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[mehak1]

Sun Pharma’s domestic formulations segment has executed well, deporting more than 20% growth in H1FY08. We have expanded our growth assumptions for this segment to 22% for FY08 and ~ 17% for FY09. The company’s US generics business has been showing Q-o-Q growth for the past few quarters. Sun Pharma’s US business is one of the best and profitable businesses amongst its compeers.  It has 87 ANDA expecting approval.  It has shown quarter-on-quarter development for the past 10 quartersThere are several one-time Chances for the company like Oxcarbazapine, Pantaprazole, Venlafaxine, and Rivastigmine, which could add ~INR 45 per share. We have admitted revenues only for
Oxcarbazapine in our numbers. The US business is expected to be the company’s forte over the next couple of years with a CAGR of ~ 28% for FY07-09E. Taro declared its CY06 and 9M07 figures, a recurring loss of USD 103 mn and a profit of USD 20 mn, respectively. This is a positive growth for Sun Pharma, as Taro’s acquisition could be EPS increasing for the company from first year onwards. These will give the payback period of ~ 5 years for Sun Pharma. Clarity on Taro acquisition is likely only
by end of February or March 08. The doubtfulness over Taro acquisition has been a major overhang on the stock over the past few months and we believe if Sun Pharma is able to acquire Taro in the next 3 months, it will provide a important trigger to the stock price, particularly after looking at Taro’s better profitability. In other sections, we consider the company will be able to deliver growth of 30% over the next two years. All in all, Sun Pharma has established one of the strongest business fundamentals in a difficult sector over the past few years. It has afforded steady topline and bottomline development of approx. 20% in the past. We think the business drivers are in place to deliver these growth numbers over the next t3 years. Additional triggers in the stockare the one-time Para IV opportunities and completion of Taro attainment. We are positive on the company’s business, but at current valuations, the upsides could be limited. We believe, with the pass completion of Taro acquisition and new proclamations on Para IV opportunities, the stock price is likely to make some substantial gains. We have altered our earnings numbers upwards by 8% for FY08E and by 6% for FY09E. At CMP of INR 1,199, the stock is trading at 24.6x on FY08 and 20.6x on FY09 revised estimations. With one-time upsides of ~INR 45 per share and possibility of Taro acquisition trigger we are positive on the stock. We maintain our ‘ACCUMULATE’ recommendation.
Sun Pharma’s domestic preparations segment, which contributed ~ 54% to incomes (in Q2FY08), has grown at a robust rate of ~28% for H1FY08. Growth in the second half is expected to be much lower than in the first, but we await total domestic revenues to grow by ~22% for FY08E and much lower at 17% for FY09E. With more than 70% profits coming from the high growth, high margin chronic sections, this growth is expected to significantly Supercharge the margins as well.

Report card

PE ratio    33.79                09/01/08
EPS (Rs)   32.52               Mar, 07
Sales (Rs crore)  541.28          Sep, 07
Face Value (Rs)      5   
Net profit margin (%) 26.69     Mar, 07
Last bonus   1:1                 21/04/04
Last dividend (%)   135       02/03/07
Return on average equity 25.68    Mar, 07