Daljeet Kohli has two stocks in his radar: Mastek Limited and Sharon Bio-Medicine Ltd. In Sharon, Daljeet has recommened a “Strong Buy” with the prospect of a 48% gain while in Mastek he has foreseen a gain of 21%. Lets’ take a quick look at his reasoning:
Mastek Ltd (Mastek’s) positioning with modern web-based property & casualty (P&C) and life & annuity (L&A) insurance industry platform remains key growth driver. Globally large number of insurers use 30+ year old platform, which become hurdle for growth in changing industry environment. As a result, despite muted performance during recent quarters the overall outlook for Mastek remains buoyant. Additionally, its strong product position offers huge penetration opportunity, cross-selling and upscale opportunity. We maintain BUY on Mastek Ltd with target price of Rs.230.
At the CMP of Rs.190, Mastek is trading at a P/E of 6.6x FY15E and 5.2x FY16E earnings estimates. We remain positive and believe in Mastek’s insurance segment re-rating potential (in-line with Guidewire) on back of high client stickiness. We sense that increased traction in license revenues from here-on should help Mastek to expand margin going ahead. Additionally, its greater focus on updating various modules of P&C should help Mastek to penetrate existing clients. We maintain BUY on stock with target price to Rs.230 (valuing 6.3x FY16E).
Sharon Bio-Medicine Ltd
Sharon Bio Medicine Booster dose of profits doubling in next 2 years
Sharon Bio Medicine (Sharon) is an integrated pharmaceutical company engaged into manufacture of API & formulations. The company has 3 plants out of which 2 are API plants based out of Taloja in Maharashtra & 1 Formulations plant located at Dehradun, Uttrakhand. All the facilities are approved by UK, Latin America etc. but none by USFDA as of now. However the company is waiting for USFDA approval for its formulation facility. USFDA has already inspected Dehradun facility but approval is pending. We have recently met the management & come out extremely positive from the meeting. We believe the company is poised for a very strong growth going ahead which would lead to doubling of profits over next couple of years. The company is changing its strategy from being API dominated company to Formulation driven. Approval from USFDA will be a strong rerating trigger for the stock. We recommend BUY on the stock with target price of Rs 74 in 1 year time period. Key rationales to BUY the stock are given hereunder:
Valuation & Recommendation
At CMP of Rs 49.5 the stock is trading at PER of ~8x FY14E, 5.3x FY15E & 3.8x FY16E.
We believe the company e the stock deserves a rerating which would happen once the numbers start showing. In nutshell we believe this company is at the point of inflexion, ready to take off. All the hard work done in last 5 years is likely to bear fruit in next few years. The stock can easily rerate to its peer multiples of around 10x. However, for the rerating to come into effect the formulation business & USFDA approval has to come. Conservatively as of now we are valuing this company at 8x FY15E EPS (which is just rolling the current multiple form FY14E to FY15E) yielding a target of Rs 74.
We recommend strong BUY with target of Rs 74 with 1 year time period.