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Brokerage Recommendations

Wednesday, October 10, 2012

Sharekhan calls a ‘Buy’ on Bajaj Corp
CMP: Rs. 187    Target Rs. 208

Results marginally ahead of expectation: Bajaj Corp Ltd’s (BCL) Q2FY2013 results are marginally ahead of our expectation (by 5%), largely on account of a higher than expected gross margin (GPM) during the quarter. The net sales grew by 27.2% year on year (YoY) to Rs135.9crore (in line with our expectation of Rs134 crore) in Q2FY2013. With an improvement of around 375 basis points in the GPM, the reported profit after tax (PAT) grew by 33.6% YoY to Rs 38.4 crore, which is marginally ahead of our estimate of Rs35.6 crore.

Another quarter of close to 20% growth in sales volume: The second quarter of FY2013 was the seventh consecutive quarter of close to 20% growth in sales volume. It reported a sales volume growth of ~19% in Q2FY2013 on the back of sustained strong volume growth in its flagship brand Bajaj Almond Drops Hair Oil (ADHO). The sales volume of Bajaj Kailash Parbat Cooling Oil (KPCO) almost doubled on a year-on-year (Y-o-Y) basis to 12,745 cases during the quarter.

Profitability improved significantly: In Q2FY2013, the GPM of the company improved significantly, by 375 basis points YoY and 150 basis points quarter on quarter (QoQ), to 57.2%. The strong improvement in the GPM can be attributed to sustained strong volume growth, close to 7.3% YoY improvement in the blended realisations and around 5% Y-o-Y decline in the price of light liquid paraffin (LLP), a key input for the company. With the LLP prices showing a downward trend and vegetable oil prices likely to decline from the current level, we expect the GPM to remain firm in the coming quarters.

Outlook and valuation: The second quarter of FY2013 was yet another quarter of strong operating performance by BCL. The highlight of the quarter was a strong improvement in the GPM on both Y-o-Y and sequential bases. We broadly maintain our earnings estimates for FY2013 and FY2014. With the volume growth likely to sustain at around 20%, we expect BCL’s top line and bottom line to grow at compound annual growth rate (CAGR) of 23.2% and 26.3% respectively over FY2012-14.

At the current market price, the stock is trading at 17x its FY2013E earnings per share (EPS) of Rs11.0 and 14.4X its FY2014E EPS of Rs12.9. In view of the consistent strong performance for the past several quarters, we have revised upwards our target multiple for the stock to 16x, which is a 40% discount to the current valuation of our fast-moving consumer goods (FMCG) basket. Our revised price target for BCL now stands at Rs 208. However, due to the minimal upside, we maintain our Hold recommendation on the stock. The key monitorables would be any development on acquisition front in the domestic and international markets, and the company’s ability to adequately utilise the cash for improving the business fundamentals.

SKP Securities calls a ‘Buy’ on Biocon
CMP: Rs. 281    Target Rs. 338

Investment Rationale: Branded Formulation is expected to drive growth: Biocon’s branded formulations business has grown rapidly over the period of time, offering a large basket of products for chronic disease. Biocon recently launched its first reusable insulin delivery device which has been showing sustainable value in the company’s basket of insulin therapies in the market.

Commitment to deliver affordable, quality Insulin: push the demand: Biocon has a good talent base, low cost infrastructure and a low cost scientific talent pool that makes it to manufacture affordable drugs. We do expect affordability of drugs is going to be the crux for the company’s growth strategies. 

Upcoming Facility in Malaysian to expand Biocon’s wings: Biocon has commenced work on its Greenfield Malaysian biopharma manufacturing facility. We expect it to commence operation by 2014. The plant is expected to be one of the largest investments in the Malaysia healthcare biotech sector and expected to cater to the global requirements for Biocon’s range of biosimilar insulin and insulin analogs for diabetes treatment.

Insulin demand is expected to increase on the broader: Biocon has strong presence in anti-diabetic segment. We expect Biocon to launch Rh insulin in FY14 in the regulated market as they have completed phase IIItrials in EU. Insulin & Immunosuppressant is capturing 12-18% of domestic market.

Research & Development to be backbone of future growth: Biocon spends around 8% of its revenue on its R&D which is one of the highest in the industry.

Outlook & Recommendation: We expect Biocon to report healthy growth in the top line on the back of increasing expenditure on R&D segment and increasing demand of affordable drugs in the market. At current market price of Rs 273, Stock is trading at an EV/EBIDTA of 10.2x & 9.5x for FY13E and FY14E respectively. We recommend BUY rating on the stock with a target of Rs.  338 (23%UPSIDE) at the EV/EBIDTA of 9.5x on FY13E earning over the period of 18month.

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