expectations regarding Reliance's E&P segment) and fair valuation; the current stock price is implying $19 billion for potential new discoveries and translates into 50 tcf of additional gas reserves.
The earnings model incorporates the recently-completed merger of Reliance Petroleum (RPET) with RIL versus consolidation of 70.4 per cent of RPET's financials previously and stronger rupee-dollar assumptions. The revised FY10E, FY11E and FY12E EPS stand at Rs 104, Rs 151 and Rs 192 versus Rs 109, Rs 158 and Rs 199 previously. The SOTP-based valuation on FY2011E estimates come to Rs 1,750, suggesting a 17 per cent potential downside to target price.
EVERONN SYSTEMS
Reco price: Rs 426
Current market price: Rs 431.25
Target price: Rs NA
Brokerage: Edelweiss Securities
Everonn Systems (Everonn), through usage of VSAT-based technology in education, has made distance and quality of teaching in classroom irrelevant through its Vitels segment says the research house. The company has used the same technology platform to service multiple markets, be it schools, colleges or retail. Estimate revenues to grow CAGR of 57 per cent over the next two years in this segment. Currently, the company has implemented ICT projects in 4,442 schools, which contribute 33 per cent to overall revenues. The company is expected to remain a key player in ICT projects; it is likely to post CAGR of 30 per cent in school additions and 33 per cent in revenues over FY10-11E.
Vitels is in the early stages of its lifecycle. As the segment's investment phase nears completion and becomes relatively mature, margins should improve. Expect the college segment to be a key margin driver as student enrollment per college (40 for FY09) remains low. The brokerage expects consolidated topline CAGR of 47 per cent and net profit CAGR of 68 per cent, over FY10-11E. The stock is currently trading at 15.9x FY10E and 10.2x FY11E. Maintain buy.
DHAMPUR SUGAR
Reco price: Rs 103
Current market price: Rs 149
Target price: Rs 99.95
Upside: 49%
Brokerage: Religare Hichens, Harrison
The brokerage has estimated that Dhampur Sugar's sales volume will decline by 6.2 per cent to 0.46 million tonne (compared to 0.49 million tonne earlier) in SY10 (SY is sugar year, which starts from October and closes in September). This will also translate into a decline of 5.8 per cent in revenue for SY10 at Rs 1,503.5 crore. The one-time gain of Rs 15.5 crore from the import and sale (assuming exchange rate of $47) would be booked in Q1SY10. Besides one time gain, the lower procurement cost for the imported raw sugar is likely to expand EBITDA margins by 180 basis points to 21.8 per cent in SY10, as against 20 per cent estimated earlier.
Considering the improvement in EBITDA margins the brokerage has revised its net profit estimates for SY10. The net profit is estimated to grow by 3.4 per cent to Rs 162 crore (excluding one-time trading gain of Rs 15.5 crore). However, including this one-time gain, the net profit for SY10 would grow by 10.8 per cent at Rs 174 crore.
The brokerage, which is positive on the sugar sector outlook maintains its buy on the stock with the price target of 149 per share. This price target is based on 4.5 times earnings multiple for SY10 earnings. At the recommended price of Rs 103 the stock is trading 3.1 times estimated earnings of SY10.
Current market price as on October 9, 2009.
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