Sun Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,000
Current market price: Rs914
Impressive performance continues
Result highlight
- Sun Pharmaceuticals’ consolidated net sales grew by 29.1% year on year (yoy) to Rs536.2 crore in Q2FY2007. The strong growth was driven by an increase of 46.9% in its exports and a 14.6% growth in the domestic business.
- A sharp spike in the research and development (R&D) expenses, along with higher staff costs led to a decline in the company’s operating profit margin (OPM), which contracted by 50 basis points to 31.9% in Q2FY2007, causing the operating profit (OP) to increase by 27.1% to Rs170.8 crore. Barring the higher R&D costs, the company’s margins actually showed an expansion of 160 basis points.
- Sun Pharma’s net profit for Q2FY2007 stood at Rs186.4 crore, up 26.1% yoy. The growth in the profit was aided by a 1.5-fold increase in the company’s other income to Rs40.2 crore and a deferred tax write-back of Rs5.4 crore.
- Between Sun Pharma and Caraco, the group has 56 abbreviated new drug applications (ANDAs) pending approvals and 28 products already in the market. This is one of the strongest product pipelines in the industry.
- At the current market price of Rs914, Sun Pharmaceutical is valued at 26.7x FY2007 and 22.6x FY2008 fully diluted earnings. The company’s future growth prospects, positive contributions from past acquisitions and value-unlocking post R&D demerger reinforce our positive stance on the company. We maintain our Buy recommendation on the stock with a price target of Rs1,000.
Cipla
Cluster: Cannonball
Recommendation: Buy
Price target: Rs300
Current market price: Rs262
Better health than expected
Result highlight
- Cipla reported better-than-expected results for Q2FY2007 with its earnings showing a 47% jump (as against an expected growth of 40%) to Rs180.28 crore.
- The revenues were up by an impressive 33 % year on year (yoy) and by 4% quarter on quarter (qoq) to Rs896.11 crore, largely fuelled by a whopping 120% growth in the exports of active pharmaceutical ingredients (APIs) to Rs159.70 crore and above the industry performance of a 22% increase in the domestic formulations.
- The operating profit margin (OPM) witnessed a contraction of 100 basis points to 25.4% in the quarter, as the raw material costs increased by 250 basis points due to the company’s changed product mix. However, the operating profit increased by 28.4% to Rs227.60 crore.
- With the reduction in the incidence of tax to 18.3% from 21.1%, possibly due to the commissioning of the new export-oriented unit (EOU) at Patalganga, the net profit increased by 47% at Rs180.28 crore.
- At the current market price of Rs262, the stock trades at 21.5x its FY2008 earnings, but expecting earning surprises in the subsequent quarters (as the company is working on about 150 product projects), we maintain our Buy recommendation on the stock with a price target of Rs300.
India Cements
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs315
Current market price: Rs222
Results better than expected
Result highlight
- India Cements (ICL) achieved a net profit of Rs117 crore for Q2FY2007, ahead of our expectations.
- The net revenues grew by a healthy 31.91% to Rs517 crore helped by a 16% growth in the volumes and a 21% growth in the realisations.
- Due to strict cost control measures, the operating cost growth remained subdued at 6.3% year on year (yoy). This, coupled with the company’s leverage to the cement prices, resulted in the operating profit jumping by a whopping 154% to Rs173 crore as against Rs67 crore in the same quarter last year.
- The operating margins expanded by a staggering 1,605 basis points to 33.41% whereas the earnings before interest, tax, depreciation and amortisation (EBITDA)/tonne more than doubled to Rs791 as against Rs361 in the same quarter last year.
- The interest cost decreased by 8.7% to Rs36 crore on account of the repayment of debt, whereas the depreciation remained stagnant at Rs19 crore.
- The tax provision was negligible at Rs40 lakh on account of the write-off of the accumulated losses. Thus the net profit grew by a staggering 1,900% year on year to Rs117 crore.
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