Buy Sun Pharma; target of Rs 718: Motilal Oswal

Motilal Oswal's report on Sun Pharmaceutical Industries

Sun Pharma's subsidiary, Taro Pharma, has announced that it will repurchase up to USD200m worth of outstanding shares (link in postscript). The price range set for the repurchase is USD84.5 to USD97.5; previous close was USD89.6.

If fully subscribed, this offer represents 4.6 percent to 5.3 percent of Taro's total outstanding shares, depending upon the repurchase price paid.

Taro had cash & equivalents of USD741m outstanding as of 31st October, 2013. Cash yield at Taro was less than 1 percent in FY13.

This reinvestment in the company indicates of management's confidence in the future business outlook. Further, we believe that the subsidiary can recuperate the investment in nine months at current run rate.

In case Taro is able to repurchase 5.3 percent of the outstanding shares, we estimate that it can reduce minority interest at SUNP by ~USD16m, i.e., 2 percent of FY15E EPS. However, this is the best case scenario as the actual repurchase can be much lower. Thus, we have not revised our estimates, pending conclusion of the transaction.

Valuation & view

We believe US will continue to be the core earnings driver for SUNP along with support from India and RoW markets. While Taro had played a key role in shaping Sun's US performance over the last two years, Sun's own pipeline in our view continues to grow over 20 percent annually.

We assume 10 percent revenue growth for Taro over the forecast period but with over 130 ANDAs awaiting approval, Sun can sustain current growth momentum in the US through its own pipeline of products. We model in a revenue CAGR of 30 percent over FY13-FY15 for Sun's own pipeline and believe that this estimate may have an element of positive surprise. While India formulations will see a slowdown in FY14 impacted by the new pricing policy, we expect growth to rebound to historical levels of 16-18 percent in FY15E.

"The stock trades at 26.6x FY14E and 23.0x FY15E core EPS. We value SUNP's core business at INR682/share (27x FY15E), we add INR28/share for the Doxil opportunity and INR8/share for other Para IV opportunities to arrive at a target price of INR718/share, an upside of 24 percent from current levels. Reiterate Buy," says Motilal Oswal research report.

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