From the Research Desk - Sun Pharma

Sun Pharma Industries Ltd.
Q3 FY07
Rating: Maintain BUY
CMP: Rs981.65
Target Price: Rs1,119

Sun Pharma Industries Ltd (Sun) reported yet another consistent quarter with sales growing by 27.2% to Rs5.4bn and profitability growing by 35.9% to Rs2bn. Export formulations recorded a growth of 48% to Rs1.9bn with Caraco recording sales of US$31.3mn for the quarter (51% growth yoy) with a profit of US$10.1mn. Domestic formulations witnessed a growth of 18.5% to Rs2.9bn whereas for 9M FY07 it increased by 16.4% to Rs8.7bn. The market has grown at 18.5% for the quarter. Sun holds 3.2% market share as per the latest data. Margins have remained flat at 32.1% on account of higher material cost due to change in product mix and increase in R&D spending. PAT witnessed a growth of 36% to Rs2bn, translating into an annualized EPS of Rs41.9.

We remain positive on Sun’s business prospects given its lean cost structure and specialty focus. With focus on niche areas with specific technology, Sun has a strong pipeline of products to be launched over 2007-09. We estimate US sales to witness a CAGR of 38.1% to Rs9.7bn over FY06-09. For the European market, Sun is looking at a partnership model approach rather than setting up its own front end. We estimate Sun to witness earnings CAGR of 24.4% to Rs11bn over FY06-09. We maintain BUY on the stock with a target price of Rs1,119 (21x FY09E). With a war chest of US$500mn, an acquisition is round the corner, which holds potential upsides to our estimates. We believe Sun will target acquisition of a distressed asset and turn it around in three-four years time.