Recommendation: Buy
CMP = Rs 106
CMP = Rs 106
Price target: Rs 205
Result highlights:
- Surya Pharmaceutical (Surya) reported a massive 90.1% increase in its top line to Rs 118.1 crore in Q2FY2008. The growth was driven by the increase in the company's existing active pharmaceutical ingredient (API) business and a 6-7% contribution from the new business of menthol and its derivatives. The sales growth was in line with our estimates.
- Surya's operating profit margin (OPM) shrank by 280 basis points to 17.8% in the quarter, primarily due to a 100.4% increase in the raw material cost. The increase in the material cost was due to the rising Penicillin-G (Pen-G) prices worldwide. However, going forward, the management has indicated that Pen-G prices have now stabilised and the raw material cost should show a marginal improvement in the coming quarters. Consequently, the company's operating profit grew by 64.0% to Rs 21.0 crore in the quarter.
- Surya's net profit grew by an impressive 83.7% to Rs 11.7 crore in Q2FY2008 and was in line with our estimate. The net profit growth was strong despite a 48.1% increase in the interest expense and an 11.3% rise in the depreciation charge. The earnings for the quarter stood at Rs 8.1 per share.
- Surya began exporting menthol and its derivatives only in mid-August 2007 and hence the Q2FY2008 results do not reflect the full quarter impact of the menthol business. I expect Surya to deliver a stronger performance in H2FY2008 on the back of steady revenues from the existing API business and growing revenues from the menthol business.
- At the current market price of Rs 106, Surya is trading at 4.6x its FY2008E diluted earnings of Rs 23.2 and 3.3x its FY2009E diluted earnings of Rs 32.1.
- At the current prices, Surya offers a remarkable combination of strong growth at cheap valuations. I view this as a strong buying opportunity and hence maintain Buy call on the stock with a price target of Rs 205.
