JP Associates, KSB Pumps, Sun Pharma

Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,475
Current market price: Rs1,252

Exclusivities galore!

Key points

• Sun Pharmaceuticals (Sun) has received the final approval from the US Food and Drug Administration (USFDA) for its abbreviated new drug application (ANDA) to manufacture and market Amifostine injection 500mg, the therapeutic equivalent of MedImmune's Ethyol. Being the first to file an ANDA for generic Ethyol with a Para IV certification, Sun has been awarded a 180-day marketing exclusivity for the product. We do not exclude the possibility of an at-risk launch by Sun, in which case Sun could generate $14 million in revenues, leading to incremental earnings of Rs1. 4 per share.
• The company has received tentative approval for generic Gemzar, for which it had filed an ANDA containing a Para IV certification. Gemzar, or generic gemcitabine injection, is Eli Lilly's anti-cancer drug with annual sales of $680 million in the USA. According to our calculations, the launch of generic Gemzar under exclusivity for 180 days could yield revenues and profits of $51 million and $25 million respectively, translating into incremental earnings of Rs4.8 per share for Sun.
• In the last one month, Sun has received three final approvals from the USFDA--for benzonatate capsules, fosphenytoin sodium injection and torsemide tablets. Additionally, Sun has also received tentative approval for divalproex sodium delayed release tablet, which is the generic version of Abbott's anti-epileptic drug, Depakote, with annual sales of $755 million. We expect the final approval for generic Depakote to come through in July 2008, upon the expiry of the patent. However, the market for this product is crowded with numerous players already having tentative approvals and hence we expect the gains from this product to be limited.
• There are two positive developments related to Sun's bid to acquire Taro Pharmaceuticals (Taro). On the one hand, Sun has acquired the 9.4% stake of Brandes, which is one of the major institutional investors in Taro and was opposing Sun's bid for Taro. Following the acquisition, Sun's stake in Taro has increased from 25% earlier to 34.4%. On the other hand, Taro, in its declaration of its preliminary unaudited financials for CY2007, has reported a very strong operating performance, which is positively surprising. The Taro acquisition is not part of our current estimate and will provide upside to our FY2010 earnings estimate, if Sun is successful in its bid.
• With the base business performing well, clarity on the launch of generic Effexor XR under exclusivity, the receipt of USFDA approval for and the subsequent launch of generic Gemzar, the potential launch of generic Ethyol under exclusivity and the progress on the Taro acquisition will act as near-term triggers for the stock. At the current market price of Rs1,252, Sun is valued at 25.1x FY2008E and 19.4x FY2009E fully diluted earnings. We reiterate our Buy recommendation on the stock with a price target of Rs1,475.

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs451
Current market price: Rs307

Price target revised to Rs451

Result highlights

• KSB Pumps' Q4CY2007 results were slightly ahead of our expectations, both on the top line and the profitability front. The net sales for the quarter rose by 21.7% to Rs131.8 crore.
• After a couple of disappointing quarters, the profitability improved substantially during this quarter as the overall margin improved by 60 basis points year on year (yoy) and by 770 basis points sequentially to 19.1%. On a segmental basis, the profit before interest and tax (PBIT) margin of the pump division rose to 15.6% (up 220 basis points yoy and 860 basis points sequentially) while that of the valve division stood at 25.1% (down 30 basis points yoy but up 610 basis points sequentially).
• We believe that the profitability of the company improved on the back of higher contribution of the project business, which carries higher margins. We understand that the order book of the company in the project business is growing at about 40% yoy. Considering this, we continue to expect strong revenue booking in the subsequent quarters also.
• A higher other income, stable interest and depreciation costs, and lower taxes led to a 62.1% growth in the net profit to Rs19.6 crore.
• In view of the slower growth this year, particularly in the first nine months, we are downgrading our earnings estimate for CY2008 by 18.8% to Rs32.2. We shall introduce our CY2009 estimate in our subsequent update.
• Considering the buoyancy in its user segments, particularly refineries and the power sector, we maintain our positive outlook on the company. At the current market price of Rs307, the stock is trading at 9.5x its CY2008E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.2x. We maintain our Buy recommendation on the stock with a revised price target of Rs451.

Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs390
Current market price: Rs233

Stake sale in Jaypee Infratech

Key points

• ICICI Bank buys 1% stake in Jaypee Infratech Ltd (JIL) for Rs250 crore, thereby valuing the company at Rs25,000 crore. This is largely in line with our estimates of Rs24,400 crore. JIL also obtains long term financing of Rs900 crore from ICICI Bank.
• The stake sale and closure of long-term financing from ICICI Bank is a positive development both in terms of raising required resources and boosting investor confidence.
• At the current market price, the stock is trading at 41x its estimated FY2009 earnings. We have revised the sum-of-the-parts (SOTP) based price target to Rs390 to reflect the de-rating of some of its businesses in line with the prevailing market conditions. We maintain our Buy call on the stock.