Sharon Bio-Medicine Ltd. |Company Update | Stay Put ...IndiaNivesh

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The stock has corrected by 40% in past three months on absolute basis. Though
the business continues to be normal and stock has become attractive in terms of
valuation, we suggest investors to wait for the results of key near term trigger –
USFDA inspection and its subsequent assessment to review the investment
decision. At CMP of Rs51, the stock is trading at 5.2x FY15E EPS of Rs9.9 and 3.7x
FY16E EPS of Rs13.9.Currently, we maintain our estimates and continue to value
SBML at 10x FY16E earnings to arrive at price target of Rs140. We maintain BUY
rating on the stock.
USFDA approval – a key near term trigger: SBML has completed the capex of
Rs900mn at its Uttarakhand formulation facility. SBML received the UKMHRA
approval for existing as well as expanded facility. The USFDA inspection is expected
to happen anytime soon. The positive outcome would enable SBML to start selling
in US market on considerable scale. This would also enhance profitability of SBML.
However, given the uncertain nature of review of USFDA inspection, we have not
yet built any upside from business in US market from this facility.
Warrants issue to dilute EPS by 13% going forward: SBML has issued 16.1 mn
warrants to the Promoter group on preferential basis in October 2014. This would
result in 13% dilution post conversion of warrants to equity shares. The infusion of
funds by promoters would enable SBML to lower financial leverage to some extent
and enhance profitability.
Major capex done for now; SBML to start reaping benefits in medium term: The
net block has increased at CAGR of 141% over FY09-14, however, sales have increased
by only 77% CAGR during the similar period, indicating ample scope of increasing
turnover as well as profitability without increasing capex in medium term. As the
long term structural driver for pharmaceutical companies in export market remains
intact with India as low cost destination for manufacturing APIs as well as finished
dosages, we believe that SBML is in sweet position to take the advantage of the
same.
Valuation: At CMP of Rs51, the stock is trading attractive valuation of 5.2x FY15E
EPS of Rs9.9 and 3.7x FY16E EPS of Rs13.9. With capex in place and probable shift
to superior product mix, we expect SBML to deliver 20% and 39% CAGR in sales and
profitability, respectively, over FY14-16. We maintain our estimates and price target
of Rs140, based on 10x FY16E earnings. We have not yet factored dilution in earnings
due to issue of warrants to promoter group. Despite stock correction of 40% over
past three months, we suggest investors to wait for outcome of USFDA to accumulate
further.

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