Stock Update Torrent Pharmaceuticals
Reco: Buy
PT: Rs1,741
CMP: Rs1,350
Strong Q3 performance; upgrade to Buy with PT of Rs1,741 Key points - Result synopsis: For Q3FY2016, Torrent Pharmaceuticals (Torrent Pharma)reported a growth of 33.1% in sales to Rs1,539 crore. Its operating profit grew by 155.4% to Rs613 crore, while operating profit margin (OPM) improved by 1,928BPS to 39.8% and profit for the quarter grew by 189.2% to Rs483 crore.
- Strong performance driven mainly by USA: For Q3FY2016, Torrent Pharma's result was ahead of expectation largely due to higher-than-expected revenues from its launches like gAbilify, gDetrol LA, gNexium and gNamenda in USA (up 226% YoY). The continuation of this is dependent on market conditions in future, including additional competition. Its domestic business recorded a 7% growth in sales to Rs450 crore, lower than the market growth, due to discontinuation of certain promotional schemes and hygiene initiatives which affected the business in short term. However, it will be a positive effect for long term. Brazil reported sales of Rs118 crore, a 24.4% decline (adjusted for currency movement, the growth was 24%).
- Growth outlook: Growth to be driven by its products pipeline in the USA as the company plans to launch eight to ten products in FY2017 (complex products with low-competition and high value). Additionally, the company will see growth in acquired products from Elder Pharma (Shelcal and Chymoral). Tax rate to be in the range of 26-28%. The company has also successfully concluded USFDA audit at Indrad (in March 2015) and Dahej (expect the establishment inspection report in Q4FY2016) plants.
- Upgrade to Buy with a PT of Rs1,741: We have upgraded our earnings estimates for FY2016 by 21% and maintained our FY2017 and FY2018 numbers. We have also upgraded our rating to Buy on the stock with a price target of Rs1,741 (valuing the stock at 20x its FY2018 EPS of Rs87).
Zydus Wellness
Reco: Buy
PT: Rs915
CMP: Rs732
Decent valuations with revival expected in FY2017; maintain Buy with PT revised to Rs915 Key points - Revenues grew in single digit; margins improved: During Q3FY2016, Zydus Wellness' revenue grew by just 3% YoY to Rs110.0 crore affected by decline in revenues of Nutralite and Everyuth face wash. However, on a like-to-like basis the overall revenues would have grown by 5.5% after excluding the effect of price reduction in Nutralite brand. The consolidated GPM improved by 284BPS YoY to 70.7% driven by a decline in the prices of palm oil and sucralose (artificial sweetener) and OPM stood almost flat at 21.7% during the quarter.
- Maintained leadership positioning in key categories: Sugarfree maintained the leadership position in sugar free category with a market share of 93.3% (gained by 110BPS) and peel-offs category with a market share of 91.4% (improved by 40BPS) during the quarter. The sugar free category grew by 6.6%, while peel-off registered a flat growth of 0.8% during the quarter. Everyuth Scrub's market share stood at 31.4% and the category grew by 13.7% (giving support to overall revenues) in Q3FY2016. Nutralite's market share stood at 39.8% (category saw a decline of 4.1%).
- Management focusing on getting growth rate back on track: The management is confident of getting back to double-digit revenue growth in FY2017 on the back of extensive marketing initiatives and increase in distribution reach. The current distribution reach of Everyuth brand stood at 3.8 lakh and Sugarfree brand stood at 3.0 lakh, and is expected to improve further in the coming quarters. The company is planning to re-launch Everyuth face wash in the coming quarters and would work on improving the market share, which currently stands at 1.8%. Further the company is looking at inorganic opportunities both in domestic and international markets to improve its growth prospect in long run.
- Valuation and view: Zydus Wellness' revenues are expected to get back to double-digit revenue growth trajectory with expected revival in urban economy in H2FY2017. The consolidated operating profit margin is expected to remain in the range of 20-21% in the coming years. The stock has corrected by 17% in the last one month and is trading at 24x its FY2017E earnings (20x FY2018E earnings). Thus, the downside risk is limited from the current levels. In view of better growth prospects in near term and discounted valuations, we have maintained our Buy recommendation on the stock with a revised price target of Rs915 (valuing the stock at 26x its FY2018E earnings).
Thomas Cook (India)
Reco: Buy
PT: Rs255
CMP: Rs193
Revival in performance expected in FY2017; maintain Buy with PT revised to Rs255 Key points - Revenues grew in strong double digits; cash flows improved YoY: TCIL's consolidated revenues grew by 41.3% YoY to Rs1,044.0 crore in Q3FY2016 driven by a 33% revenue growth in core travel business revenues and 47% growth in human resource (HR) services business (Quess Corp). The operating profit margin (OPM) declined by 204BPS YoY to 4.3% largely on account of decline in the margin of financial services business, increase in contribution from HR services business and losses at EBIDTA level by vacation ownership business. The interest cost rose by 91% to Rs29.0 crore, which had an effect on PAT. The company has posted a loss of ~Rs2 crore at adjusted PAT level. However, excluding one-time impartment cost of Rs6.2 crore and acquisition related cost of Rs5.5 crore, the PAT at adjusted level would have been close to Rs10 crore. With sustained focus on improving the working capital, TCIL's cash flows improved to Rs209.6 crore from Rs204.4 crore in the corresponding quarter last year.
