Tushar's Stock Tips: Sharekhan Investor's Eye dated September 28, 2007

Sunday, September 30, 2007

Sharekhan Investor's Eye dated September 28, 2007

STOCK UPDATE

Surya Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs205
Current market price: Rs83

Strong growth at cheap valuations

Key points

During FY2007, Surya Pharmaceuticals (Surya) has enhanced its production capacities and has improved efficiencies of its production processes through de-bottlenecking exercise. From a collective capacity of manufacturing 4,152 metric ton (MT) per annum, the company's current capacity stands at 5,423MT per annum marking an increase of 30%. The resultant capacity increase is expected to translate into higher revenues for the company's existing business of active pharmaceutical ingredients (APIs) and intermediates from FY2008 onwards.
Surya has also initiated construction of a new plant in the tax-haven state of Jammu. The Jammu plant will be constructed in line with the US Food and Drug Administration (US FDA) standards primarily to manufacture new APIs and sterile cephalosporins. With the commissioning of this facility, Surya will enter the high-margin injectable business. We expect the Jammu facility to contribute an incremental Rs100 crore to Surya's revenues in FY2009E.
Surya has recently entered the business of manufacturing menthol and its derivatives. The company primarily intends to sell these products to its overseas clients, and the company has started exporting these products in August 2007. We expect the menthol business to add Rs50 crore to Surya's turnover in H2FY2008E and Rs100 crore in FY2009E.
Having made a foray into the contract manufacturing space, Surya is now increasing its focus on the contract research area. The company is in advanced stage of negotiation with a British company for the development of a cost-effective process for a new molecule. Surya expects that partnering with the British company at this early stage of development will open up huge contract manufacturing orders for it, once the molecule gets commercialised. However, as the deal has not yet been finalised, we have not factored the upsides from this development into our estimates.
We have introduced our FY2009E revenue and earning estimates for Surya. We expect Surya's profit to grow at a compounded annual growth rate (CAGR) of 55.3% over FY2007-09E on the back of a 46.2% CAGR in the revenues and a 100 basis point expansion in the operating profit margin. Based on this, we have projected fully diluted earnings of Rs28.8 per share in FY2008E and Rs32.1 per share in FY2009E.
At the current market price of Rs83, Surya is trading at 3.6x its FY2008E diluted earnings of Rs23.2 and at 2.6x its FY2009E diluted earnings of Rs32.1. The stock is highly undervalued when compared with its peers like Ankur Drugs, Sharon Bio-Medicine and Granules India, which are trading at an average FY2009E price earning (P/E) multiple of 7x. At current prices, Surya offers a remarkable combination of strong growth at cheap valuations. We view this as a strong buying opportunity and hence maintain our Buy call on the stock with a price target of Rs205.

Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs70
Current market price: Rs61

Growth momentum continues
The copra prices have strengthened in the last two months but Marico has taken a price hike of 3% in Parachute, which will offset the increase in its raw material cost and help it to safeguard its margin. The company has been able to maintain its market share at 48%. The launch of Fortune (agro tech foods) has been a non-event for Marico since the same has not been able to erode its market share.

Seamec
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs208

Unexpected damage
Seamec has announced that its vessel Seamec II has been damaged in its front portion due to a fire while the vessel was undergoing statutory dry-docking in a shipyard at Netherlands. The extent of damage is not certain as of now. However, it is clear that the dry-docking days for the vessel would get extended now, resulting in lower revenue and earnings for the company in CY2007.

SECTOR UPDATE

Banking

Banking sector poised for a re-rating
In this report we have discussed our views on the various macro aspects that have been a concern for the banking sector in the recent past. We have also delved into the various positive and negative factors that are likely to affect the banking sector in the medium term. Keeping in mind the strong interest of the investors in the financial sector, we feel the unfolding of the various positive triggers could lead to a re-rating of the banking sector in the medium term. Hence, we have revised our price targets for most leading banks (explained in detail later).

Banks	CMP* (Rs)	Old price target (Rs)	New price target (Rs)	Upside (%)
Bank of Baroda	322.0	366.0	400.0	24.1
Bank of India	260.0	280.0	325.0	25.0
SBI	1886.0	1780.0	2282.0	21.0
HDFC Bank	1433.0	1355.0	1694.0	18.2
Axis (UTI) Bank	768.0	725.0	960.0	25.0
*CMP as on September 27, 2007

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