Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs410
Current market price: Rs298
The growth pill
Key points
- Elder Pharmaceuticals (Elder) has a diversified product portfolio that includes pharmaceuticals, consumer products and bulk drugs. It plans to launch new molecules and line extensions in the coming years. With big brands like Shelcal and Tiger Balm in its fold, the company has the ability to develop and grow big brands. Its bulk drug sales are also expected to pick up from FY2007 onwards. We expect its net sales to grow at a compounded annual growth rate (CAGR) of 20% over FY2005-08.
- Last year, Elder took concrete steps to boost its exports. The benefits of these initiatives will be seen over the next few years, as we expect its sales in the African and South-East Asian countries to start picking up. We expect the exports to grow at a CAGR of 46% over FY2005-08.
- Elder has more than 25 marketing alliances with foreign companies to market their products in India. We expect these alliances to grow into contract research and manufacturing service (CRAMS) and marketing agreements in the long term.
- The company is setting up manufacturing plants in excise-and tax-free zones to reduce the outsourcing of its finished products. As a result, its raw material cost will decrease sharply. We expect the tax savings to improve the net profit margin (NPM) significantly over the next two years.
- We expect the net profit to grow at a CAGR of 49% over FY2005-08. At 7.8x FY2008E earnings, Elder is trading at a deep discount to its peers. Considering the strong growth prospects in domestic as well as export markets and cheap valuations, we initiate coverage on Elder with a 12-month price target of Rs410, expecting a 38% upside from the current levels of Rs298.