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Giving Indian pharma its place in the Sun

Mkt Cap Rs 1216291mn; USD: 20103m

In a mega deal that would create the world’s fifth largest generic pharmaceuticacompany, Sun Pharma (SUNP) has announced that it has entered into a definit

agreement to acquire Daiichi’s 63.5% stake in Ranbaxy (RBXY) in an all-stock transactio

The transaction will have a total value of USD 4 bn (consisting equity of USD 3.2bn an

debt of USD 800mn) in which investors of RBXY will get 0.8 share of SUNP for every sha

held in RBXY. This share swap ratio represents an implied value of INR 457 for each RB

share (18% and 24% premium to RBXY’s 30-day and 60-day average share pri

respectively). SUNP expects a closure of this deal by the end of CY2014 and would requ

the approval of the Indian Government, various other regulatory bodies and minor

shareholders. Both Daiichi Sankyo and SUNP management (having 63.7% shareholdin

have voted in favour of the transaction. Post the acquisition, Diaiichi Sankyo will becom

the second largest shareholder in SUNP with nearly 9% stake in the combined entity.

Key Synergies

The combined entity will be India's largest pharmaceuticals company and the world's fift

biggest generic drug maker in terms of revenues having operations in 65 countries. T

acquisition will strengthen the manufacturing capabilities of SUNP with 47 manufacturi

facilities across 5 continents.

With RBXY in its fold, SUNP will be able to expand its footprint in emerging markets. T

combined entity will be generating revenues of around USD1bn from ROW, as compar

to SUNP’s current ROW revenues of USD0.3bn. Through the acquisition SUNP will be ab

to increase its presence in Russia, Romania, South Africa, Brazil & Malaysia.

The merged entity will become the top Indian Pharma company in the US, with salesover USD 2 bn and a robust pipeline of 184 ANDAs including high value FTFs like Nexium

Lexiva etc. The merged entity will not only continue to remain no. 1 in the therap

classes in India where SUNP is currently no.1 but will also improve their rankings to No

among Diabetologists, Physicains, Dermatologist, Urologist, Chest Physicains & Gene

Surgeons.

nancialss mn) FY13 FY14E FY15E FY16E

t rev. 112,389 165,206 189,746 221,773

ITDA 49,063 77,006 85,022 101,160

ITDAM (%) 43.7 46.6 44.8 45.6

T 34,693 36,965 67,759 81,385

TM (%) 26.5 18.2 32.5 34.5

S (Rs) 14.4 14.6 29.8 36.9

PS (Rs) 144.7 164.0 106.8 138.8

E 41.9 41.5 20.3 16.3

B 4.2 3.7 5.7 4.4

/EBITDA 12.0 15.9 13.8 11.1

November 3,

Sun Pharmaceutical (SUNP IN)Event Update April 8, 201

SystematixInstitutional Resea

ndustry Pharma

te April 7, 2014

MP (Rs.) 588rget (Rs.) 710

tential Upside 21%

E Sensex 22343

SE Nifty 6695

arket Data

rket Cap.(Rs. mn) 1216291

uity Sh. Cap. (Rs. mn) 1035.6

Wk High/Low 653/423

ce Value (Rs.) 1

rip Code

oomberg SUNP IN

uters SUN.BO

E Group A

E Code 524715

E Symbol SUNPHARMA

BUY (CMP: INR58

areholding Pattern

on 31st Dec 2013)

itutions 28.2

moters 63.7

lic & Others 8.1

al 100.0

Arun Gopalan

Vice President - Research

[email protected]

Tel: 022 - 6704 8061

Atul Karwa

Research Analyst

[email protected]

Tel: 022 - 6704 8062

ce Performance

50

70

90

10

30

50

70

Nifty Sun Pharma

mailto:[email protected]





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ril 2014 Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters SYSTEMATIX SHARES & STOCKS (I) LT

The Positives of the deal:

Given SUNP’s track record of turning around companies (Taro, Caraco etc.), we have

positive view on this acquisition. We firmly believe that SUNP will able to bring out the tr

value of RBXY through efficient marketing, increasing manufacturing efficiency, operati

cost rationalisation.

SUNP, in turn would get access to the global generic business of RBXY, of which the

business is the most valuable. SUNP expects to get USD 250 mn (INR 15 bn), in acquisitio

related cost synergies by the third year after the acquisition is completed which in our vie

is fairly significant and these savings should be from the elimination of overlappi

processes and manpower and from economies of scale.

With a 9.2% market share of the Indian generics market, in our opinion, the combin

entity would not face any roadblock from the Competition Commission of India (CCI).

Words of Caution:

US FDA-related regulatory issues have been a major challenge for RBXY over the last

years, including the recent import alerts to Mohali and Toansa. SUNP has also recen

received an import alert on its Karkhadi Plant. Effective management of the regulato

issues will be essential for long-term value creation.

