News update: Sun Pharmaceutical Industries to acquire Ranbaxy Laboratories

Sun Pharmaceutical buy recommendation was given on at Rs 375 (bonus adjusted) on 10^th Feb 2013. (http://atulgandhicom.blogspot.in/2013/02/investment-ideas-sun-pharmaceutical.html)

Stock has been rising since & had touched high of 650 on 09-Oct-2013. Stock is currently trading at 613.

Long term positive vibes about acquisition

: Sun Pharmaceutical has a proven track record of buying distressed assets and turning them around.

: Acquisition is via stock deal, so no cash outflow or no need for new debt for acquisition for Sun Pharmaceutical

: Daiichi Sankyo gets right to nominate one director to Sun Pharma’s Board of Director. Daiichi Sankyo is having sales around 66000 crore. Sun Pharmaceutical can capitalize on relationship with Daiichi Sankyo

: Expectation of management - $250 mn operating synergies by the third year of the acquisition

Medium term challenges

: USA FDA regulatory concern about Ranbaxy’s Indian Plant.

: Current low operating margin of Ranbaxy Laboratories

Sun Pharmaceutical’s management comment on USA FDA regulatory concern

“It is difficult for me to respond. We have some idea about the extent of the issue that they have. We honestly do not know the degree of effort which is required to address the underlying issue. I personally don’t think the Japanese were involved in day-to-day activity. My sense is that the essential point of communication was with Ranbaxy management and FDA.”

Looking at Dec-13 9month result (Apr-13 to Dec-13) Indian currency deprecation has been favourable to Sun Pharmaceutical. Sun Pharmaceutical had decent CAGR in past. Even looking at Sun Pharmaceutical pre-merger price (Rs 572), there was decent scope for appreciation without considering effect of Ranbaxy Laboratories deal.

Stock outlook in the medium term

: There may be hiccups or underperformance if USA FDA regulatory issue is not gets resolve /drag further.

: Positive surprises if USA FDA regulatory issue gets resolve

Stock outlook in Long term

: Deal has potential to add substantial value.

Continue to hold Sun Pharmaceutical share & keep an eye on

: Indian currency movement against dollar

: Ranbaxy Laboratories USA FDA regulatory issue.

: Sun Pharmaceutical Guidance for FY 14-15

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