Sharekhan Research has maintained buy rating on Sun Pharmaceutical Industries with target price of Rs 1287. At the current market price of Rs 965, the stock is valued at 21.6x FY2008E and 18.1x FY2009E fully diluted earnings.

Share khan report on Sun Pharma:

Result highlights:

In Q1FY2008 the consolidated net sales of Sun Pharmaceuticals (Sun Pharma) grew by 22.8% year on year (yoy) to Rs 6.275 billion. The same were significantly higher than our estimate of Rs 5.879 billion. The strong growth was driven by an increase of 25.7% in its domestic business and an 18% growth in its exports.

Its US subsidiary, Caraco Pharma, continued its growth momentum. Caraco Pharma's sales grew by 43% yoy to $ 25 million with the net income rising by 70% to $ 8.5 million in Q1FY2008.

The operating profit margin (OPM) declined by 120 basis points to 34.2%, which was still 300 basis points better than our expectations. As a result, the operating profit grew by 18.6% to Rs 2.148 billion. This margin performance is very encouraging, given the 47.8% growth in the company's research and development (R&D) expenses as well as the negative impact of the rupee's appreciation.

In the quarter the other income was higher by 121.1% to Rs 606 million, largely supported by the translation gain coming from outstanding foreign currency convertible bonds (FCCBs). Subsequently, the depreciation charge rose by 12% and the tax incidence moved up to 3.9% (from 0.1% in the corresponding previous quarter), resulting in a 29.1% growth in the profit after tax (PAT) to Rs2.43 billion. Finally, the minority interest increased by 38.1% to Rs158 million, consequent to which the bottom line stood at Rs 2.272 billion (against our estimate of Rs 2.278 billion).

In order to factor in the rupee's appreciation, the new product approvals, the transfer of assets to Sun Pharma Advance Research Company (SPARC) and the money outflow for the Taro Pharma (Taro) acquisition, we are revising our FY2008 estimates and introducing our FY2009 estimates in this note. Our revised EPS estimates stand at Rs 44.8 (which is 6.5% lower than our earlier estimate of Rs 47.9) and Rs 53.1 for FY2008 and FY2009 respectively.

At the current market price of Rs 965, Sun Pharma is valued at 21.6x FY2008E and 18.1x FY2009E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,287 (after adjusting the estimated value of SPARC, ie Rs 54, from our earlier
target of Rs 1,341).

In Q1FY2008 the consolidated net sales of Sun Pharma grew by 22.8% yoy to Rs 6.275 billion. The same were significantly higher than our estimate of Rs 5.879 billion. The strong growth was driven by an increase of 25.7% in its domestic business and an 18% growth in its exports.

Revising our FY2008 estimates and introducing FY2009 estimates

During the quarter, the company completed the listing of its demerged R&D business, SPARC, and paid USD 58.73 million towards the strategic acquisition of the Israel-based Taro. Also, the rising rupee affected the operating performance of the company. In order to factor in the developments discussed above and the recent product approvals from the USFDA, we are revising our FY2008 estimates and introducing the FY2009 estimates in this note. Our earlier estimates for FY2008 were based on an exchange rate of Rs 45/dollar; we have now revised the exchange rate to Rs 41/dollar and factored the transfer of assets worth Rs 550 million to SPARC. The Sun Pharma management is quite confident of completing the acquisition by the end of 2007 and indicated that internal accruals and available cash would easily fund the Taro acquisition. So we have assumed the company would pay the entire amount for the acquisition and consequently it would lose the interest income on the paid fund. We have factored the reduction in the interest income but not considered the revenues and earnings of Taro in our estimates for Sun Pharma (due to lack of information). As per our revised estimates, we project the revenue of the company would grow at a compounded annual growth rate (CAGR) of 23.1% to Rs 32. 32 billion in FY2009 and the net profit would grow at a CAGR of 19.3% to Rs11 billion in FY2009. Our revised EPS estimates stand at Rs 44.8 (which is 6.5% lower than our earlier estimate of Rs 47.9) and Rs 53.1 for FY2008 and FY2009 respectively.

Valuation and view

Sun Pharma has been consistently reporting strong results quarter after quarter. The performance of Q1FY2008 was ahead of our expectations and commendable in light of the growing R&D cost of the company. Going forward, we expect the ramp-up in the US business and the continued momentum in the domestic formulation business to drive the company's growth. With the company's ANDA pipeline remaining strong, we are likely to see an accelerated pace of new product launches, which will drive the US business. The outlook for the company's domestic business also remains bright as it operates in niche, high-margin lifestyle segments, which are growing at higher than industry rates. The positive contribution from its acquisitions will add to Sun Pharma's earnings going forward. At the current market price of Rs 965, Sun Pharma is valued at 21.6x FY2008E and 18.1x FY2009E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs 1287 (after adjusting the estimated value of SPARC, ie Rs 54, from our earlier target of Rs 1341).