sun pharma mo

8/11/2019 Sun Pharma MO

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Alok Dalal ([email protected]); +91 22 3982 5584

Hardick Bora ([email protected]); +91 22 3982 5423

7 April 2014

Update | Sector: Healthcare

Sun PharmaCMP: INR587 TP: INR750 Buy

Acquires Ranbaxy: yet another steal for SunSynergies could realize over two to three years

SUNP acquires RBXY for USD4b, diversifies India business, strengthens position in

emerging markets, deal valued at 2.2x sales.

SUNP expects the acquisition to be cash EPS accretive in the first year and realize

USD250m of operating synergies by third year post close.

We believe SUNP can manage RBXYs assets better; however, synergies could

take two to three years to realize. Cultural integration, the biggest challenge for

SUNP.

SUNP acquires RBXY for USD4b, diversifies India business, strengthens

position in emerging markets: Post the acquisition, SUNP will be a leading

player in 13 therapies in India, gain entry into the fast growing OTC space in

India, establish a footprint across 55 emerging markets and will create a strong

pipeline of 184 ANDAs, including FTFs in the US. SUNP becomes the fifth largest

global specialty company, No. 1 pharma company in India, No. 1 generic

company in the generic derma space in the US.

SUNP expects acquisition to be cash EPS accretive in the first year and realize

USD250m of operating synergies by third year post close: SUNP expects to

realize synergies through stronger sales growth, efficient procurement and

supply chain efficiencies. It also intends to leverage the human resources of

both companies. SUNP believes it can realize USD250m of operating synergies

by the third year post close. The synergy benefits do not consider any gains

from resolution of US FDA issues at RBXY.

Expect SUNP to manage RBXY assets better; however, synergies could

take two to three years to realize. Cultural integration, the biggest

challenge for SUNP:Keeping the strong acquisition track record in mind,

we expect RBXYs assets to show a better performance under SUNP.

However, synergy benefits will take time to materialize and will only

happen over a period of 24-30 months. Hence, we believe RBXYs FY16

numbers could have an upside potential. Among the three challenges

seen (US FDA compliance, company profitability and integration of

RBXY), we believe the cultural integration could be the most important

challenge for SUNP. Overall, we remain positive on the deal. We do not

change our financial estimates and retain our rating and target price of

INR750 as the deal closure is expected at the end of CY14. However, we

present a performa of the merged entity in the following pages, based on

which we believe the combined entity has a fair value of INR770/share.

Investors are advised to refer through disclosures made at the end of the Research Report.

BSE Sensex S&P CNX

22,343 6,695

Stock Info

Bloomberg SUNP IN

Equity Shares (m) 2,071.1

52-Week Range (INR) 653/423

1, 6, 12 Rel. Per (%) -6/-16/16

M.Cap. (INR b) 1,184.5

M.Cap. (USD b) 19.7

Financial Snapshot (INR b)

Y/E Mar 2014E 2015E 2016E

Sales 163.6 187.1 230.9

EBITDA 72.3 80.6 100.0

Rep. PAT 30.3 60.8 79.5

Rep.EPS (INR) 14.6 29.3 38.4

Core PAT 46.8 54.4 61.6

Core EPS (INR) 22.6 26.2 29.8

EPS Gr. (%) 53.1 16.2 13.4

BV/Sh. (INR) 84.0 109.2 142.9

RoE (%) 28.9 27.2 23.6

RoCE (%) 29.4 41.3 40.5

Payout (%) 19.4 12.5 11.2

Valuations

P/E (x) 26.0 22.4 19.7

P/BV (x) 7.0 5.4 4.1

EV/EBITDA (x) 15.3 15.3 15.3

Shareholding pattern (% )

As on Dec-13 Sep-13 Dec-12

Promoter 63.7 63.7 63.7

Dom. Inst 5.7 3.2 4.4

Foreign 22.6 22.9 21.6

Others 8.0 10.3 10.3

Stock Performance (1-year)


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Sun Pharma

7 April 2014 2

How is the SUNP-RBXY merger structured?

SUNP has announced the definitive acquisition of 100% stake in Ranbaxy Labs

(RBXY IN, SELL) in an all stock transaction. The equity value of the deal is USD3.2b

while SUNP will assume outstanding debt of USD800m from RBXY. Under these

agreements, Ranbaxy shareholders will receive 0.8 share of SUNP for each share of

RBXY. Post the closure of the transaction, SUNPs promoter stake will decline to

54.7% from 64% currently. Daiichi Sankyo which currently holds 64% in RBXY will

become the largest shareholder in SUNP with a 9% stake.

SUNP current shareholding

Source: MOSL, Company

SUNP shareholding post deal


Why has SUNP acquired Ranbaxy despite all its ongoing issues with the US

FDA?

