STOCK IN FOCUS 09/01/2019

                            

 Sun Pharmaceutical Industries (SUNP) has been investing significantly for building US specialty franchise. Further, due to successful US FDA clearance for Halol facility, best-in-class franchise, strong track record of transforming acquired assets, we see multiple growth drivers for SUNP. f On specialty side, SUNP got US FDA approvals for Yonsa, Illumya, Xelpros and and Cequa in FY18. It has already launched its key product i.e. Ilumya (Oct-18) and expected to launch Cequa and Xelpros in 4QFY19E. We see specialty business is a key growth driver for SUNP, going ahead. f With clearance to Halol unit, we expect strong recovery in US business (34% of sales; 22% CAGR over FY18- 20E) led by specialty product launches and low YoY base. We envisage SUNP’s domestic formulation business (31% of sales) to report 12% CAGR over FY18-20E led by new launches. f We expect SUNP’s overall sales/earnings to clock 14%/37% CAGR over FY18-20E, while EBITDA margin is expected to expand by 243bps to 23.6%. f We have a fundamental BUY recommendation on the stock with a Target Price of  Rs610.

Intraday Picks

MOTHERSUMI (PREVIOUS CLOSE: 158) BUY    For today’s trade, long position can be initiated in the range of
 Rs 154-156 for the target of Rs.163 with a strict stop loss of Rs 151.  TATAGLOBAL (PREVIOUS CLOSE: 215) BUY For today’s trade, long position can be initiated in the range of
 Rs 212-214 for the target of Rs.222 with a strict stop loss of Rs 210. VOLTAS (PREVIOUS CLOSE: 540) SELL For today’s trade, short position can be initiated in the range of
 Rs 544-548 for the target of Rs.530 with a strict stop loss of Rs 552.   

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•   YES BANK    BUY   AT 192    SL183      TGT  211                                                                           
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• BANKNIFTY    buy  at  27500   SL  27200  TGT   27900
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• Following the global cues, yesterday NIFTY opened with a gap on the upside but it could not sustain above 10800 mark and we witnessed some profit booing on higher levels but NIFTY is still trading above its 200DEMA. We maintain bullish view on NIFTY with the immediate term target of 10900 - 10925. On the downside, the Friday’s low of 10625 is an important immediate term support. However the range of 10550 to 10500 remains a strong support for short term.
• 08/01/2019

Automobile industry delivered subdued volume performance in 3QFY19, though wholesale industry witnessed YoY growth due to shift of festival by a month this time. Most automobile segments witnessed YoY growth except for M&HCV segment. PVs and 3Ws segments reported more or less flat volume on YoY basis, while CV segment witnessed growth due to healthy growth in LCVs, though M&HCVs declined in double-digit. 2Ws segment reported strong growth  and Tractor segment too witnessed double-digit YoY growth. However, from retail sales perspective, overall festival season was muted across the segments, which resulted into higher inventory at the end of the festiv al season. This has forced the auto makers to offer higher incentives/discounts to reduce inventory level at the dealers’ end. Therefore, the industry faced competitive environment and pricing pressure mounted towards the end of the quarter. We believe that despite decent revenue growth by the auto companies under our coverage universe, net profit would remain flat YoY due to margin contraction, as the players have displayed limited ability to pass on cost inflation. Moreover, the companies with higher overseas exposure would also deliver a subdued performance amid ongoing slowdown in global automobile industry. New insurance policy, NBFC issue, higher fuel prices and rural slowdown took the toll on company’s performance during the quarter. We believe that slowdown would continue over next 6-8 months despite correction in fuel prices, as the rural economy has been facing challenges. The ancillary companies are also expected to witness similar slowdown due to lower OEM sales and cost inflation. However, the companies with stronger presence in aftermarket (tyre companies) would see better performance due to double-digit volume growth and effective cost control.

Result Expectations

We expect a flat YoY growth in PAT for Auto OEM universe. The auto companies would record mixed performance with growth coming for Escorts, Bajaj Auto (BAL), TVS and M&M, while the companies like Ashok Leyland (ALL) and Maruti Suzuki (MSIL) would report decline. On the other hand, Tata Motors (TTMT) and Hero MotoCorp (HMCL) would report flat performance. We expect operating margin of the auto companies under our coverage universe to contract by 116bps YoY due to cost inflation and pricing pressure, while EBIDTA margin is expected to grow marginally on sequential basis.

In line with OEMs’ performance, we expect the auto ancillary companies to report subdued performance. We expect them to report healthy 15% YoY growth in top-line but net profit would remain flat on YoY basis due to margin contraction, higher depreciation and taxes.

We expect ongoing slowdown to continue in 4QFY19 as well as 1HFY20 due to demand slowdown in rural market. Few regions have witnessed higher monsoon deficit, which led to negative impact on rural income in recent times, which would continue to impact rural spending till next monsoon, in our view. Moreover, Rabi cropping is also down to some extent.

Outlook & Valuation - Roll Over to FY21E

In view of lower demand during festival, as well as ongoing slowdown coupled with adverse economic developments due to monsoon deficit and lower Rabi cropping, we reduce our volume, revenue and earnings estimates for FY19E and FY20E for the companies under our coverage universe. We introduce our FY21 estimates and roll over our Target Prices to FY21E. We expect FY21 to witness downcycle for the automobile industry. Factoring lower volume, subdued revenue growth and margin contraction, we cut our EPS estimates in the range of 2-47% for the automobile companies for FY19E and FY20E. We expect 4QFY19E to remain subdued with lower growth and 1HFY20E would also see similar trend, while2HFY20E would witness healthy growth due to pre-buying ahead of BS-VI implementation. Post that, we see cyclical reversal in FY21E and we expect CV and Tractor industry to witness downfall in volume. We expect margin contraction for the automobile industry in FY21E due to limited ability to pass on high cost inflation for BSVI engines. On the other hand, the companies’ investment would further increase towards new emission as well as safety norms in FY21, which would drag their respective return ratios, going forward. Therefore, we expect the automobile companies to witness contraction in their respective valuation multiple over historical average and would trade near to down cycle multiple. Accordingly, we lower our valuation multiple by 5-20% for our coverage universe.

Our target price reduction is in the range of 5-35% for the auto companies on account of muted earnings growth and valuation contraction. In view of challenging global business environment and falling crude price, we downgrade BAL to HOLD from BUY. In view of cyclical reversal for M&HCV and competitive margin pressure, we downgrade ALL to REDUCE from BUY. We would prefer PV segment over other auto segments.        Top Picks: Maruti Suzuki and Escorts.