Retain ‘buy’ on Sun Pharmaceuticals with a target price of R1,050 per share. Taro announced that it plans to invest in wind energy plant in the US along with Sun Pharma to gain tax benefits. The total equity funding will be up to $100 million. While this is in line with Sun’s well-known tax planning measures and is good tax planning, we believe this is negative due to two factors – the supplier
for the project is Suzlon, where Sun’s promoters hold a 23% stake, and it diverts cash from the core pharma sector.
The announcement does not change our positive view on the stock. We have been positive on Sun Pharma as we do not expect Halol to escalate. Further, we expect significant synergy benefits from Ranbaxy and benefits from the strong product pipeline. Although the investment seems to a good tax saving measure, it is a negative, in our view.
Taro is seeking board approval to invest in a wind energy project in the US along with Sun Pharma. The project cost is expected to cost $250 million, with at least 60% debt financing. Taro will invest 33%; Sun Pharma will own the rest.
The investment is largely to gain tax incentives that renewal energy projects get in the US. Management has stated that this is not a entry into renewable energy
but largely a tax planning exercise.
Management expects the tax savings to greatly reduce the company’s tax burden and in that sense is a good tax saving exercise.