IIFL- Buy Sun Pharma; Taro, Caraco and Taxotere – net 10% upgrade; raise target price

Sun Pharmaceutical Industries Ltd – BUY;  Taro, Caraco and Taxotere – net 10% upgrade; raise target price
Sun Pharma has raised its stake in Taro to 53% economic interest and 69% voting rights, following
the recent warrant conversion and buy-out of erstwhile promoter shares. We are consolidating Taro in
Sun Pharma’s financials. At current levels of Taro’s profitability, we estimate this will add 9-10% to
Sun’s consolidated net profit. The latest update on FDA issues at Caraco’s US facilities was not as good
as we had expected, but the generic Taxotere opportunity in the US should enable the company to
meet our overall projections. Our FY11 estimate is still short of guidance (13% topline growth vs 20%
guidance, ex-Taro), and upside to our estimates is possible. We believe any weakness in the stock
price would be a buying opportunity—we retain BUY and raise our price target from Rs2111 to Rs2470.
Taro in the bag: After a two-year legal tussle, Sun Pharma has acquired majority control of Taro Pharma in
the US. Taro will remain an independent subsidiary for the time being; Sun’s management could extract better
value off its assets. Potential medium-term benefits to Sun include a larger distribution network in the US,
entry into the attractive US dermatology segment, and access to branded-drug sales infrastructure in the US.
Taxotere compensates for slower Caraco ramp-up: The latest update from Caraco indicates that the original
timeline on resumption of manufacturing (4QFY11) is on track, but ramp-up during FY12 is likely to be slower
than initially expected. Recent invalidation by a US court of two patents covering Taxotere (anti-cancer drug)
opens up a new unique opportunity for Sun, more than compensating for lowering of Caraco sales estimates.
Premium valuation to remain: We expect Sun Pharma shares to maintain their premium valuation on the
back of strong domestic business, good growth prospects in both domestic and international markets, and
the superior quality of management. Our price target of Rs2470 is (26x FY12ii EPS) is 30x FY12ii core
earnings plus cash per share, adjusted for potential liability on generic Protonix sales.