Recommendation: Buy
CMP = Rs 376 (as of Thursday)
Price target: Rs 508
Result highlights:
- Elder Pharmaceutical's (Elder) net sales for Q2FY2008 grew by a strong 21.3% to Rs 132.3 crore, thus maintaining the growth momentum seen in the previous quarters. The sales growth was marginally ahead of our estimates of Rs 128 crore and was driven by the continued momentum in the company's star brands and new products and line extensions launched by the company over the past one year.
- Elder reported an expansion of 50 basis points in its OPM, which stood at 19.4% during the quarter. The expansion in the OPM was led by a 230-basis-point reduction in the other expenses incurred by the company. The decline in the other expenses was mainly due to the effect of increased productivity of the marketing spend incurred by the company.
- Consequently, the company's operating profit rose by 24.5% to Rs 25.6 crore in Q2FY2008.
- Elder's net profit rose by 21.7% to Rs 17.7 crore in Q2FY2008. The growth in the profit was marginally ahead of our estimate of Rs 15.5 crore and was robust despite an increase of 50.8% in the interest cost and a rise of 53.2% in the depreciation charge during the quarter. The net profit growth was aided by a substantially lower tax provision made during the quarter.
- Elder is exploring new contract research and manufacturing (CRAMS) opportunities through its 29 alliance partners. Having executed one such project with its Italian partner, Angelini, the company hopes to get 3-4 more such manufacturing contracts from Angelini, which will enable it to scale up its CRAMS business.
- Elder has recently announced two acquisitions in Europe: a 20% stake in the UK-based Neutra Health PLC and a 51% stake in the Bulgaria-based Biomeda. These two acquisitions will provide Elder an entry into the European markets. Elder plans to complete the Biomeda acquisition by the end of FY2008 and also increase its stake in Neutra Health from 20% currently to 26% by December 2007.
- At the current market price of Rs 376, the stock is quoting at 9.3x its estimated FY2008 earnings and at 8.3x its estimated FY2009 earnings.
- I maintain Buy recommendation on the stock with a price target of Rs 508 with time frame of 8-9 months.