The acquisition enables SUNP to: Strengthen presence in the Indian Pharma market

Become the number one company in India with number one presence

across 13 specialty segments. Combined market share of 9.2% versus 6.5%

for Abbott

Entry into the OTC business with strong brands like Revital and Volini

Minimal product overlap between the two companies

Enhances rural reach for SUNP

31 brands in top 300, highest for the combined entity

Strengthens presence in the emerging markets Merged entity will have global footprints across 55 markets

Increasing leadership in markets like Russia, Romania, South Africa, Brazil &

Malaysia

Strong product pipeline for high-growth emerging markets

US: Leadership position in derma space

Strong pipeline of 184 ANDAs including high-value FTFs

No. 1 in generic dermatology, No. 3 in branded

Coverage across Actinic keratosis, Anti-fungals, Acne, etc


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Sun Pharma

7 April 2014 3

India sales mix: pre deal


India sales mix: post deal


Sales mix: pre deal


Sales mix: post deal


What could be the synergy benefits for SUNP and by when could they be

realized?

SUNP expects acquisition to be cash EPS accretive in the first year and realize

USD250m of operating synergies by third year post close. SUNP expects to realize

synergies through stronger sales growth, efficient procurement and supply chain

efficiencies. SUNP also intends to leverage the human resource of both the

companies. It believes it can realize USD250m of operating synergies by third year

post close. This is not even dependant on (1) resolution of the consent decree or (2)

realization of any of the FTF opportunities at RBXY.

The management believes that the quality of the RBXYs business is in no way

inferior to that of SUNP. They believe that with the right management thrust, RBXY

business can generate greater value. Hence, the valuation seems fair despite the

operational bottlenecks faced in the recent past.

How is this acquisition different from earlier acquisitions?

SUNP typically weighs acquisition opportunities based on (1) managements

bandwidth to integrate the target, (2) cost consideration and (3) potential synergies

that can be realized. RBXY deal was appealing on all parameters.

SUNP has acquired 16 businesses in its history. SUNPs philosophy has been to

acquire assets with deep value and turn it around successfully. A case in point is

Taro which was generated significant value to investors. SUNPs last acquisition of


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Sun Pharma

7 April 2014 4

URL Pharma for USD80m was turned around within a year. The RBXY acquisition is

to some extent similar to SUNPs style of acquisitions in the past except that the size

of the acquisition is very large. SUNP expects a payback period of 5-6 years with this

acquisition which is in line with acquisitions concluded in the past.

SUNP acquisition track recordCompany Facility/Products Cost (USDm) Date Remarks

Caraco Detroit formulations facility 52 Aug-97 Front-end in US

Women's Health

Brands 3 brands in US 5.4 Sep-04

Entry into branded business in US. Brands had

annual sales of $7.6m

Valeant Pharma

Formulations facility in Ohio

(USA)10

Sep-05

Access to facility for mfg lotions, ointments &

liquids

Able Labs

Formulations facility in NJ (USA)

& IP 23 Dec-05

Access to facility for mfg controlled substance

formulations

Taro Pharma

API & formulations facility in

Israel & Canada. Operations in

the US 250-260 May-07

Access to Taro's specialized Dermatology

portfolio, facility for mfg controlled substance

formulations

Chattem

API facility in Tennessee,

controlled substance - Nov-08

Access to controlled substance API

manufacturing facility

Inwood

Some products of Forest's

Inwood business - 3QFY10 Increase in generic product portfolio

DUSA

Approved NDA for novel derma

product and FDA approved

facility. 230 3QFY13

Access to technology in dermatology products

and novel brands. Innovator of unique therapy

which uses combination of drug and blue light.

URL Pharma Generic product portfolio. 80 3QFY13

Acquired from Takeda, who retained key brand

"Colcrys". Non-overlapping generic products.

Note- Acquisition costs are approximate Source: MOSL, Company

What could be the top challenges for SUNP to turnaround RBXY? What are

the milestones that an investor could monitor?

We believe there are 3 key challenges to RBXY acquisition:

Getting company back on US FDA compliance

Making the company profitable from current levels

Overall integration of RBXY

Amongst the three challenges that we foresee, we believe cultural integration could

be the most important challenge for SUNP.

Amongst the key milestones that an investor could monitor are:

Regulatory clearance which include approvals from various local governments,

High Courts, Competition Commission in India/US

Shareholder votes: Approval of 75% of the shares voted by both SUNP and

RBXY. We note that both Daiichi Sankyo and SUNP promoters have agreed to

vote in favor of transaction

Synergies of USD250m by 3rdyear of close

Remediation of manufacturing facilities


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Sun Pharma

7 April 2014 5

What can lead to delay in realizing synergy benefits of USD250m over a

period of three years post close?

