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Expensive, but holds further promise; initiate with Hold
We initiate coverage on Sun Pharmaceutical Industries (SPIL)
with Hold and target price of `2,053. We are Neutral on the
stock mainly owing to high valuation of 24.9x FY11e and 23x
FY12e earnings. However, we remain bullish on the business
model, growth momentum, high profitability and synergistic
benefits from Taro acquisition.
Core business to deliver strong growth. We expect core
business to register a robust 20.9% CAGR over FY10-13e led by
higher-than-industry growth in the domestic market and
improving US business through third-party and own
manufacturing.
Taro – Strategic fit. Taro acquisition brings into SPIL’s fold
dermatology and paediatrics products. It also gives it access to
Europe and +100 ANDA approvals; the acquisition fits in line
with SPIL’s strategy of expanding in the US market.
Healthy financials. The net cash of >`40bn would enable SPIL
to target more strategic inorganic growth apart from Taro. SPIL
enjoys the highest margins, of ~35%, in the Indian pharma space.
Valuation and risks. We value SPIL at `2,053 based on 22x
FY12e earnings and `103/share for Taro integration. We assign
10% higher multiple to SPIL versus peers (20x) due to strong
management quality, highest margins and possibility of upside
from Taro. Risks: Currency fluctuation (as 52% revenue is
contributed by exports) and major negative deviation in accounts
of Taro post auditing.
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