Buy Sun Pharma; target of Rs 1200: Deutsche Bank

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Deutsche Bank is bullish on Sun Pharmaceutical Industries and has recommended buy rating on the stock with a 12-month target of Rs 1200.

 

Deutsche Bank report on Sun Pharmaceutical:

 

Sun acquired Taro fully aware of its losses in 2006  

 

Taro, in a letter to shareholders seeking approval for its acquisition by Sun, guided   for its 2006 financials. We believe that these, below expectation numbers, were largely driven by restructuring. With such significant restructuring already done, we believe that its recovery should be faster. Maintain estimates and Buy on Sun.  

 

Taro's communication to its shareholders 

 

On 21st May, Sun announced the acquisition of Taro. The latter has sent a letter  (dated 8 June'07) to its shareholders, announcing a meeting on 23rd July for  approval of this acquisition.

 

Weaker headline 2006 numbers indicate restructuring is largely done 

 

Guides 2006 financials, which are below expectations. Analysis indicates that  Taro, on its own, has significantly rationalised its working capital, manpower,  product portfolio and inventory at wholesalers/ retailers. We believe that after this  significant clean-up and with its retail market-share being largely intact, Taro  should bounce back sharply.

 

While some minority shareholders object to the  fact that fresh equity issued to Sun was significantly below the open offer price,  we believe that the sale process seems extensive and transparent. New equity  issuance was a part of the acquisition process signed by Sun. Hence, we believe  that all approvals for this acquisition should fall in place. 

 

Valuation/risks 

 

Taro's financials (eps accretive for Sun FY2009E) are not included in our estimates.  We believe that Sun should trade at a premium to the sector on account of its  superior growth strategy (high and consistent growth as well as high ROCE) and  value accretive acquisitions. Hence, our target multiple of 25x Mar'08e is at 20%  premium to sector PE. Spreading its scarce management resources quite thinly  and a delay in turnaround/ integration are key risks to this acquisition and our PT.