RBXY’s regulatory trouble has casted obstacles in the way of launching some of its key blo

buster products. In our view, SUNP’s success in this acquisition will depend on its ability

resolve RBXY’s FDA-related troubles and ensure timely launch of its product, especia

those having Para IV exclusivity.

Outlook and Valuation:

What we like the most is the fact that the deal is an all-stock deal thus having negligib

impact in SUNP’s balance sheet. The transaction implies ~14% e quity dilution for SU

shareholders. SUNP promoters will hold ~56% and Daiichi Sankyo will hold ~9% stake in t

combined entity. Post transaction, the combined entity will still has net cash of ~US

500mn. These synergies are expected to result primarily from strong revenue growefficient procurement a0nd operating cost rationalisation. We believe it will take around

4 years for SUNP to reap the benefits of this acquisition. We do not see any significant sho

term price gain in both SUNP and RBXY and advice investors to have a long term view.

As a result of the deal, all the shares of RBXY will be converted to SUNP shares. T

combined FY2016E Sales of the merged entity is estimated to be Rs. 359,073 mn, while t

combined PAT is estimated to be Rs. 85,601 mn. This translates to an FY2016E EPS

Rs.35.5.

At the CMP of Rs.588, the stock trades at 19.6 x its FY2015E EPS of Rs.30. We value t

scrip at 20 x its FY2016E EPS of Rs.35.5 and assign a Target Price of Rs.710.

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PROFIT & LOSS CASH FLOW

BALANCE SHEET RATIO ANLAYSIS Rs in mn FY13 FY14E FY15E FY16E

EPS (INR) 14.4 14.6 29.8 36.9

BV per share (INR) 144.7 164.0 106.8 138.8

ROE (%) 22.0 18.9 31.5 30.1

Growth (%)

Revenues 40.1 47.0 14.9 16.9

EBITDA 53.1 57.0 10.4 19.0

Net profit 14.0 1.0 104.5 24.1

EPS 14.1 1.0 104.5 24.1

Margins (%)

EBITDA 43.7 46.6 44.8 45.6

EBIT 40.7 43.5 42.1 43.3

Net profit 26.5 18.2 32.5 34.5

Valuation ratios

P/E (x) 41.9 41.5 20.3 16.3

Price/BV(x) 4.2 3.7 5.7 4.4

Market cap/sales (x) 5.6 7.6 6.6 5.6

EV/sales (x) 5.2 7.4 6.2 5.0

EV/EBITDA (x) 12.0 15.9 13.8 11.1

Mcap/Sales (x) 5.6 7.6 6.6 5.6

Earnings Yiels (%) 2.4 2.4 4.9 6.1

articulars (Rs in mn) FY13 FY14E FY15E FY16E

et revenues 112,389 165,206 189,746 221,773

ost of revenues 20,797 30,243 36,433 41,462

ross profit 91,592 134,963 153,313 180,311

Operating expenses 15,345 20,255 23,803 27,611

BITDA 49,063 77,006 85,022 101,160

epreciation 3,362 5,069 5,206 5,206

BIT 45,701 71,937 79,816 95,954nterest 432 455 851 852

Other Income 3,715 3,596 3,698 4,178

rofit Before Tax 43,149 48,833 82,663 99,281

ax 8,456 11,868 14,904 17,895

AT 34,693 36,965 67,759 81,385

AT after Min Int 29,831 30,139 61,643 76,515

Particulars (Rs in mn) FY13 FY14E FY15E FY16

Cash from operating activities 34,053 19,818 65,686 70,17

Cash from investing activities (13,650) (17,754) (6,000) (6,00

Cash from financing activities (6,215) 15,714 (11082) (11,08

Net Change in Cash 14,189 17,779 48,604 53,09

Particulars (Rs in mn) FY13 FY14E FY15E FY16E

Shareholders Equity 149,897 169,806 221,218 287,503

Minority Interest 16,351 23,177 29,293 34,163

Total Debt 1,982 28,382 28,382 28,384

Long term borrowings 1,153 1,308 1,308 1,310

Short-term debt 830 27,074 27,074 27,074

Provisions 22,687 18,932 19,144 19,354

Current liabilities 12,856 14,643 17,640 20,075

Other long term liabilities 123 167 180 202

Other liabilities

Total liabilities & equity 203,773 254,940 315,678 389,480

Net intangible assets 24,870 31,699 30,120 28,541

Net fixed assets 37,230 41,740 44,114 46,487

Investments 24,116 25,462 25,462 25,462

Inventories 25,778 30,848 37,162 42,291

Sundry debtors 24,122 36,841 38,518 49,455

Loans & advances 19,174 22,050 25,357 29,161

Other current assets 774 812 853 896Cash & cash equivalents 40,587 58,366 106,971 160,066

Current assets 110,434 148,916 208,861 281,869

Deferred tax asset, net 110,434 148,916 208,861 281,869

Miscellaneous expenditure

Other assets

Total Assets 203,773 254,940 315,678 389,480

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