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US regulatory issues persist
Downgrade CDH to NEU: The USFDA inspected CDH’s key formulations plant at Moraiya, in Apr-19, and issued 14 observations post audit. Our analysis of the form 483 suggests that the risk-reward is not in favor of CDH.
* Issues related to contamination in the sterile unit could be a major hurdle for clearance. Since the facility contributes 40-45% to US revenues (in our estimates) and has over 30% of the pending US filings, we believe a warning letter (WL) or import alert would be detrimental for CDH. The US remains CDH’s key performer as India and other segments have been continuously disappointing. Any slowdown in the US could severely hurt earnings, especially since gLialda, gTamiflu and gAsacol HD contribute 29% to US revenues (in FY19).
* Our WL scenario (less likely) shows a potential ~37% dip in FY21E earnings. However, assuming a delay of 6-8 months in clearing the plant (in our base case), we cut our FY21E earnings by 17% and multiple to 18x from 22x. In case of any adversities, the elevated debt (0.7x FY19E Net D/E) could prove to be fatal for earnings. Downgrade to NEU with a revised target price of Rs 315 (18x FY21E EPS).
Upgrade TRP to BUY: TRP corrected ~15% over the last one month on regulatory concerns over the Dahej facility. The plant has received serious observations from the USFDA, which can potentially lead to an OAI/ warning letter soon. However, the fall in the stock price is unjustified in our view, as Dahej contributes only ~10% to US revenues and pending filings are limited.
* Meanwhile, the earnings driver for TRP remains its India branded business, led by legacy products like Shelcal, Chymoral and Losar. TRP has also successfully derived synergies from the Unichem acquisition as margin jumped from ~22% in FY18 to ~26% in FY19. With potential price hikes in Non-NLEM portfolio and improvement in MR productivity, we expect margin to cross 27% in FY21E.
*Post its recent correction, the stock is available at 20x FY21E EPS. With a ~Rs 33bn domestic franchise, the ability to generate Rs 10-12bn FCF every year and 18-20% ROEs, TRP merits a higher multiple, in our view. We have increased our multiple from 22x to 24x. Upgrade the stock to BUY with a revised target price of Rs 2,000 (24x FY21E EPS).
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