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STOCK UPDATE Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Rs1,190
Current market price: Rs1,095 Price target revised to Rs1,190; maintain Buy Key points -
Sun Pharma to gain from shortage of Doxycycline in US market: Anti-biotic drug Doxycycline is one of the drugs listed under the shortage category in the USA. Recently, Hikma Pharmaceuticals (Hikma) has revised its revenue forecast showing that Doxycycline will add at least $100 million of incremental revenue with a potential gain of $60 million in the incremental profits. This has relevance for Sun Pharmaceutical Industries (Sun Pharma) as it also becomes one of the suppliers for Doxycycline after acquiring the generic business of URL Pharma in the USA. Last quarter, URL Pharma had taken a price hike for Doxycycline in the USA, following the shortage of drugs, while Hikma's production of Doxycycline was halted due to a warning letter by the US Food and Drug Administration (USFDA). Though Hikma's production of Doxycycline is normalised now and therefore it hopes to gain significantly from this drug, Sun Pharma is also expected to gain both in terms of revenues and healthy margin. We can expect nearly $60-80 million (we have built in $80 million) revenues from this product with the operating profit margin (OPM) at approximately 50 % in FY2014. -
Doxycycline will make up for the loss related to Lipodox/Doxil: Sun Pharma has got an opportunity to supply Doxil (liposomal doxorubicin, sold as Lipodox by Sun Pharma) in the USA during FY2013 after getting fast-track approvals from the USFDA due to shortage of drugs. We estimated nearly $250 million of revenues from this product with a very high margin due to limited competition. However, since the resumption of supplies by innovator Janssen Pharmaceuticals (Janssen Pharma) and generic approvals in February 2013, Sun Pharma has started losing market share in Lipodox. Based on the retail sales data (in US dollar terms) for May 2013, the market share of Sun Pharma's Lipodox declined by 14% month on month (MoM; market share stood at 16.1%). However, the generic version of Lipodox recorded a market share of 32.7% (up 17.7 basis points MoM). We believe Sun Pharma would lose more on the margin front due to increased competition in Lipodox. However, with the ramp-up in Doxycycline, Sun Pharma would be able to materially make up for the loss related to Lipodox. -
We have revised earnings estimates and price target: We have revised our earnings estimates upwards by 12.9% and 3.5% for FY2014 and FY2015 to factor the upside from Doxycycline and currency benefits. Accordingly, our price target gets revised up by 6% to Rs1,190 (which implies 26x estimate earnings per share [EPS] of FY2015). We maintain Buy rating on the stock. Eros International
Recommendation: Buy
Price target: Rs240
Current market price: Rs139 Better days ahead We recently met Mr. Kamal Jain, group chief financial officer of Eros International Media Ltd (EIML), to discuss the current state of the business environment and the future outlook. The management indicated that FY2014E would be better for the earnings performance after a soft performance in FY2013 (when EIML's revenues had grown by 13% and net profit had grown by 4.7%). The optimism was driven by some big-ticket releases in FY2014E ("Kochadaiyaan", "Ram Leela" and "Rambo Rajkumar" among others) coupled with the company's proven track record of making high-margin low-budget movies (recent success "Raanjhanaa", coming up "Bajate Raho"). It further shared that better monetisation of the movie slate and HBO partnership is expected to aid margin improvement (the HBO deal has the potential net profit margin of 80%). The progress on the HBO partnership has been on expected lines and the deal is expected to contribute around Rs3-4 crore of revenues in FY2014E. On the Q1FY2014 performance, the management said that the revenue and earnings growth would be driven by a much better than expected performance by the company's low-budget film, "Raanjhanaa". The company also released some other successful movies like "Yeh Jawaani Hai Deewani" (overseas rights) and "Go Goa Gone" (which enjoyed average success) during the quarter.
