Buy Matrix Labs; target of Rs 229: DSP ML

Refreshing estimates; Maintain Buy noting robust outlook

Post a tough FY07E, we forecast strong 77% EPS CAGR for Matrix over FY07-09E (vs. 55% EPS de-growth in FY07E) driven by integration benefits of Mylan’s acquisition, strong core business growth, impact of generic Norvasc supply and lower R&D spend. Maintain Buy with revised PO of Rs229/share (27% potential upside) Key risks: Further margin erosion in EU generics, core business pricing pressure.

Integration benefits of Mylan deal from FY08E onwards

Based on our analysis of Mylan’s ANDA pipeline and Matrix’s DMF portfolio, we estimate sourcing of 12-15 products by Mylan (US$25mn revenues in FY09E).

Big EPS boost in FY08E from Generic Norvasc opportunity

We estimate over 40% of Matrix’s FY08E EPS (US$14mn PAT ) will likely come from generic Norvasc API supply to Mylan (40% market share achieved so far).

Strong growth momentum in most mainline businesses

Except for the EU generics (DocPharma) we forecast 30%+ revenue CAGR (FY07-09E) in Matrix’s ARV, custom manufacturing and API business

Poor FY07E in the price; likely buyout catalyst ahead

In our view, the stock’s significant 53% and 37% relative underperformance over the past year and six months respectively well reflects the likely 55% EPS degrowth in FY07E. Further, the stock’s current 40% discount to Mylan’s acquisition cost makes it an attractive candidate for complete buyout by Mylan