ICICIDirect - Company Update - Sun Pharmaceuticals (Price: Rs 1,057, Performer)

Sun Pharmaceuticals (SUNPHA)

Price: Rs 1,057 PERFORMER

Sun Pharma is a leading domestic pharma company with a strong presence in chronic segments such as cardiology, neurology and diabetology. The
company's turnover has doubled and net profit tripled in the last 4 years. Its net margins have been consistently higher than its peers (the top 10
Indian pharma companies) and it boasts one of the highest operating margins in the sector. It established its first research center, Sun Pharma Advanced
Research Center (SPARC), in 1993. The company has used a combination of internal growth and acquisitions to drive growth. The most important
acquisition was in 1997, that of Detroit-based Caraco Pharm Labs in the US.

The company plans to demerge areas related to new molecular entities and drug delivery systems into SPARC and list the company. The fair value of the
newly formed company works out to US$620 million (around 13% of the current market price). We believe the de-merger and listing of the newly formed
subsidiary will unlock value both for the company and its shareholders.

The stock is currently trading at Rs 1,057, 18.51x FY09E EPS of Rs 57.11 and 23.16x FY08E EPS of Rs 45.63. Given the superior fundamentals in terms of RoNW, ROCE, margins, product mix (95% chronic space) and almost debt-free status, we believe that the stock should trade at a premium to its peers. At
the current levels, its peers are at an average PE of 16.44x FY09E EPS, while Sun Pharma is trading at a premium of 12.60%, at a P/E of 18.51x its
FY09E EPS. We rate the stock a PERFORMER.

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