Buy Sun Pharma; target of Rs 750: Sharekhan

The prospects for Sun Pharma have improved on the back of (a) an increase in prices of the key products in its dermatology portfolio of Taro Pharma (a 65.89 percent Israeli subsidiary); and (b) the merger deal with Ranbaxy Labs getting sweetened with the approval of Valsartan (a generic version of Diovan) in the US market. We estimate the GPM of Taro Pharma would expand by over 200BPS in FY2015 as a result of the price increases in the dermatological segment and price erosion in a couple of other products. For every 100-BPS improvement in the margin of Taro Pharma, Sun Pharma will see a 30-BPS improvement in the consolidated margin. Though we have not included the numbers of Ranbaxy Labs in our earnings estimates for now, but as the deal is progressing well, we are confident of the deal closing as per schedule. The recent USFDA approval for Diovan is set to ease off the pressure on the margin after the integration with Sun Pharma. Ranbaxy Labs holds the exclusivity right for Diovan (market size = $2.3 billion) for 180 days.

We have revised our earnings estimates by 2.2 percent and 5.2 percent for FY2015 and FY2016 respectively mainly on considering a 70-BPS and 120-BPS expansion in the margin in FY2015 and FY2016 respectively. We have also assigned a higher multiple (of 24x FY2016E earnings vs 23x earlier) to set a new price target of Rs750, says Sharekhan research report.

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