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Emkay Global
GSFC (Reduce)
CMP: Rs 380.50
Target: Rs 350
Caprolactam-benzene spreads have declined by 50 per cent in the US $ which is likely to have 30 per cent y-o-y drop in FY13 earnings. Despite attractive valuations, sharp drop in company’s earnings and absence of any positive trigger will put pressure on the stock in near-term. We downgrade our FY13 earnings estimates by 10 per cent to Rs 65.6 (20 per cent below consensus) and downgrade the stock from Accumulate to Reduce with revised price target of Rs 350. Historically, there has been a strong correlation between variation in chemicals margins and the corresponding movement in stock price. We expect that due to the current decline in chemical margins, stock price may also follow suit despite attractive valuations, though the current valuations are compelling. Sharp reversal of Caprolactam-Benzene spread and announcement of any special dividend are key risks to our recommendation.
Sumedha Fiscal
Dr Reddy’s Lab (Buy)
CMP: Rs 1,649.20
Target: Rs 1,884
Dr Reddy’s Laboratories Ltd (DRL) is one of India’s leading generic pharmaceutical companies having presence in over 25 countries globally. We have used PE multiple to value the company’s stock price. At the current market price of Rs 1,646.50, the stock is trading at 14.42x FY14E EPS. We have taken a conservative PE multiple of 16.5 to value the stock (historically the stock was being quoted at 15-20x). Considering the strong performance in the US driven by robust product pipeline, diversified revenue streams such as bio-similar and reasonable valuations, we are initiating coverage on the stock with a buy rating.
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