Stock Idea - Surya Pharmaceuticals

Recommendation: Buy

CMP = Rs 107

Price target: Rs 205

Key points:

• Surya Pharmaceuticals (Surya) reported an impressive 89.5% increase in revenues to Rs 156.5 crore in Q4FY2008. The revenue growth in FY2008 was equally robust with a jump of 63.2% to Rs 496.7 crore. An escalation in the raw material cost caused Surya's operating profit margin (OPM) to shrink by 420 basis points to 14.8% during Q4FY2008 and by 40 basis points to 17.0% in FY2008. Consequently, the operating profit grew by 46.8% to Rs23.1 crore in Q4FY2008 and by 59.0% to Rs 84.4 crore in FY2008.
• Despite higher interest and depreciation charges, Surya's net profit grew by an impressive 56.6% to Rs 12.8 crore in Q4FY2008 and by 95.4% to Rs 46.7 crore in FY2008. In addition to its investment in the sterile facility in Jammu, Surya has announced a capex of Rs 100 crore for further de-bottlenecking of the existing capacities and expansion of menthol capacities. This would lead to a substantial jump in the company's interest and depreciation costs in FY2009, thereby straining its profitability.
• At the current market price of Rs 107, Surya is trading at 3.6x its FY2009E diluted earnings of Rs 29.7 and 2.7x its FY2010E diluted earnings of Rs 39.9. At the current prices, Surya offers a remarkable combination of strong growth at cheap valuations.
• I maintain strong Buy call on this stock with a price target of Rs 205 over next 6 months.