Stock Idea - Elder Pharmaceuticals

Recommendation: Buy

CMP = Rs 399 (as of Wednesday)

Price target: Rs 508

 

Key points:

• Elder Pharmaceuticals (Elder) has acquired a 51% stake in Biomeda Group in Bulgaria for 5 million euros (around Rs 28 crore) in an all-cash deal.
• Biomeda is among Bulgaria's top ten oral dosage formulation manufacturer and distributor. The manufacturing division of the company includes a manufacturing facility to produce oral formulations and hard gelatin capsules. The company imports products from the global players and distributes them to clients all across the European Union through its warehouses.
• In line with its strategy to expand its global footprint, Elder's acquisition of a 51% stake in Bulgaria's Biomeda group is expected to provide it with an entry point into the European markets. With Biomeda's stable of nine products and its strong relationships with global pharmaceutical companies, Elder hopes to grow the existing business of Biomeda at an annual rate of 15-20% in the next two-three years. Further, Elder is also planning to introduce products from its own portfolio into Bulgaria and the other European countries through Biomeda. 
• I believe that through the introduction of Elder's products into the Bulgarian and other key European markets, Biomeda's sales will grow by 20% to 12 million euros in CY2008/FY2009 and by 50% to 18 million euros in CY2009/FY2010.
• Further, cheaper sourcing of the raw materials and rationalisation of operating costs will improve Biomeda's margins from the current level of 8-10% to 12% in the next three years. Our back-of-the-envelope calculations indicate that after minority interest, the Biomeda acquisition will dilute Elder's earnings by Rs 0.06 per share in FY2008, but add Rs 0.8 per share in FY2009 and Rs 2.3 per share in FY2010. 
• At the current market price of Rs 399, Elder is quoting at 9.9x its estimated FY2008 earnings and at 8.8x its estimated FY2009 earnings.
• I maintain Buy recommendation on the stock with a price target of Rs 508.