In our view three things can spoil the party for SUNP:

Inability to successfully integrate RBXY with SUNP

Change in nature of important markets (eg: implementation of price controls

etc)

Inability to have adequate managerial bandwidth to turn things around

Valuations and view: Expect SUNP to manage RBXY assets better; however

synergies could take two-three years to realize. Cultural integration the

biggest challenge for SUNP

Keeping the strong acquisition track record in mind, we expect RBXYs assets to

deliver a stronger performance under SUNP. However synergy benefits will take

time to materialize and will only happen over a period of 24-30 months.

Consequently we believe RBXYs FY16 numbers could have an upside potential.

Amongst the three challenges seen (US FDA compliance, company profitable and

integration of RBXY), we believe cultural integration could be the most important

challenge for SUNP.

Overall we remain positive on the deal. We do not change our financial estimates

and retain our rating and target price of INR750 as the deal closure is expected at

the end of CY14. However we present a performa of the merged entity in the

following pages based on which we believe the combined entity has a fair value of

INR770/share.

Financial snapshot of combined entity

ParticularsSun Pharma Ranbaxy Combined

FY15E FY16E FY15E FY16E FY15E FY16E

Core sales 177,943 205,293 115,651 132,623 - 337,916

YoY growth (%) 19.3 15.4 -14.7 14.7 - 15.1

Core EBITDA 72,753 80,321 11,860 15,946 - 96,267

Margin (%) 40.9 39.1 10.3 12.0 - 28.5

Core PAT 54,360 61,630 3,704 7,994 - 69,624

YoY growth (%) 16.2 13.4 -26.7 115.8 - 19.9

Core EPS 26.2 29.8 8.8 18.9 - 28.9


Financial snapshot of Ranbaxy

Particulars

Ranbaxy

FY15E FY16E FY17E FY18E FY19E

Core sales 115,651 132,623 145,886 160,474 176,522

YoY growth (%) -14.7 14.7 10 10 10

Core EBITDA 11,860 15,946 20,424 25,676 31,774

Margin (%) 10.3 12 14 16 18

Core PAT 3,704 7,994 11,425 15,251 19,787

YoY growth (%) -26.7 115.8 42.9 33.5 29.7

Target multiple for teminal value 18

Terminal value 356,174

Discount factor for 3 years @15% 0.6575

One-year forward RBXY value 234,190Per share value 97

Source: MOSL


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Sun Pharma

7 April 2014 6

SOTP Valuation

Particulars Valuation basis Per share value

SUNP's business 24x FY16E FDEPS 615

RBXY business DCF of TV terminal value in FY19E 97

FTF opportunities + Doxil DCF of exclusive sales 58

Total intrinsic value Sum-of-parts 770

Source: MOSL


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Sun Pharma

7 April 2014 7

Financials and valuation

Consolidated Income Statement (INR Million)

Y/E March 2011 2012 2013 2014E 2015E 2016E

Net Sales 57,214 80,095 112,388 163,639 187,093 230,853

Change (%) 42.8 40.0 40.3 45.6 14.3 23.4

To ta l Exp end itu re 37,648 48,152 64,036 91,352 106,536 130,884

% of Sa les 65.8 60.1 57.0 55.8 56.9 56.7

EBITDA 19,566 31,944 48,352 72,287 80,558 99,969

Margin (%) 34.2 39.9 43.0 44.2 43.1 43.3

Depreciation 2,049 2,912 3,362 4,133 4,406 4,625

EBIT 17,518 29,032 44,991 68,154 76,152 95,344

Int. and Finance Charges 739 282 432 553 553 553

Other Income - Rec. 3,611 4,856 4,491 5,077 6,991 10,891

Extra-ordinary Exp 32 11 5,901 25,174 0 0

PBT 20,357 33,595 43,148 47,504 82,590 105,682

Tax 1,286 3,826 8,456 9,942 14,866 19,023

Tax Rate (%) 6.3 11.4 19.6 20.9 18.0 18.0

Profit after Tax 19,072 29,769 34,693 37,562 67,724 86,659

Change (%) 41.6 56.1 16.5 8.3 80.3 28.0

Margin (%) 33 37 31 23 36 38

Less: Mionrity Interes t 913 3855 4863 7306 6959 7137

Net Profit 18,158 25,914 29,830 30,256 60,765 79,522

Adj. PAT 14,039 23,270 30,550 46,774 54,360 61,630

Consolidated Balance Sheet (INR Million)

