Sun Pharma: no downside seen

Sun Pharma: no downside seen
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First Published: Sun, Jun 01 2008. 10 09 PM IST

Updated: Sun, Jun 01 2008. 10 09 PM IST
Shares of Sun Pharmaceutical Industries Ltd have fallen by 4% since Taro Pharmaceutical Industries Ltd’s decision last week to terminate their merger agreement. The shares had risen sharply just a day before the decision, perhaps in anticipation that the deal will come through. Excluding this gain, the company’s shares are pretty much where they were prior to the termination of the deal.
That’s partly because the downside from Sun Pharma’s point of view seems protected. The average cost of Sun Pharma’s 34% stake in Taro is about $7.2 per share. The latter’s announcement last week that it had reported a net profit for the fifth consecutive quarter and terminated its merger agreement with Sun Pharma sent its shares soaring 14.5% in just three trading sessions to $9.5 per share. Even if Sun Pharma were forced to back off from the deal, it’s sitting on a cool profit of about $32 million on its current investment.
The company also owns warrants to purchase another 3.8 million Taro shares at $6 per share, which entails a profit of another $13 million at current prices.
But, the outcome of the Sun-Taro saga may not be as simple. Given Sun Pharma’s large holding in the company—which may increase to more than 50% after it exercises warrants and the option to buy out certain shareholders in the event that the merger doesn’t happen—things may get murkier. Most analysts haven’t yet factored in upsides from a possible merger, since the price at which Taro’s shares will be valued is still not certain.
Meanwhile, the company has closed financial year 2007-08 in style, reporting a 225% increase in net profit on the back of a 129% increase in net sales. Results were boosted by a one-time benefit related to ‘at-risk’ launches of Protonix and Ethyol, heartburn medication and cancer-related treatment, respectively, in the US generics market. At-risk is a term given to generics that are launched before a patent case against the innovator product is finally decided. The company’s US subsidiary, Caraco Pharma, reported a 487% jump in sales last quarter, thanks to these product exclusivities. The company filed a record 48 abbreviated new drug applications (ANDAs), seeking approval of generic versions of drugs, and ended the year with 53 approved ANDAs compared with 29 at the end of the previous fiscal year. The company outperformed the domestic industry and is expected to maintain the trend even this fiscal year.
On the flip side, pricing pressure in the US generics market and litigation-related risks could dampen things a bit. And the uncertainty relating to Taro acquisition could act as an overhang on the stock, which now trades at a premium valuation of more than 20 times the company’s estimated earnings for this fiscal year.
Shriram Transport Finance: unhurt in slowdown
There are some firms that show few signs of being in the midst of a slowdown in the economy. One of them is Shriram Transport Finance Co. Ltd, the mainly pre-owned (euphemism for second-hand) commercial vehicle (CV) financier.
In the March quarter, the company’s operating income was higher by 75.6% compared with the year-ago period, while net profit rose a huge 131.3%. That scorching pace of growth is even higher than what the company achieved in the December quarter, when operating income rose by 15.5% year-over-year, and net profit rose 94.8%.
How did the company manage such a stupendous result? By a 183% increase y-o-y in pre-owned CV disbursements. Even disbursements for the purchase of new vehicles saw a 51% increase. Very strong growth in income from securitization also added to the net profit.
Although the yield on assets was lower than in the third quarter, the cost of liabilities was even lower, thereby increasing net interest margins—they expanded from 7.49% in the third quarter to 7.72% in the fourth. The best part of the story is that all this has been achieved together with lower non-performing assets (NPAs). Gross NPAs at 1.6% have improved from 2% in the year-ago period, while remaining more or less at the level they were at the end of December.
It’s difficult for the company to continue to see disbursements grow at this torrid pace as its base increases and higher inflation and higher interest rates will undoubtedly slow growth. The stock is not cheap at around 3.8 times fiscal 2008 book value, but its niche position as the best play on the high-yield retail lending sector should see it handsomely outperforming the Bankex, the banking sector index of the Bombay Stock Exchange.
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First Published: Sun, Jun 01 2008. 10 09 PM IST