Elder Pharmaceuticals Ltd (Elder Pharma) is a Mumbai-based pharmaceutical company with prime focus on manufacturing and marketing of pharmaceutical brands in the domestic market. Traditionally, Elder Pharma has been a India centric pharma company but of late it has forayed into the regulated markets of Europe by acquiring a strategic 20% stake in Neutra Health PLC (an UK based neutraceutical company) and a 51% stake in Biomeda (one of the top 10 manufacturing and distribution company in Bulgeria). Simultaneously, it is penetrating deep into the semi-regulated and non-regulated markets.

In terms of therapy coverage, Elder Pharma maintains its leadership positioning in Women’s healthcare, wound care management and nutraceuticals. The brand positioning of the Elder Pharma can be seen from the fact that SHELCAL, CHYMORAL and ELDERVIT are leading brands in the Women’s healthcare, wound care management and nutraceuticals, respectively. It has a strong presence in the pain management, antiinfectives, dermatology and lifestyle disorders. It also has got strong foot hold in the domestic Fast Moving Heath Goods (FMHG) segment with brands like – Fair One, Tiger Balm, AM PM Mouthwash etc.

Driven by steady progress in the domestic formulations, more specifically the leading brands, Elder Pharma’s revenues and profit grew at a CAGR of 19.3% and 50% respectively over last five years upto FY07. Going forward, we estimate the revenues to grow at a CAGR of 18.3% during FY07-09E. We conservatively estimate margin expansion of 160 bps to 19.0% in FY09E largely driven by progressive shifting of manufacturing activity to excise free zone. As a result, we estimate 31.5% and 24.9% profit growth to Rs 647.10 mn and Rs 808.4 mn in FY08E and FY09E respectively.

At current price of Rs 416 the stock trades at a 9x EV/EBITDA of FY09E and trades at 10x EPS FY09E. We are initiating a coverage on Elder with a target price of Rs 554, based on our DCF valuations. At our target price the stock would be valued at 13x FY09E EPS and 11x its FY09E EV/EBITDA.