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Sun Pharma---------------------------------------------------------------------------- Maintain NEUTRAL
Caraco's new offer implies a 55-60% recovery of its base business
● Caraco’s valuation at US$5.25/share provides a ballpark estimate
of the extent of recovery of the base business at Caraco. Sun has
exercised its right to transfer the distribution of Sun’s products
from Caraco to Sun and therefore the majority of the value for
Caraco is for its own products. Using the valuation multiples of the
US peers, the current valuation implies a 55-60% recovery of
Caraco’s manufactured products.
● The current offer of US$5.25/share for the minority shareholders
(Sun holds a 75.8% stake in Caraco) is contingent on shareholder
approval after which Caraco would be delisted. We believe Sun
may not go for a separate distribution network and duplicate
costs, if Caraco goes private.
● We maintain our NEUTRAL rating on Sun with a target price of
Rs425/share. The two immediate catalysts are Taxotere approval
and the release of Taro’s audited numbers for CY09 and CY10.
We continue to expect a downward revision to Taro’s audited
numbers (CY08 audited net income was revised down by 30%)
and therefore use a lower multiple to value Taro
Implications for Caraco’s base business in $5.25/sh offer?
Sun Pharma initially offered US$4.75/share for all outstanding shares
of Caraco not owned by Sun (Sun holds a 75.8% stake in Caraco).
However, the independent committee has recommended the valuation
be increased to US$5.25/share. The new merger agreement is
contingent on shareholder approval after which Caraco would be
delisted.
We believe this offer provides important ballpark estimates of the
extent of recovery of the base business at Caraco. Currently, US
counterparts Teva, Watson and Mylan are trading at 8-9x one-year
forward EV/EBITDA. Assuming the same multiple for Caraco, the
implied EBITDA for Caraco is US$18 mn (Figure 1).
Additionally, Sun has exercised its right to end its distribution
arrangement with Caraco (the current agreement has been extended
until 28 January 2012). Sun will transfer the distribution of Sun
products from Caraco to Sun and/or its wholly owned affiliates. This
will deprive Caraco of its distribution revenue, which was recording a
gross margin of 8-10%. Therefore, US$18mn EBITDA for Caraco is
mainly for its own manufactured products.
Prior to the cGMP related issues with Caraco, it made US$36 mn in
EBITDA at the peak (Figure 2). Therefore, the current valuation
approximately factors in a 55-60% recovery (adjusted for the
discounted value) of Caraco’s own manufactured products.
Sun may shun separate distribution, if Caraco goes private
Sun Pharma has expressed its intention to go for a separate
distribution set-up and mentioned that it may involve duplication of
some of the costs between Caraco and Sun. However, we believe if
Caraco goes private, Sun may not set up a separate distribution arm.
Taxotere and Taro’s audited numbers are the next catalyst
We maintain our NEUTRAL rating on Sun with a target price of
Rs425/share. The two immediate catalysts for the stock are Taxotere
approval by the USFDA and release of Taro’s audited numbers for
CY09 and CY10. We continue to expect a downward revision to Taro’s
audited numbers (CY08 audited net income was revised downwards
by 30%) and therefore use a lower multiple to value Tar
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sun Pharma---------------------------------------------------------------------------- Maintain NEUTRAL
Caraco's new offer implies a 55-60% recovery of its base business
● Caraco’s valuation at US$5.25/share provides a ballpark estimate
of the extent of recovery of the base business at Caraco. Sun has
exercised its right to transfer the distribution of Sun’s products
from Caraco to Sun and therefore the majority of the value for
Caraco is for its own products. Using the valuation multiples of the
US peers, the current valuation implies a 55-60% recovery of
Caraco’s manufactured products.
● The current offer of US$5.25/share for the minority shareholders
(Sun holds a 75.8% stake in Caraco) is contingent on shareholder
approval after which Caraco would be delisted. We believe Sun
may not go for a separate distribution network and duplicate
costs, if Caraco goes private.
● We maintain our NEUTRAL rating on Sun with a target price of
Rs425/share. The two immediate catalysts are Taxotere approval
and the release of Taro’s audited numbers for CY09 and CY10.
We continue to expect a downward revision to Taro’s audited
numbers (CY08 audited net income was revised down by 30%)
and therefore use a lower multiple to value Taro
Implications for Caraco’s base business in $5.25/sh offer?
Sun Pharma initially offered US$4.75/share for all outstanding shares
of Caraco not owned by Sun (Sun holds a 75.8% stake in Caraco).
However, the independent committee has recommended the valuation
be increased to US$5.25/share. The new merger agreement is
contingent on shareholder approval after which Caraco would be
delisted.
We believe this offer provides important ballpark estimates of the
extent of recovery of the base business at Caraco. Currently, US
counterparts Teva, Watson and Mylan are trading at 8-9x one-year
forward EV/EBITDA. Assuming the same multiple for Caraco, the
implied EBITDA for Caraco is US$18 mn (Figure 1).
Additionally, Sun has exercised its right to end its distribution
arrangement with Caraco (the current agreement has been extended
until 28 January 2012). Sun will transfer the distribution of Sun
products from Caraco to Sun and/or its wholly owned affiliates. This
will deprive Caraco of its distribution revenue, which was recording a
gross margin of 8-10%. Therefore, US$18mn EBITDA for Caraco is
mainly for its own manufactured products.
Prior to the cGMP related issues with Caraco, it made US$36 mn in
EBITDA at the peak (Figure 2). Therefore, the current valuation
approximately factors in a 55-60% recovery (adjusted for the
discounted value) of Caraco’s own manufactured products.
Sun may shun separate distribution, if Caraco goes private
Sun Pharma has expressed its intention to go for a separate
distribution set-up and mentioned that it may involve duplication of
some of the costs between Caraco and Sun. However, we believe if
Caraco goes private, Sun may not set up a separate distribution arm.
Taxotere and Taro’s audited numbers are the next catalyst
We maintain our NEUTRAL rating on Sun with a target price of
Rs425/share. The two immediate catalysts for the stock are Taxotere
approval by the USFDA and release of Taro’s audited numbers for
CY09 and CY10. We continue to expect a downward revision to Taro’s
audited numbers (CY08 audited net income was revised downwards
by 30%) and therefore use a lower multiple to value Tar
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