Buy Sun Pharma with target price of Rs.475 - Motilal Oswal

Sun Pharma (SUNP IN, Mkt Cap US$9.4b, CMP Rs417)

Sun has entered into merger agreement with Caraco, Sun's 76% owned subsidiary in US. This is the outcome of Sun's recent proposal of taking Caraco private by buying out minority shareholders and de-listing it from the US bourses. The merger agreement provides that all minority shareholders will receive a cash payment of $5.25/share upon the closing of the transaction.

Sun will have to acquire 9.7m shares of Caraco resulting in total consideration of US$51m. Sun currently has ~Rs38b of cash on books. We do not expect any major change in our estimates as Caraco is already a 76% subsidiary of Sun Pharma. We believe that this is an opportune time to take Caraco private as it is a win-win situation for both Sun Pharma & Caraco's minority shareholders. Sun Pharma gains from the significant decline in Caraco's stock price (over the past 2 years it has declined by ~70%), thus lowering the cost of acquiring the incremental 24% stake.

Sun's stock is valued at 31.6x FY11E, 26.1x FY12E and 22.1x FY13E core earnings. Maintain Buy with a TP of Rs475 (25x FY13E EPS).

Source : Equity Bulls

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