Sharon Bio-Medicine - Delay in key trigger to play out....downgrade to HOLD :: IndiaNivesh

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We cut our EPS estimates of Sharon Bio-Medicine Ltd. (SBML) for FY15E and FY16E
by 38.3% and 40.6% to factor delay in getting the regulatory approval and dilution
of earnings due to issue of warrants. We also reduce the PE multiple from 10x to
8x to factor lower growth in sales and profitability. Accordingly, we reduce our
price target to Rs66 (based on 8x FY16E earnings) from Rs140 earlier. We conclude
from our meeting with management during annual general meeting (AGM) held
on 17th December 2014 that current business is progressing on track. However,
the major future growth driver for SBML in terms of USFDA approval is yet to
occur. Though the upside from current levels is about 66%, we downgrade the
stock to HOLD from BUY and suggest waiting till further clarity emerges on growth
drivers as well as regulatory approval for its new facility.
Key change in estimates:
Note: *-On fully diluted basis; Source: IndiaNivesh Research
Regulatory delay may result in postponement of business
SBML’s Uttarakhand formulation extended facility was inspected by UKMHRA in
October 2014. SBML is yet to receive formal approval from UKMHRA, though
management is confident of receiving it any time. Also, USFDA inspection for both
Uttarakhand formulation as well as Taloja API facility is yet to take place. The delay
in inspection and approval by USFDA may result in deferment in sales as well as
improvement in profitability. As a result, the debt may remain at similar levels,
resulting in interest outgo to remain at higher level in FY15 as well.
Warrant conversion would shave-off 16% from pre-dilution EPS
About 16mn warrants were issued to promoter group on preferential basis in
October 2014. Warrants were issued to promoter group to reduce debt of the
company to some extent. However, debt level being very high, reduction in interest
is lower. And dilution of equity shares being higher, reduction in EPS is much higher.
Current equity shares are 106mn. Conversion of warrants would reduce EPS by 16%
on pre-dilution basis. As a result, though the PAT estimation is reducing by 28.3%
and 31.4%, our EPS estimate is reducing by 38.3% and 40.6%, for FY15E and FY16E,
respectively.
Valuation
Considering deferment in sales and warrant conversion, we reduce our sales estimate
for FY15 and FY16 by 12.5 and 16.1%. Accordingly, we reduce our PAT estimates by
28.3% and 31.4% to Rs745mn and Rs1,009mn. We arrive at revised price target of
Rs66 (based on 8x FY16E earnings) from Rs140 earlier. Though the upside from
current levels is about 66%, we downgrade the stock to HOLD from BUY and suggest
waiting till SBML gets USFDA approval for its new facility