Buy Sun Pharma; target of Rs 661: Angel Broking

Angel Broking's report on Sun Pharmaceutical Industries

"Sun Pharmaceutical Industries (Sun Pharma) and Ranbaxy Laboratories (Ranbaxy) announced that they have entered into definitive agreements pursuant to which Sun Pharmaceuticals will acquire 100 percent of Ranbaxy in an all-stock transaction. The deal value for the transaction at ~ USD4bn, puts the valuation of Ranbaxy at 1.6xFY2015E EV/sales, which is at a discount to its peers, which trade at 2.0-2.5x. Thus, every shareholder of Ranbaxy would get 0.8 shares of Sun Pharmaceuticals. This exchange ratio represents an implied value of Rs 457 for each Ranbaxy share (18 percent and 24 percent premium to Ranbaxy’s 30-day and 60-day volume-weighted average share price, respectively). The transaction has a total equity value of approximately USD3.2bn. Subject to pending shareholders and regulatory approvals, Sun Pharma anticipates that the transaction will close by the end of CY2014."

Outlook and Valuation: "The acquisition is likely to get completed by the end of CY2014 and thus will fully reflect in Sun Pharma’s FY2016 financials. Thus, in FY2016, Ranbaxy will contribute around 37 percent to the sales (estimated to be around Rs 31,223cr) of the combined entity. On the operating front, the company is likely to have an OPM of 29.3 percent, with a combined net profit of Rs 6,639cr. The EPS of the combined entity would now stand at Rs 27.6 for FY2016, lower form Rs 28.8 estimated earlier, on back of equity dilution of 16 percent. The acquisition will dilute Sun Pharma’s reported ROE from an estimated 25.4 percent to 25.1 percent in FY2016, which is healthy, given the low profitability of the acquired company and would be higher end of most of its peers which have an ROE of 17-25 percent. However, the operating ROE, which excludes the cash component, will still be higher at around 41 percent."

"Also, in connection with the transaction, Daiichi Sankyo has agreed to indemnify Sun Pharmaceuticals and Ranbaxy for, among other things, certain costs and expenses that may arise from the recent subpoena which Ranbaxy has received from the United States Attorney for the Toansa facility. Thus there could be some expenses, if any, to be borne by Sun Pharma, which should not be a problem, given the strong cash on the books of the combined entity (estimated to be around Rs 20,000cr in FY2016)."

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