4 March 2015
Update | Sector: Healthcare
Sun Pharma
BSE Sensex
29,381
S&P CNX
8,923
CMP: INR1,005
TP: INR1,220 (+21%)
Buy
Halol concerns allayed – reiterate as top pick
Ranbaxy merger completion imminent, synergies to unlock value
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val(INRm)/Vol‘000
Free float (%)
SUNP IN
2,071.1
2083/33.4
1,035/553
9/10/23
1875/2558
36.4
Sun Pharma Advanced Research Company (SPARC) announced USFDA approval
for its NDA Elepsia XR, which was filed from Sun Pharma’s (SUNP) Halol facility
(largest facility for the US). This is the first product approval since Form 483
issuance (23 observations, Sep’14) at Halol, implying likely clearance of the
facility by USFDA. This removes a key overhang on SUNP, as a timely closure of
USFDA issues reflects SUNP’s strong focus on quality/compliance and paves way
for new product approvals, key for SUNP’s growth in the US (60% of total sales).
US pipeline focused on differentiation, await pickup in new approvals:
SUNP’s focus on complex generics in the US is likely to bear fruit over the next
few years, with 228 pending ANDAs (including 30 in Taro). With only 15 ANDA
approvals (inc. 4 for Taro) YTD in the US, growth for FY15 has been impacted.
However, we expect bunched-up product approvals by USFDA, as GDUFA
implementation gathers pace. Halol accounted for 25%+ of US sales and hence
clearance of the same is critical for upcoming launches’ visibility. We expect
SUNP’s US business to post 18% CAGR over FY15E-17E, with key launches like
gActonel, gFocalin, gGleevec having the potential to surprise positively.
Financial Snapshot (INR Billion)
Y/E Mar
2015E 2016E 2017E
Sales
180.4 212.4 252.7
EBITDA
Rep. PAT
Rep.EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div. Yield (%)
31.7
8.7
22.9
0.4
27.9
6.9
19.4
0.5
22.2
5.4
15.4
0.6
85.0
65.7
31.7
109.0
30.8
37.1
13.8
97.5 118.2
74.6
36.0
13.6
27.5
36.1
14.6
93.7
45.2
25.5
27.3
35.4
14.2
116.2 146.4 184.6
Strengthening backward linkage for controlled substance:
Recent
acquisition of GSK’s Opiates business in Australia solidifies SUNP’s presence in
controlled substances globally (USD10b+ market). The acquired operations
reported revenue of ~USD65m with marginal profitability but supplies 25% of
the world’s medicinal opiate needs. Hence, it is a strategic asset as SUNP looks
to intensify focus on low competition segments and has forward linkages
through Hungary (ICN) and New Jersey (Able Labs) in the controlled substance.
Synergy target from RBXY achievable:
With only the Punjab and Haryana
High Court approval pending, we expect merger with RBXY to be completed by
March 2015. We believe SUNP’s target of USD250m synergy benefit is realistic,
noting largely non-overlapping businesses and SUNP’s sharp focus on cost
containment to drive margin expansion for Ranbaxy (from 15% now to 20% by
FY17E). We expect the RBXY deal to be EPS accretive from FY17 itself.
Merits premium multiples, remains our top pick:
We believe SUNP would
continue to trade at premium valuations due to superior execution track
record, high RoIC (46% versus 35% for peers) and potential for accretive M&A
(USD2b cash). We estimate an EPS CAGR of 19% over FY15E-17E, despite surge
in R&D spend (novel molecule) restraining margins. We raise our target price
to INR1,220 (27x FY17E) mainly on inclusion of gGleevec in our estimates
(RBXY not included in our assumptions).
Risks:
execution challenges on RBXY
integration, resolution of USFDA issues at RBXY facilities, currency fluctuation.
Arvind Bothra(Arvind.Bothra@MotilalOswal.com);+91
22 3982 5584
Amey Chalke(Amey.Chalke@MotilalOswal.com);+91
22 3982 5423
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.