Surya Pharmaceutical Ltd. (Code:532516) Rs.79

Incorporated in 1992, Surya Pharmaceutical Ltd. (SPL) manufactures and markets a range of active pharmaceutical ingredients, drug formulation and bulk intermediates that address various therapeutic segments. Starting as a manufacturer of penicillin derivatives, today SPL is among the top five Indian players in betalactum and cephalosporin range of anti-infectives. In fact, it is moving up the product value chain from being a manufacturer of betalactum antibiotics-a low margin product, to a maker of third and fourth generation sterile range of cephalosporins - a high margin product such as cephaclor, cephixime, cefprozil, cefdinir etc. It has also diversified into high-margin lifestyle segments like anti-histamines and cardio vascular drugs and is increasing its focus on exports for the long-term. In the near future, the company may set up or acquire a pharmaceutical manufacturing unit in Europe.

SPL has five manufacturing facilities spread across three states in northern India. It has two plants at Baddi - HP, two plants at Banur – Punjab and one at Panchkula – Haryana. Nearly half the production is exported to more than 60 countries across Europe, South East Asia, the Far East, Middle East, Latin America and Africa. Lately, SPL made an impressive foray into contract research and manufacturing (CRAMS) space with an order worth Rs.350 cr. to be executed over the next few years. For that, it is implementing an ambitious Rs.90 cr. expansion plan of setting up a new US-FDA compliant facility in Jammu. This new facility will manufacture high-margin products such as statins, sterile & oral cephalosporins and advanced intermediates and formulations. This would also help the company in servicing MNCs through the contract-manufacturing route. Further, it is also carrying out massive capacity expansions at its existing facilities in Baddi and Banur and upgrading them to US FDA Standards. Its bulk drug facility at Panchkula has been completely revamped to produce anti-histamine bulk products like loratidine and fexofenadine.

To finance its growth plans, SPL raised around Rs.54 cr. via FCCBs to be converted into equity shares at Rs.160 per share. Besides, it has already allotted Rs.40 lakh warrants to promoters and others, which will be converted into shares at Rs.70 per share. It may raise another Rs.225 cr. in future through the ADR/ GDR route. Thus, financially the company has made all arrangements for its working capital and expansion requirements. For FY06, its top-line registered a gain of 40% to Rs.238 cr. whereas its net profit recorded 180% growth to Rs.24 cr. posting an EPS of Rs.22 on its equity of Rs.11.08 cr. For FY07, it may earn a net profit of Rs.28 cr. on sales of Rs.300 cr. And since its equity will get bloated to Rs.18 cr. due to the FCCB and convertible warrants, the EPS works out to Rs.15. Hence the scrip is trading fairly cheap at a forward P/E of less than 5 times. Although there is the risk of further equity dilution due to the likely ADR/ GDR issue, but still it’s a good bet and can give 50% return if held for 15-18 months.