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Sun Pharma----------------------------------------------------------------------------Maintain NEUTRAL
Early to apply Sun's multiple to Taro
● We assume coverage of Sun Pharma, with a NEUTRAL rating
and raise our target price to Rs425 from Rs304.
● We believe the Taxotere launch and base business upside for
FY12 are factored into its stock price. We disagree that Taro
should be given Sun’s multiple, as there could be significant
downward revisions when CY09 and CY10 audited numbers are
available. Otherwise, we would recommend investors to buy Taro
instead of Sun, as Taro is trading at 7x forward P/E while Sun is at
23x P/E and Sun’s management has a 77% voting stake in Taro.
● We await clarity on several catalysts: 1) Taro’s audited results for
CY09 and CY10, 2) Sun’s market share of Taxotere (our base
case is 15% and launch in 1Q12), and 3) use of US$800 mn cash.
● We value Sun’s base business at 23x FY12E earnings (a 10%
premium to the sector average) and Taro at 12x FY12E earnings,
as we believe Taro’s audited results could throw negative
surprises (net income was revised down 30% in CY08 audited
results). Our estimates for FY11-13 rise by 18%/25%/16%, as we
consolidate Taro and incorporate Taxotere.
Should Taro get Sun’s multiple?
No doubt that Sun could bring significant integration benefits to Taro
through focussed R&D and SG&A spend, but the moot question is
what multiple should be used while integrating Taro with Sun. Taro is
trading at 7.7x 1H FY11E earnings while Templeton exited its 13%
stake in Taro at 8.5x 1H FY11E earnings. Currently, Taro trades at a
40% discount to its US counterparts (Figure 1).
The reason for the steep discount for Taro is the apprehension that
when the audited results for CY09 and CY10 are released, there
might be a significant downward revision to earnings. In its recent
CY08 audited results, net income was revised down by 30%. The
possibility of a significant downward revision to CY09 and CY10
results cannot be ruled out. Additionally, Sun’s acquisition of a
majority stake in Taro has been preceded by an acrimonious battle
between the promoters of Sun and Taro for three years and there
could be a risk of poison pill in Taro.
Hospira is not getting a multiple for Taxotere
Hospira’s market cap increased US$700 mn between 27 September
2010 (when Sanofi’s patents on Docetaxel were invalidated) and 2
November 2010. This clearly suggests Hospira is not getting a
multiple on Taxotere profit and the expected cash flow over the next
three years (before other generics enter). However, Sun’s current
stock price values Taxotere at Sun’s base multiple
Upside from US$800 mn cash on balance sheet
Sun’s management has been very disciplined while using cash in the
past and the Taro investment was very fruitful – Sun invested about
US$247 mn and the market cap of Sun’s stake in Taro is already
about 2-2.5x. We believe management would like to preserve cash
until the Protonix liabilities are settled. We estimate total liabilities of
1x profit of US$300 mn and therefore, surplus cash available with Sun
for US acquisition is close to US$500 mn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sun Pharma----------------------------------------------------------------------------Maintain NEUTRAL
Early to apply Sun's multiple to Taro
● We assume coverage of Sun Pharma, with a NEUTRAL rating
and raise our target price to Rs425 from Rs304.
● We believe the Taxotere launch and base business upside for
FY12 are factored into its stock price. We disagree that Taro
should be given Sun’s multiple, as there could be significant
downward revisions when CY09 and CY10 audited numbers are
available. Otherwise, we would recommend investors to buy Taro
instead of Sun, as Taro is trading at 7x forward P/E while Sun is at
23x P/E and Sun’s management has a 77% voting stake in Taro.
● We await clarity on several catalysts: 1) Taro’s audited results for
CY09 and CY10, 2) Sun’s market share of Taxotere (our base
case is 15% and launch in 1Q12), and 3) use of US$800 mn cash.
● We value Sun’s base business at 23x FY12E earnings (a 10%
premium to the sector average) and Taro at 12x FY12E earnings,
as we believe Taro’s audited results could throw negative
surprises (net income was revised down 30% in CY08 audited
results). Our estimates for FY11-13 rise by 18%/25%/16%, as we
consolidate Taro and incorporate Taxotere.
Should Taro get Sun’s multiple?
No doubt that Sun could bring significant integration benefits to Taro
through focussed R&D and SG&A spend, but the moot question is
what multiple should be used while integrating Taro with Sun. Taro is
trading at 7.7x 1H FY11E earnings while Templeton exited its 13%
stake in Taro at 8.5x 1H FY11E earnings. Currently, Taro trades at a
40% discount to its US counterparts (Figure 1).
The reason for the steep discount for Taro is the apprehension that
when the audited results for CY09 and CY10 are released, there
might be a significant downward revision to earnings. In its recent
CY08 audited results, net income was revised down by 30%. The
possibility of a significant downward revision to CY09 and CY10
results cannot be ruled out. Additionally, Sun’s acquisition of a
majority stake in Taro has been preceded by an acrimonious battle
between the promoters of Sun and Taro for three years and there
could be a risk of poison pill in Taro.
Hospira is not getting a multiple for Taxotere
Hospira’s market cap increased US$700 mn between 27 September
2010 (when Sanofi’s patents on Docetaxel were invalidated) and 2
November 2010. This clearly suggests Hospira is not getting a
multiple on Taxotere profit and the expected cash flow over the next
three years (before other generics enter). However, Sun’s current
stock price values Taxotere at Sun’s base multiple
Upside from US$800 mn cash on balance sheet
Sun’s management has been very disciplined while using cash in the
past and the Taro investment was very fruitful – Sun invested about
US$247 mn and the market cap of Sun’s stake in Taro is already
about 2-2.5x. We believe management would like to preserve cash
until the Protonix liabilities are settled. We estimate total liabilities of
1x profit of US$300 mn and therefore, surplus cash available with Sun
for US acquisition is close to US$500 mn.
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