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Buyout boosts Sun Pharma stock

Buyout boosts Sun Pharma stock
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First Published: Tue, May 22 2007. 12 04 AM IST
Updated: Tue, May 22 2007. 12 04 AM IST
The Sun Pharma stock moved up 5% on Monday as investors welcomed not just the company’s excellent March quarter results, but also the news of its acquisition of Israeli generic company Taro Pharma for $454 million (Rs1,861 crore).
Taro has made significant losses for 2006 and it has had to restate profits for earlier years. Its stock has halved in value over the past year.
Turning the company around is going to be a challenge, according to the Sun Pharma management. The Taro acquisition is different from its other acquisitions both in terms of size and complexity. “It will require us to perform consistently over a large number of parameters,” said the Sun Pharma management in a conference call with analysts.
They say the payback for the $454 million will take five-and-a-half years. But Sun has enough cash to pay for the acquisition and there won’t be any equity dilution.
What are the synergies? Sun Pharma aims to improve Taro’s performance by focusing on reducing costs on the one hand, and using Caraco’s distribution channels to distribute Taro products on the other. R&D expenditure too will be significantly enhanced.
But if Taro is in such bad shape, why is the market enthused about it? There are several reasons. Taro is very strong in complex generics that are difficult to make. As a result, competition in the field is limited. It is strong in research and Sun Pharma has said that it is looking forward to product filings of higher complexity. Growth prospects are high.
These strengths have so far been overshadowed by its weaknesses, which include its relatively small size and its heavy dependence on powerful wholesalers, who have been able to squeeze the company, which has led to cash flow problems. The magnitude of the problem can be seen from the fact that Taro needs an immediate bridge loan from Sun in order not to default on its loan payments. These weaknesses can be addressed by leveraging on Caraco’s distribution chain.
Analysts in the US have also been pushing for a change in the Taro Pharma management for quite some time. In a recent note, an analyst with Morningstar.com wrote that a merger with a large generic company could address Taro’s problems and that the stock could go up as high as $20 provided such a merger goes through.
As the Sun Pharma management has indicated, while the potential upside from the acquisition is substantial, much depends on the execution.
In spite of high interest rates, despite an appreciating rupee and notwithstanding all the talk of a slowdown in the economy, the Nifty has reached an all-time high, and ended at a closing high of 4260.90 on Monday. Its previous closing high was 4224.25 on 7 February.
Of course, it’s not just the Indian market that is going places. The Dow Jones Industrial Average hit a new high on Friday, followed by the stock indices for Korea, Singapore, Australia and New Zealand. The red-hot Shanghai market, too, rose to a new peak. That seems to suggest that it is the weight of fund flows, rather than the strength of the domestic economy, that is propelling indices to new records.
Also, among Indian indices, it’s not just the Nifty that’s on a tear. The Junior Nifty has moved up 6.9% from 7 February, much higher than the Nifty.
Over the same period, the price-earnings ratio for the Nifty has gone down marginally from 20.32 to 20, thanks to earnings growth during the March quarter. For the Junior Nifty, however, the PE ratio has come down from 20.25 to 17.7.
That’s an indication of how well the second tier of corporate India has done in the March quarter.
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First Published: Tue, May 22 2007. 12 04 AM IST
More Topics: Money Matters | Equities |