Shilpa Medicare is another of Daljeet Kohli’s successful stock picks. On 24th March 2014, when Shilpa was quoting at Rs. 348, Daljeet recommended a “Strong Buy” on the basis that there are “multiple triggers ahead”. Daljeet gave several reasons in support of his analysis and promised a target price of Rs. 544 for the stock (50% upside).
The stock surged up to Rs. 525 by September 2014. However, it reported disappointing Q1FY15 results and Daljeet downgraded the stock to ‘hold’.
At that time, I raised the pertinent question whether “Shilpa Medicare is giving the same opportunity that JB Chem did” implying that the slump in the stock price is an opportunity to tuck into the stock.
I was right in my theory because Shilpa did surge upwards after the initial disappointment was overcome.
Thereafter, Daljeet committed a tactical error. On 17th November 2014, he issued a report on the Q2FY15 results in which he downgraded the stock price to Rs. 473 though the stock was quoting at Rs. 557.
The downgrade in the stock price was very surprising because Daljeet himself remarked in the report that “The key near term trigger – USFDA approval for Raichur facility- is yet to play out” and “the levers for further upside in earnings as well as re-rating of stock are in place”.
So, then, where was the provocation for the downgrade? Instead, Daljeet should have urged that the weakness in the stock price is an opportunity to buy the stock.
At this stage, we must note that Daljeet follows a strict discipline on valuations. This is very prudent and makes a lot of sense in normal conditions. However, in a raging bull market, this conservative strategy costs dearly. Two glaring examples are Ajanta Pharma and Kajaria Ceramics where Daljeet advised a “Sell” on the basis that the valuations were excessive. However, he was thereafter compelled to change the rating to ‘hold’ for both stocks because the stock prices kept marching upwards.
Anyway, thereafter, Motilal Oswal named Shilpa Medicare as a potential 100-Bagger in its Wealth Creation Study Report and the stock surged. It is presently at Rs. 712.
Daljeet’s latest report advocates caution for the stock. Let’s listen in:
“Shilpa Medicare receives Cofepris GMP certificate, Mexico for Ambroxol, Nifedipine and Gemcitabine; maintain HOLD with PT of Rs473
Our view: We believe that Mexico certification is a sentiment booster for Shilpa Medicare (SLPA IN). We continue to like business model of SLPA and believe that groundwork for next phase of growth is on track. We expect return on investment to improve going forward as new capacity gets utilized and product mix shifts to relatively higher margin products. The key near term trigger – USFDA approval for Raichur facility- is yet to play out. Even if the USFDA approval gets delayed, the existing business would be least impacted and base business growth would remain intact. Hence, we remain positive on the stock and have faith that company has capability to show robust growth in future.
Valuation: At CMP of Rs710, the stock is trading at 34x FY15E EPS of Rs21 and 24.6x FY16E EPS of Rs29. Though the stock is trading at expensive valuation which implies 34% away from our price target of Rs473 (based on 16x FY16 Earnings), we maintain HOLD rating on the stock as the levers for further upside in earnings as well as rerating of stock due to shift towards superior product mix are in place and are yet to play out.”
Now, you have to decide for yourself whether you want to take Daljeet’s advice or not.