Y/E March 2011 2012 2013 2014E 2015E 2016E

Equity Share Capita l 1,036 1,036 1,036 2,071 2,071 2,071

To ta l Re se rve s 93,798 120,628 148,862 171,848 224,131 293,960

Net Worth 94,833 121,663 149,897 173,919 226,203 296,032

Mi nori ty I nte res t 8,472 11,616 16,351 20,362 27,321 34,458

Deferred Liabi l i ties -3652 -5199 -7122 -7122 -7122 -7122

Total Loans 3,717 2,739 2,072 1,343 1,343 1,343

Capital Employed 103,370 130,820 161,197 188,501 247,744 324,710

Gross Block 39,128 46,542 56,026 63,839 70,495 76,574

Le s s: Accum. De prn . 16,794 20,406 24,421 28,535 32,940 37,566

Net Fixed Assets 22,334 26,136 31,604 35,304 37,555 39,008

Capita l WIP 2,355 3,447 5,626 3,313 2,157 1,578

Goodwi l l 10,599 13,378 24,870 33,150 33,150 33,150

Investments 22,297 22,129 24,116 26,116 28,116 30,116

Curr. Assets 61,146 90,681 113,420 138,902 195,470 276,676

Inventory 14,895 20,870 25,778 35,727 43,119 53,161

Acco unt Re ce iva bl es 11,049 19,261 27,108 39,303 44,907 55,365

Ca s h a nd Ba nk Ba l a nce 22,046 33,672 40,587 41,015 81,251 138,128

L & A a nd Othe rs 13,156 16,878 19,948 22,857 26,193 30,021

Curr. Liability & Prov. 15,361 24,950 38,439 48,284 48,703 55,817

Account Pa ya bl es 10,078 14,410 15,752 24,847 23,562 29,049

Provis ions 5,283 10,541 22,687 23,437 25,141 26,768

Net Current Assets 45,785 65,730 74,981 90,618 146,767 220,858

Appl. of Funds 103,371 130,820 161,198 188,501 247,744 324,710

E: MOSL Estima tes


8/10

Sun Pharma

7 April 2014 8

Financials and valuation

Ratios

Y/E March 2011 2012 2013 2014E 2015E 2016E

EPS 6.8 11.2 14.8 22.6 26.2 29.8

Fully Diluted EPS 6.8 11.2 14.7 22.6 26.2 29.8

Cash EPS 9.8 13.9 16.0 16.6 31.5 40.6BV/Share 45.8 58.7 72.4 84.0 109.2 142.9

DPS 1.7 2.1 2.5 3.0 3.5 4.0

Payout (%) 22.1 17.2 17.5 19.4 12.5 11.2

Valuation (x)

P/E 52.2 39.8 26.0 22.4 19.7

P/BV 10.0 8.1 7.0 5.4 4.1

EV/Sales 14.5 10.3 7.0 5.9 4.5

EV/EBITDA 36.4 23.8 15.9 13.8 10.5

Dividend Yield (%) 0.4 0.4 0.5 0.6 0.7

Return Ratios (%)

RoE 16.2 21.5 22.5 28.9 27.2 23.6

RoCE 23.6 30.4 31.5 29.4 41.3 40.5Working Capital Ratios

Fixed Asset Turnover (x) 3.2 3.3 3.9 4.9 5.1 6.0

Debtor (Days) 70 88 88 88 88 88

Inventory (Days) 95 95 84 80 84 84

Working Capital T/O (Days) 151 146 112 111 128 131

Leverage Ratio

Interest Cover Ratio 23.7 103.0 104.2 123.3 137.8 172.5

Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0 0.0

Cash Flow Statement (INR Million)

Y/E March 2011 2012 2013 2014E 2015E 2016E

OP/(Los s) be f. Ta x 19,534 31,933 42,451 47,113 80,558 99,969Int./Di vi dends Recd. 3,611 4,856 4,491 5,077 6,991 10,891

Di re ct Ta xe s Pa id -4,048 -5,373 -10,379 -9,942 - 14,866 -19,023

(Inc)/Dec i n WC -286 -8,319 -2,336 -15,209 -15,913 -17,214

CF from Operations 18,811 23,096 34,227 27,038 56,770 74,623

(i nc)/de c i n FA -16,500 -10,585 -22,501 -13,799 -5,500 -5,500

(Pur)/Sal e of Inves t. 9,367 169 -1,987 -2,000 -2,000 -2,000

CF from investments -7,134 -10,416 -24,488 -15,799 -7,500 -7,500

Change in networth 8,225 5,321 4,334 -2,260 0 0

(Inc)/Dec in Debt 2,006 -978 -668 -729 0 0

Interest Paid -739 -282 -432 -553 -553 -553

Dividend Paid -4,213 -5,115 -6,058 -7,270 -8,481 -9,693CF from Fin. Activity 5,280 -1,055 -2,824 -10,811 -9,034 -10,246

Inc/Dec of Cash 16,957 11,626 6,915 429 40,235 56,877

Ad d: Be gi nn in g Ba l ance 5,089 22,046 33,672 40,587 41,015 81,251

Closing Balance 22,046 33,672 40,587 41,016 81,251 138,128

Note: Cashflows do not tally due to acquisition


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Sun Pharma

7 April 2014 9

N O T E S


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Sun Pharma

7 April 2014 10

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