FY2014E to be better than FY2013: The management indicated that FY2014E would be better in terms of the earnings performance after the soft performance of FY2013 (when the company's revenues had grown by 13% and net profit had grown by 4.7%). The optimism was driven by some big-ticket releases in FY2014 ("Kochadaiyaan", "Ram Leela" and "Rambo Rajkumar" among others) and the company's proven track record of making high-margin low-budget movies (the recent hit "Raanjhanaa", coming up "Bajate Raho"). EIML has some key movies lined up for release in FY2014 like "Kochidayaan", which is expected to be released around Diwali. The company has already begun the process of monetising its key movie, "Kochidayaan" (the company has sold its satellite and music rights), and has received a very healthy response to the movie's distribution rights as well. The company is confident of releasing all its key films on schedule in FY2014. Further, it has planned to spend Rs700 crore in FY2014 out of which Rs150 crore will be on content. With the increasing penetration of the Internet (on PCs and mobile), the advent of the 4G technology and the partnership with Viacom 18's Colors channel, the company expects the monetisation of its film library to improve gradually in FY2014E and FY2015E.
Valuation: In the last six months EIML's stock price has corrected by close to 34%, led by a weak quarterly performance and delays in the planned release of the big movie "Kochadaiyaan". Further, the lower disclosure level of the company's financials has also led to apprehension among investors. The management has assured that after the New York Stock Exchange (NYSE) listing of Eros Plc. (some time in October-November 2013), the disclosure level will improve significantly. The management expects advances of close to Rs1,000 crore to come to EIML from Eros Plc. (parent) after the listing on the NYSE. With earnings improvement on cards and the company's strategy on low-budget high-margin movies turning to be successful, we expect the stock's performance to follow suit. At the current level the stock is trading at an inexpensive valuation of 6x FY2015E earnings. We reiterate our Buy recommendation on EIML with a price target of Rs240 for a 12-month time frame.
SECTOR UPDATE Insurance Slowdown persists -
The growth in the annual premium equivalent (APE) of the life insurance industry declined for the eleventh consecutive month in May 2013 as it declined by 23.6% year on year (YoY). This was largely contributed by the Life Insurance Corporation of India (LIC), which showed a decline of 32.0% YoY in the APE. On the other hand, the private players reported a decline of 7.2% YoY in May, with Aviva Life (down 42.5% YoY), HDFC Life (down 38.1% YoY) and Birla Sun Life (down 31.2% YoY) posting the steepest decline in the APE. However, Reliance Life Insurance (Reliance Life; up 165.5% YoY) and Kotak Life Insurance Company (Kotak Life; up 138.1% YoY) posted a significant increase in the APE on a year-on-year (Y-o-Y) basis. -
On a year-to-date (YTD) basis (April 2013-May 2013), the private players fared relatively better as their APE declined by mere 4.1% YoY as compared with a 28.9% Y-o-Y decline by the LIC and a 21.1% Y-o-Y decline by the industry. The growth (April 2013-May 2013) in the APE of the private players was mainly led by players like Kotak Life (up 100.9% YoY) and Reliance Life (up 88.8% YoY). Max Life Insurance (Max Life) also reported a healthy growth of 15.6% YoY in its APE. -
On a month-on-month (M-o-M) basis, the APE for industry grew by 28.5% with the private players and LIC showing a growth of 51.9% and 16.1% respectively. On an M-o-M basis, mere eight out of the 24 players posted a decline in their APE. Companies like Tata AIA Life Insurance Company (Tata AIA), MetLife and Max Life reported a decline of 15.6%, 10.4% and 8.3% respectively in their APE. -
The market share of the private players in May 2013 improved by ~725 basis points to 41.0% (LIC, 59.0%) compared with 33.8% in May 2012. During the period under review, the companies like Reliance Life, Kotak Life and Max Life turned out to be major gainers as their market share improved by ~440, 190 and 85 basis points respectively. Outlook
Slowdown persists in the sector and it's been almost a year since the sector has seen a positive growth (Y-o-Y basis). Compared with a growth expectation of about 10% at the beginning of the fiscal, we now expect the premium growth to be flattish in FY2014. The IRDA is likely to come up with guidelines on bankassurance over the next couple of months, which could help the sector. Besides that, the transition towards the newer regulations (proposed for traditional products) will continue to impact the premium growth. | | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | | | |
