The Hindu Business Line : Sun Pharma gains on re-rating talk

While, Sun Pharma's decision to hike its stake in Caraco Pharma to 63 per cent is said to have been the turning point, expectations of a further quantitative and qualitative enrichment of its business model have infused a bullish undertone to the counter.

According to Mr Rajesh Vora, Vice-President, ICICI Securities, Sun Pharma is making faster progress in its US generic business and R&D than what meets the eye.

"The stake hike at the cost of $46 million is not only value accretive but more importantly strategic for the company's prospects. Caraco has the potential to achieve $100 million revenue by CY06E (estimate). And as per the new agreement, Sun Pharma is to transfer 25 ANDAs (abbreviated new drug applications) over the next five years. We expect Sun Pharma to complete the transfer of the 25 ANDAs by end-CY06.

"Consequently, Sun Pharma's stake in Caraco would rise over 75 per cent. This could raise prospects of a reverse merger and result in Sun getting listed on the US bourses,'' Mr Vora reasoned.

Additionally, international business, which contributed to around 27 per cent of the consolidated revenues in FY03, is expected to improve to 40 per cent through FY06E on the back of a strong 30 per cent CAGR (compounded annual growth rate) in the US generics business.

"More importantly rising exports will boost margins,'' adds Mr Vora. An ability to maintain an EBITDA margin and RoCE (Return on Capital Employed) of 34 per cent each - viewed as the highest in the sector - has led analysts to predict a re-rating over the next 2-3 years.

A section of the market is of the view that a re-rating could take time, as at these levels valuations are a little stretched.

"Growing competition could see the company's margins come under pressure in the domestic market. It would need to show sustained outperformance in the regulated markets to provide a trigger. Thus, unless we see some specific development take place, it is very likely the stock could languish at these levels,'' says analyst Mr Prashant Nair of Edelweiss Capital.

The stock ended at Rs 642, up 1.71 per cent with around 2,120 shares traded on the BSE.

On the NSE, it closed at at Rs 642.10, up 1.59 per cent with around 11,492 shares traded.

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