Buy Sun Pharma; target of Rs 600: Motilal Oswal

Motilal Oswal's report on Sun Pharma:

“Sun Pharma’s FY13 annual report provides good visibility on the key growth levers from its important markets like US and India. The company intends to continue focusing on (1) developing complex and differentiated products, and (2) maintaining cost leadership through vertical integration. It will adopt a conservative approach towards inorganic initiatives.”

“SUNP’s cash flows indicate that the acquisition price paid for URL Pharma was USD71m, implying a valuation of 0.4x EV/Sales as per our assumption. Lower-than-expected acquisition cost coupled with faster-than-expected ramp-up at URL will shorten the estimated payback period for the acquisition. URL Pharma was consolidated for 55 days in 4QFY13. For this period, it reported sales of USD33m, with PAT margin of ~15%. SUNP has outstanding hedges of USD300m, for which it has made provisions of INR1.29b. Net working capital days stood at 112 at the end of March 2013 against 146 at the end of March 2012. SUNP has spun off its India business into a 100% subsidiary, Sun Pharma Laboratories, which reported sales of Rs 27.4b, with a negative PBT of Rs 1.4b. The new structure might help SUNP to reduce overall effective tax rate, going forward. “

“We believe the US will continue to be the core earnings driver for SUNP, with support from India and RoW. We estimate 22% CAGR in core EPS over FY13-15. The stock trades at 26.9x FY14E and 23.9x FY15E core EPS. Maintain Buy with a target price of Rs 600,” says Motilal Oswal research report.

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