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UBS Investment Research
Sun Pharma
Raise to Buy, Taro minority buyout
a ccretive
Event: Sun Pharma proposes to buy out minority holders in Taro
Sun Pharma has submitted a proposal to Taro Pharma board today to acquire the
33.76% stake held in Taro Pharma by minority investors at a price of US$24.5 per
share in cash. This will involve acquisition of 15.03mn shares and cost the co. at
current price US$368mn. Sun Pharma had ~US$900mn of Net cash on its books as
of Mar 31, 2011 and doesn’t need to raise any financing.
Impact: Raise FY13E EPS by 11% on back of proposed buyout
We assume the merger acquisition with effect from FY13 and raise our EPS for
FY13/14E by 11.1%/11% respectively. We est. Sun is paying 8.1x FY12E PE for
Taro Pharma and believe the deal is highly accretive for Sun Pharma shareholders.
Action: Raise to Buy, FY11-14E EPS CAGR of 20%
Stock is down 10% since Aug 3’11. We upgrade the stock to a Buy as post Taro
minority buyout we expect an EPS CAGR of 20% over FY11-FY14. We believe
investors have been concerned on the rising cash at Sun Pharma. We believe this
deal is accretive and prudent use of cash.
Valuation: 18x FY13E PE, PT Raise to Rs 580 (from Rs 515)
We derive our price target using DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool with a WACC of 11%. Our
12-mth price target implies 22xFY13E PE.
Sun Pharmaceuticals Industries Limited
Sun Pharmaceuticals Industries (Sun Pharma) is the sixth largest pharmaceutical
company in the India. It has a presence in chronic segments such as cardiology,
diabetology, and the central nervous system. In FY10, it derived 46% of sales
from Indian finished dosages, 28% from US finished dosages, 12% from rest of
the world finished dosages and 14% from global API sales. The company
distributes its products in the US through US-listed subsidiary, Caraco
Pharmaceuticals. Sun acquired a majority stake in US-listed Taro Pharma in
September 2010. The founders, the Shanghvi family, own 64% of Sun Pharma.
Statement of Risk
We believe general risks include FDA approval, timing of approvals,
competition from rival drug therapies, litigation (including the appeal process),
accounting/disclosure, and product pricing from generic competition. Pricing
pressure in the US market remains high.
Sun Pharma is increasing its focus on the US business. Risks relating to the
generic pharma sector in US become increasingly applicable now. Continued
rupee appreciation is likely to put further pressure on operating margins going
forward. Our estimates assume purchase of the remaining 33.76% of Taro
Pharma.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sun Pharma
Raise to Buy, Taro minority buyout
a ccretive
Event: Sun Pharma proposes to buy out minority holders in Taro
Sun Pharma has submitted a proposal to Taro Pharma board today to acquire the
33.76% stake held in Taro Pharma by minority investors at a price of US$24.5 per
share in cash. This will involve acquisition of 15.03mn shares and cost the co. at
current price US$368mn. Sun Pharma had ~US$900mn of Net cash on its books as
of Mar 31, 2011 and doesn’t need to raise any financing.
Impact: Raise FY13E EPS by 11% on back of proposed buyout
We assume the merger acquisition with effect from FY13 and raise our EPS for
FY13/14E by 11.1%/11% respectively. We est. Sun is paying 8.1x FY12E PE for
Taro Pharma and believe the deal is highly accretive for Sun Pharma shareholders.
Action: Raise to Buy, FY11-14E EPS CAGR of 20%
Stock is down 10% since Aug 3’11. We upgrade the stock to a Buy as post Taro
minority buyout we expect an EPS CAGR of 20% over FY11-FY14. We believe
investors have been concerned on the rising cash at Sun Pharma. We believe this
deal is accretive and prudent use of cash.
Valuation: 18x FY13E PE, PT Raise to Rs 580 (from Rs 515)
We derive our price target using DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool with a WACC of 11%. Our
12-mth price target implies 22xFY13E PE.
Sun Pharmaceuticals Industries Limited
Sun Pharmaceuticals Industries (Sun Pharma) is the sixth largest pharmaceutical
company in the India. It has a presence in chronic segments such as cardiology,
diabetology, and the central nervous system. In FY10, it derived 46% of sales
from Indian finished dosages, 28% from US finished dosages, 12% from rest of
the world finished dosages and 14% from global API sales. The company
distributes its products in the US through US-listed subsidiary, Caraco
Pharmaceuticals. Sun acquired a majority stake in US-listed Taro Pharma in
September 2010. The founders, the Shanghvi family, own 64% of Sun Pharma.
Statement of Risk
We believe general risks include FDA approval, timing of approvals,
competition from rival drug therapies, litigation (including the appeal process),
accounting/disclosure, and product pricing from generic competition. Pricing
pressure in the US market remains high.
Sun Pharma is increasing its focus on the US business. Risks relating to the
generic pharma sector in US become increasingly applicable now. Continued
rupee appreciation is likely to put further pressure on operating margins going
forward. Our estimates assume purchase of the remaining 33.76% of Taro
Pharma.
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