Shasun Chemicals

Shasun is in transition from a pure API
supplier to a serious contract research and manufacturing services (CRAMS)
player. Its dependence on the legacy active pharmaceutical ingredient (API)
business (the key reason for low valuations) has declined materially post the
acquisition of Rhodia’s CCS business and since its foray into formulations (tieups
with Glenmark & Actavis).
Shasun's acquisition of Rhodia’s CCS
business marked a major foray into innovator CRAMS, with access to an existing
set of contracts and established relationships with emerging pharmacos, where
it had limited presence. Innovator CRAMS accounted for c52% of sales in FY07,
and is expected to increase further going forward as synergies are exploited.
More business drivers = Higher valuations — Shasun’s foray into innovator
CRAMS and generic formulations adds more exciting growth drivers as well as
diversity to its business model – the absence of which is the main reason for low
valuations, in our view. We expect this to change for the better in line with the
improving revenue mix.
P-III contract: potential money-spinner — Shasun indicates that SPSL has a
contract for an NCE (currently in P-III trials), which could be a key growth
driver. Shasun expects the innovator to launch the molecule in late 2008; if
successfully launched, Shasun would be the sole API supplier for the US market
for three years. We estimate an option value of Rs35/share for this opportunity.
Valuations:
Given that Pharma is a growth sector, we use P/E as our primary method to
value the base business of every company. At the same time, since many
pharma companies have some unique opportunities that could play out, we
ascribe a separate value for these. For Shasun, we use a combination of P/E (for
the base business) and probability adjusted NPV (for a phase III contract)
approaches to arrive at a 12 month target price of Rs165/share.

Technically also the price target works out to 165-167 which is the resistance the script would face at the upper trendline. Add Shasun on dips from here with a support at 86 and stop loss at 83.