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Higher outgo for Taro control, valuations may cap upside

Source : BUSINESS_STANDARD
Last Updated: Thu, Sep 06, 2012 20:05 hrs

In the last one year, the Sun Pharmaceutical Industries stock significantly outperformed markets and the BSE healthcare index. The company's stellar performance in the quarter ended June, to which its subsidiary Taro contributed significantly, saw its stock hit a 52-week high of Rs 690 on August 10.

In what brought further cheer to the company, recently, the US Food and Drug Administration approved the resumption of production at Caraco Pharma (Sun's US subsidiary).

However, in the last few days, the stock has lagged its peers, as well as the market. Analysts say this is because supplies of Lipidox to the US, which had boosted the revenue, may not continue in the quarter ending September. While most analysts remain positive on the company's long-term prospects (Taro continues to drive revenue, a strong dermatology product portfolio and price rises), they are also cautious of developments regarding the complete acquisition of Taro. There is concern on a likely increase in the cash outgo, as the offer price to Taro's minority shareholders is expected to be raised further. Analysts like Praful Bohra of Nirmal Bang say Sun stock valuations are stretched. These may cap the upside for the stock in the near term. For now, the consensus one-year price target (according to Bloomberg data) stands at Rs 704, which indicates limited upside from the current Rs 652 levels.


 
STRONG GROWTH PROSPECTS
In Rs crore Q1' FY13 FY13E
Net sales 2,658.1 10,373.8
% change y-o-y 62.5 29.5
Ebitda 1,216.9 4,527.4
Ebitda (%) 45.8 43.6
Net profit 795.6 3,327.0
% change y-o-y 58.8 28.6
EPS (Rs) - 32.1
PE (x) - 20.3
E: Estimates            Source: CapitaLine Plus, HSBC Research

Taro: The fair value
Sun's attempt to acquire complete ownership in Taro, compared with its current 66 per cent stake, would be operationally positive for the former. However, though Sun had revised the offer price from $24.5 to $39.5 a share in August-end, a few minority shareholders are seeking higher compensation.

Analysts expect Sun to raise the offer price again. Sarabjeet Kaur Nangra at Angel Broking says even at the revised offer price of $39.5, the minority shareholders may not agree to sell their shares, and Sun would have to revise the price again. Surjit Pal at Elara Capital, too, feels the revised offer price doesn't match up to expectations of the minority shareholders. "To arrive at a consensus price, Sun will have to further revise its offer price substantially," he says.

Taro has net cash of $315 million, and analysts estimate it would generate another $225 million annually. With complete control of Taro, Sun can utilise the company's cash flow for growth of the consolidated entity. At the offer price of $39.5 (estimated outgo of $592 million for 15 million shares), Anubhav Aggarwal at Credit Suisse feels, it would be accretive for Sun, and it can add about five per cent to the target price of Rs 740.

Though there is room to raise the offer price, given the benefits it may derive, analysts at Credit Suisse peg Taro's fair value at $49 a share, considering the multiples at which Sandoz acquired Fougera (8.8 times the 2011 earnings before interest, tax, depreciation and amortisation, or Ebitda). Whether Sun would raise the offer price further or not is yet to be seen, but most analysts expect more action on this front.

Taro on a strong footing
During the quarter ended June, Taro's revenue, at $159 million, grew 42.6 per cent year-on-year and 7.5 per cent sequentially. Ebitda stood at $79 million (a margin of 49.6 per cent) and net income stood at $62.9 million, a rise of 76.3 per cent year-on-year. This boosted Sun's consolidated performance.

While Taro's excellent growth has been aided by price rises, at the end of the quarter ended June, the management cautioned Taro's growth might not be sustained. Reports suggest in July, Taro had increased the price of a dermatology product. According to analysts at Credit Suisse, this implies results for the next two quarters would be strong, with sales in the quarter ending September expected at about $167 million (a sequential rise of five per cent) and Ebitda estimated at $92 million (up 10 per cent sequentially). They feel this could add about five per cent to Sun's FY14 estimates. The analysts add a product-by-product analysis shows about 90 per cent of Taro's sales are sustainable, even if all entities with approved abbreviated new drug applications return. Analysts at HSBC believe Taro, which accounts for about 35 per cent of Sun's total revenue and Ebitda, would see strong growth, owing to price increases and favourable positioning in the US skin market.

Caraco FDA clearance
Clearance of Caraco's Michigan facility by the US Food and Drug Administration means Sun can now manufacture cardiac product Cavedilol and anti-biotic Paromomycin at the facility. Analysts feel other clearances would be granted on a product-to-product basis, leading to gradual rise in manufacturing. They expect this subsidiary to add $40-45 million in sales during FY13 and FY14 each. This would include sales from potential generic launches like Prandin (an anti-diabetic).




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