Shilpa Medicare Ltd.|Q2FY15 Result Update | CMP : Rs.557 | Rating : HOLD | Target : Rs.473 | A muted quarter; however, levers for future growth remain in place :: IndiaNivesh

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Shilpa Medicare (SLPA IN) delivered muted performance for the quarter. This has
been mainly due to high base of past year. We trim our FY15/FY16 EPS estimates
by 19% and 14% to Rs21 and Rs29, respectively, and continue to value SLPA at 16x
FY16 earnings to arrive at revised price target of Rs473 (from Rs542 earlier). We
maintain HOLD based on valuation. We strongly believe that foundation building
for next phase of higher growth is on track and would deliver returns over next 2-
3 years. The key near term trigger – USFDA approval for Raichur facility- is yet to
play out. The levers for further upside in earnings as well as re-rating of stock due
to shift towards superior product mix are in place and hence we maintain positive
view on the stock.
A muted quarter; however, levers for future growth remain in place
Though sales up 13% y-y, adjusted PAT down 1% y-y due to higher operating
expenses: SLPA delivered 13%, y-y growth in sales to Rs1.5bn, driven by higher
custom synthesis business. The gross margin declined 286bps y-y and 276bps q-q
due to higher raw material cost. This has been partly due to higher usage of raw
material for exhibit batches. EBITDA margin reduced by 253bps y-y and 321bps q-q
to 18%, mainly due to higher manpower cost. Manpower cost rise has been on
account of increase in number of employees and annual hikes for the existing
employees. We believe that higher manpower cost may continue for few quarters
as the new capacities come on stream. Lower depreciation and higher other income
was offset by higher tax resulting in 1% drop in adjusted PAT to Rs174mn on y-y
basis. Capex for FY15 is expected to the tune of Rs1bn, out of which Rs400mn is
spent in 1HFY15.
Valuation: We reduce our earnings estimate by 19% and 14% to Rs809mn and
Rs1.1bn for FY15 and FY16, respectively. We continue to value SLPA at 16x FY16E
EPS of Rs29 to arrive at price target of Rs473 (from Rs542 earlier). We maintain
HOLD rating as the stock is trading at higher end of valuation at 26x FY15E EPS of
Rs21 and 19x FY16E EPS of Rs29.
We continue to like business model of SLPA and believe that groundwork for next
phase of growth is on track. We expect return on investment to improve going
forward as new capacity gets utilized and product mix shifts to relatively higher
margin products. The key near term trigger – USFDA approval for Raichur facility- is
yet to play out. Hence, we remain positive on the stock and have faith that company
has capability to show robust growth in future.

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