Surya Pharma is the second stock to get added to my multibaggers list after Alok Industries. Surya Pharma has once again posted a really strong set of numbers this year where their profits rose 38% YoY. Surya Pharma has grown it’s profits from 27 cr to 105 cr in the last 4 years, up almost 4 times. Surya Pharma has been on an acquisition phase where it acquired ActivOn drug in the US and has been opening stores after stores in the retail front. It has increased it’s exposure to Andhra Pradesh recently by acquiring Medimart retail shop chain. I believe that Surya Pharma will continue to add new retail outlets and drugs in future as well and thus the growth outlook is interesting.

Surya Pharma posted net sales of 447 cr, up 27% YoY and net profits of 28 cr, up 33% YoY in Q4 FY11. In the whole year FY11, it’s revenues stood at 1599 cr as against 1134 cr, up 40% and net profits stood at 105 cr as against 76 cr, up 38% YoY. Surya Pharma’s EPS for FY11 stands at 5.2 which relates to a P/E of 4.2 on the current price of 21.80. We are expecting a growth of atleast 20 – 25% in FY12 as well because new stores and ActivOn drug is going to add consistently to their bottomline. So if I take expected EPS of FY12 to be 6.5 around, the stock trades one year forward P/E of 3.35.

These valuations for such a fast growing company is clearly not justified. Surya Pharma has enjoyed P/E of 6 in the past and so I feel if markets recover then this stock can enjoy those P/E multiples once again or maybe cross it. The only risk to Surya Pharma is it’s debt. It’s interest cost have gone up significantly from 62 cr to 99 cr, up 60%. But that is fair enough as the company is on the growth phase and thus interest costs have to go up. Im sure in future the company will definitely look towards debt reduction since now it is making a lot of profits and those can be used to repay debts to reduce the burden.

I claim Surya Pharma to be a multibagger clearly because of it’s valuations that looks really cheap. In future we can definitely see a re rating of this stock. If this stock trades at a P/E of 6.6 by FY12, then the stock can double itself which still is very cheap according to other stocks. So clearly Surya Pharma looks interesting at current levels and posts a big upside. For now I can give a moderate target to Surya Pharma of 5 kind of P/E multiple and that gives a target price of 32.5, still a good upside.

Buy Surya Pharma with 12 months target price of 32.5.

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1. Buy Alok Industries