Is Taro buyback news triggering rally in Sun Pharma?

Our Bureau Chennai | Updated on November 20, 2019

Analysts remain cautious, as the stock is volatile

Shares of Sun Pharmaceutical Industries jumped over 8 per cent on Wednesday at ₹460.60 on the NSE, on the back of Taro's buyback news. The stock closed at ₹448.5 on the NSE, a gain of 5.62 per cent, over the previous day’s close. Trading volumes to jumped to 2.31 crore shares.

According to analysts, the main trigger for the rally is the current buyback offer from Taro Pharmaceutical Industries, which could lift Sun Pharma’s holding in the company. Currently, Sun Pharma holds 76.5 per cent stake in the company.

Taro Pharmaceutical Industries on November 14 launched its modified Dutch auction tender offer to repurchase up to $225 million in value of its ordinary shares at a price not greater than $92 a share or less than $80/share. The offer will expire on December 16. If the offer is fully subscribed, the number of shares to be purchased in the offer represents approximately 6.3-7.3 per cent of Taro’s currently issued and outstanding shares depending on the purchase price payable for those shares pursuant to the offer, Taro said in the offer document.

On buyback, Uday Baldota, Director and Chief Executive Officer, Taro, told investors: “We constantly evaluate various alternatives to obtain this result, which include acquisitions, special dividends or share buybacks, all of which are benefits and consideration.”

With regard to inorganic opportunities, Taro is keen and continues to evaluate such opportunities that have a strategic fit and are financially justifiable.

“Based upon our strong balance sheet and operating cash flows as well as a cautiously optimistic view of our short- and long-term strategy, we believe the benefits of a share buyback provides the best benefits and most value to our shareholders, especially, by providing liquidity to the current shareholders,” he added.

Forensic audit blues

According to marketmen, the offer might have received a strong response, though one has to wait for official confirmation. If it gets overwhelming response, then the move could help Sun Pharma as it will make Taro’s cash fungible. Besides, its voting power will also increase substantially in the Israel-based firm. However, analysts cautioned investors as the stock is generally volatile in nature and any negative news could trigger a sharp fall in the stock, especially when the company is facing a forensic audit for its FY16-18 financials and litigation on Ranbaxy products.

In a recent research report (post Q2 results), Emkay Global said: “We do not foresee any meaningful margin expansion until the specialty portfolio picks up meaningfully. We expect the stock to be range-bound as the market will keenly follow data points on specialty products.” The domestic broking house maintained its ‘hold’ rating with a revised target price of ₹490 from earlier ₹465. While corporate governance concerns are largely behind, Sun Pharma’s US specialty business still has a long road to profitability, it added.

“In light of increasing business visibility in India and other geographies, we maintain our ‘buy’ recommendation on the stock with a target price of ₹500,” said Reliance Securities said.

Published on November 20, 2019

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