'Neutral' on Sun Pharmaceuticals Industries shares

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SummarySun Pharmaceuticals Industries announced settlement of the Protonix litigation and agreed to pay $550 million. We believe Sun Pharma earned $400–500 million from the product. This is higher than $300 million that we had factored into our target price and $107 million provisioned for by the company in 2Q13.

Sun Pharmaceuticals Industries announced settlement of the Protonix litigation and agreed to pay $550 million. We believe Sun Pharma earned $400–500 million from the product. This is higher than $300 million that we had factored into our target price and $107 million provisioned for by the company in 2Q13.

The cash outflow is 42% of Sun Pharma’s consolidated cash balance and the incremental liability (over and above provisions made in FY13) is approx 17% of FY13 net worth (we do not assume any tax benefit at this stage).

The potential earnings impact due to one-time extraordinary expense can be R24.5/share in FY14 assuming no tax shield, which is 60% of projected earnings for FY14E. Sun Pharma is trading at 23.8xFY14F and 22.2xFY15F, a 15–20% premium to peers.

We believe one of the key reason for the premium multiple is a strong balance sheet and the possibility of a value accretive acquisition. Therefore, reduction in cash balance could lead to some correction in PE multiples. We have a ‘neutral’ rating on the stock with sum-of-the-parts target price of R842/share, which implies PE multiple of 18.5xFY15 estimates.

Sun Pharma currently trades at 23.8xFY14 and 22.2xFY15 estimates, which is a 15–20% premium to other front-line peers.

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