- HR services business continued to perform well: HR services business continued to perform well for the company with revenues growing by 47% and the PBIT margin improved by 50BPS to 5.3% during the quarter. The travel business grew by 33.3% YoY to Rs81.8 crore, but the business did make a loss of Rs1.1 crore at EBIDTA levels (largely due to higher acquisition cost and other related expenses). The financial services business declined by 5.2% and the PBIT declined by ~18% mainly due to volatile currency.
- Quess Corp to raise Rs400 crore through IPO: Quess Corp, a subsidiary of TCIL engaged in HR services business, has planned to raise Rs400 crore by listing on markets. Quess Corp plans to use the IPO proceeds for repayment of debt, funding of capital expenditure and working capital requirement.
- Outlook–HR services business to lead the performance: The travel business is expected to maintain double-digit revenue growth momentum on the back of improvement in the corporate travelling. Also, consolidation of Kuoni's business will improve the prospects of outbound travel business in long run for the company and improve the revenues of travel business. The HR services business is expected to achieve a strong revenue growth and is expected to see OPM improvement to 8% from the current 4-5% by FY2018 on the back of improvement in the revenue mix. The vacation ownership business has maintained a double-digit revenue growth and we expect the profitability of the business to improve gradually once it attains certain scale. The financial services is expected to post subdued performance in the near term due to volatile currency movement, but has strong growth potentials in long run.
- Maintain Buy with revised PT of Rs255: We re-iterate that FY2016 is a year of consolidation and restructuring of various acquired businesses for TCIL. The incorporation of Kuoni's business and strongly growing HR services business will improve TCIL's consolidated performance in FY2017 (larger benefits could be seen in FY2018 with stable global macro and currency environment). Also, the company is continuously focusing on improving its cash flows through better working capital management. We have marginally revised downwards our earnings estimates for FY2017 and FY2018 to factor in a lower-than-earlier-expected OPM. We have maintained our Buy recommendation on the stock with a revised price target of Rs255 (valuing at 13x its FY2018E EBIDTA).
Inox Leisure
Reco: Buy
PT: Rs307
CMP: Rs212
Outlook remains strong; maintain Buy Key points - Adjusted PAT increased 43.8%, misses estimates: For Q3FY2016, Inox Leisure Ltd (ILL) reported a below-than-expected performance, owing to weaker-than-expected success in the movies released during the quarter. The consolidated revenues for the quarter increased by 13.7% to Rs341.7 crore, led by 14% Y-o-Y growth in gross box office revenues (GBOC), 14% Y-o-Y rise in food & beverages, while advertisement revenues were up by 2% YoY. Its OPM improved marginally to 15.5% YoY, but was down 43BPS on a sequential basis. The decline in margins on a sequential basis was primarily due to higher employee costs coupled with other expenses. The reported net income increased by 9.1% YoY to Rs15.6 crore on the back of higher tax expenses coupled with one-time exceptional expense of Rs5.0 crore (Rs3.5 crore of assets written-off and Rs1.3 crore for provisioning for retrospective amendments to Bonus Act). Excluding the exceptional item expenses, the adjusted PAT increased by 43.8% YoY to Rs20.6 crore.
- On track to reach 645 screens over next 2-3 years: (1) Added four new properties during the quarter (presence in 57 cities) and 20 new screens, taking the total number of properties to 105 with 413 screens and 107,576 seats; (2) Footfalls increased by 11% YoY to 1.29 crore; (3) The average ticket price (ATP) increased by 2.3% YoY to Rs179, (management has taken moderate price hikes, to gain on footfalls), food and beverages spends per head (SPH) increased by 5.4% YoY to Rs59), while occupancy rate remained stable at 28% YoY and was down 400BPS QoQ; (5) While advertising revenue per screen declined by 8% YoY to 0.78 million (took a price hike during the fag end of the quarter), expect market to absorb the hikes gradually and reflect in higher ads revenues; (6) Entertainment tax increased to 19.2% as compared with 18.9% in Q3FY2015, led by some of the properties falling out of tax exemption and also overall increase in entertainment tax rates; (8) The management expects margins to improve over FY2017 and FY2018 on account of incrementally higher contribution coming from advertising and F&B revenues; (9) Expect to add six new properties in Q4FY2016, taking the total to 111 and expect screen additions of 4,246, taking the total to 111,822 by the end of FY2016. On track to reach 645 screens in the next two to three years.
- Outlook remains strong, maintain Buy with a PT of Rs307: The management has reiterated at aggressive growth plans for over the next two to three years and plans to reach 645 screens over the same time frame. Its healthy balance sheet and treasury shares of 4.3 crore shares provides strength to drive inorganic growth activities in the coming years. We believe, ILL with its strong brand and extended reach is well poised to leverage opportunity in India's under penetrated multiplex sector and growing spends of moviegoers. At current levels, the stock trades at inexpensive valuation of 9.1x and 7.4x on FY2017E and FY2018E based on EV/EBITDA. We have maintained our Buy rating on ILL with an unchanged price target of Rs307.
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