Add Sun Pharmaceutical Industries - Multiple drivers may sustain high-teens growth - Avendus

While TARO's recent quarters of strong performance have likely been led by short-term opportunities, we estimate the trend to sustain, supporting a CAGR of 27% in PAT during 2011f-2014f. Other than TARO, as Para-IV opportunities recede, the focus is likely to now shift to its base generic pipeline, which we estimate could sustain a CAGR of 18% during FY12f-FY14f. In domestic formulations, SUNP's dominance in chosen chronic therapies is likely to be a protective factor. We maintain our Dec12 TP at INR580; maintain Add. Higher-than-expected growth in US generics is an upside risk; higher-than-estimated tax outgo is a key downside risk.

TARO can accelerate near-term earnings; base US pipeline promising: Delivery from TARO in recent quarters has caught investors by surprise. While a part of the gain, particularly in recent quarters, is likely to have been driven by short-term opportunities, we estimate the trend of strong revenue growth to sustain. SUNP's efforts, we believe, are likely to focus on reclaiming TARO's dominance in generic dermatology. Investments in R&D are likely to revive, despite which, we believe, TARO's 18% revenue CAGR during 2011f-2014f would support a PAT CAGR of 27%. Other than TARO, as Para-IV opportunities recede and CPD's contribution to sales stays low, the focus is likely to now shift to its base generic pipeline. During FY12f-FY14f, we build in a CAGR of 18% in the base US generic business. Overall, we estimate SUNP's US generic business to report a CAGR of 18% during FY13f-FY14f.

Protective portfolio in India; RoW gearing for a larger role: While the ongoing slowdown in the domestic market is likely to impact SUNP, we believe the company's dominance in chosen chronic therapies (CVS and CNS) is likely to be a protective factor, supporting a CAGR of 17% in revenue during FY12f-FY14f. In RoW markets, we believe SUNP's focus lies in the LatAm region, followed by Russia/CIS and the EU. While SUNP scouts for inorganic opportunities in key emerging markets, the base business, including TARO, is likely to contribute c15% of consolidated revenues by FY14f.

17% PAT CAGR, maintain Add; defensive, with strong fundamentals: We marginally raise our PAT forecasts and estimate a CAGR of 17% over FY12f-FY14f. We maintain our Dec12 SOTP-based TP at INR580; maintain Add. Exercising total control on TARO would entail a cash outgo of USD366mn at the USD24.5/share offer price, which may restrict the company's near-term ability to pursue big-ticket M&A. However, considering 2012f PAT of USD110mn for TARO, the deal may turn out to be EPS accretive in FY13f. SUNP is also a classical defensive play, with the stock showing a strong inverse correlation with the delta change in its average one-year forward P/E compared to the delta change in the forward P/E of the Nifty. Higher-than-expected growth in US generics – in TARO, the base business as well as surprise deliveries from Para-IV opportunities beyond the publicly-known pipeline are upside risks to our estimates. The liability for generic Protonix and a higher-than-estimated tax outgo are key downside risks.

Source : Equity Bulls

Keywords