Buy Lupin

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Lupin
CMP: Rs 721
Target Price: Rs 938

Company’s initiative to build a global presence through small acquisitions and the buyout of a majority stake in Pharma Dynamics of South Africa would boost inorganic growth.

“This is the company’s third acquisition in FY09 after Hormosan (Germany) and a minority stake in Generic Health (Australia). We believe the small size has kept valuations reasonable & expect all deals to be EPS and RoI accretive from FY10,” .

Lupin rated as ‘medium risk’ citing generic competition in Suprax (around 5% & 16% of sales & PBT) as the key reason. rising input costs due to Chinese government’s crackdown on environmentally unfriendly plants could hurt profitability. “Inability to effectively integrate the Kyowa acquisition could take a heavy toll on profitability as well as return ratios,” .

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Opto Circuits
CMP: Rs 287.25
Target Price: Rs 463

Valuations are very attractive considering the strong market positioning, potential introduction of new products, front end R&D set up (with the Criticare acquisition) and strong management.

The brokerage expects OCIL to register a 56.7% and 43.7% compounded growth in revenues and earnings, respectively over the next two years. It expects revenue growth of 73.9% to Rs 8.1 billion and net profit growth of 43.5% to Rs 1.9 billion in FY09.

“The key growth drivers for topline would likely to be stents business which is expected to grow at about 80% while non-invasive segment is expected to grow at 77%, mainly due to Criticare acquisition,” . net profit margin is likely to decline to 23.8% in FY10 as against 28.3% in FY08 mainly due to higher interest cost.

“The company has raised $52 million debt to fund the Criticare acquisition. We expect 43% and 44% growth in EPS in FY09 and FY10, respectively. In FY09, we expect EPS of Rs.20.2 while in FY10 we expect EPS of Rs.29,” .

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Ranbaxy Lab
CMP: Rs 298
Target Price: Rs 260

Morgan Stanley has downgraded its rating on Ranbaxy to ‘underweight’ saying the recent FDA action will erode the company’s US business considerably, thereby rendering the business model incomplete and lowering its stature in the global generic industry.

“We expect a significant decline in base earnings along with a stock de-rating in the coming months,” said Morgan Stanley in a note to its clients. According to Morgan Stanley, sorting out FDA issues, resolving a Department of Justice enquiry, integration with Daiichi, and managing the negative fallout of the FDA action in other markets are the key challenges for the company.