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Sun looks structurally well positioned for growth, as 83% of its revenues are from the US
(benefiting from a robust ANDA pipeline, improvement in Taro and a depreciating INR) and
India (above industry growth). Moreover, with US$1bn in cash, Sun looks well poised to
achieve value-accretive deals. We upgrade to Buy.
Well positioned due to favourable business mix
Sun, in our view, is well positioned for growth under the current uncertain macro environment
due to its favourable business mix (42% of FY11 revenues from domestic formulations and
41% from US export formulations). We believe the company’s domestic business is well
poised to grow at 20% yoy vs industry growth of 12-15% due to around 60% exposure to the
growing chronic therapies segment. This would be aided in the near term by R&D initiatives
(delivery technology platform) by Sun Pharma Advanced Research Centre (SPARC). We
believe Sun’s US business is also well poised for growth, with 19 abbreviated new drug
applications (ANDAs) approved in the last 12 months, 152 awaiting approval, ongoing
improvement in Taro’s margins and a depreciating INR (11% in last month).
Expect value-accretive acquisition (with US$1bn in cash)
Sun made eight acquisitions from 1996-2001, but has made fewer since. It raised US$350m
in 2004 to fuel further growth, but made only a few small acquisitions due, in our view, to
expensive valuations. It has also acquired a majority stake (around 63%) in Taro after three
years of litigation and now fully owns Caraco, after acquiring the 24.5% it did not previously
own in June 2011. We believe Sun, with around US$1bn in cash and cash equivalents, is
best positioned to get value-accretive deals now, considering the ongoing global slowdown.
We raise estimates and TP, and upgrade to Buy
We believe Sun will soon be able to resolve its USFDA issues (after having received a warning
letter in Oct '08 and thereafter entering into a consent decree in Sep '09) on its Caraco facility (we
expect resolution in FY13), with the company having achieved USFDA resolution of its Cranberry
facility and Taro’s facility in Canada in the last six months. Improvement in Taro’s financials
(margins have expanded in the last three quarters) would also aid Sun’s margins, in our view. We
therefore raise our earnings estimates by 1%/4% for FY12F/13F. We roll forward our valuation to
FY13 and consolidate Taro and Sun’s financials. Thus, we value Sun’s core business at Rs518
(20.9x FY13F, at 10% premium to the sector) and one-offs at Rs7 (after 20% execution discount)
resulting in an SOTP-based TP of Rs525. We upgrade to Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sun looks structurally well positioned for growth, as 83% of its revenues are from the US
(benefiting from a robust ANDA pipeline, improvement in Taro and a depreciating INR) and
India (above industry growth). Moreover, with US$1bn in cash, Sun looks well poised to
achieve value-accretive deals. We upgrade to Buy.
Well positioned due to favourable business mix
Sun, in our view, is well positioned for growth under the current uncertain macro environment
due to its favourable business mix (42% of FY11 revenues from domestic formulations and
41% from US export formulations). We believe the company’s domestic business is well
poised to grow at 20% yoy vs industry growth of 12-15% due to around 60% exposure to the
growing chronic therapies segment. This would be aided in the near term by R&D initiatives
(delivery technology platform) by Sun Pharma Advanced Research Centre (SPARC). We
believe Sun’s US business is also well poised for growth, with 19 abbreviated new drug
applications (ANDAs) approved in the last 12 months, 152 awaiting approval, ongoing
improvement in Taro’s margins and a depreciating INR (11% in last month).
Expect value-accretive acquisition (with US$1bn in cash)
Sun made eight acquisitions from 1996-2001, but has made fewer since. It raised US$350m
in 2004 to fuel further growth, but made only a few small acquisitions due, in our view, to
expensive valuations. It has also acquired a majority stake (around 63%) in Taro after three
years of litigation and now fully owns Caraco, after acquiring the 24.5% it did not previously
own in June 2011. We believe Sun, with around US$1bn in cash and cash equivalents, is
best positioned to get value-accretive deals now, considering the ongoing global slowdown.
We raise estimates and TP, and upgrade to Buy
We believe Sun will soon be able to resolve its USFDA issues (after having received a warning
letter in Oct '08 and thereafter entering into a consent decree in Sep '09) on its Caraco facility (we
expect resolution in FY13), with the company having achieved USFDA resolution of its Cranberry
facility and Taro’s facility in Canada in the last six months. Improvement in Taro’s financials
(margins have expanded in the last three quarters) would also aid Sun’s margins, in our view. We
therefore raise our earnings estimates by 1%/4% for FY12F/13F. We roll forward our valuation to
FY13 and consolidate Taro and Sun’s financials. Thus, we value Sun’s core business at Rs518
(20.9x FY13F, at 10% premium to the sector) and one-offs at Rs7 (after 20% execution discount)
resulting in an SOTP-based TP of Rs525. We upgrade to Buy.
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