Cluster: Apple Green
Price target: Rs634
Current market price: Rs550
Plan to raise Rs151 crore approved
- The board of Marico Ltd (Marico) has approved a fresh issue of shares worth Rs151 crore to qualified institutional buyers (QIB). This is in addition to the net amount of Rs75 crore raised by the company through the issue of preference shares last month.
- The net equity infusion of Rs226 crore will bring down the debt/equity ratio of Marico from 0.95x currently to 0.40x. The leaner balance sheet would also allow Marico to raise debt quickly in case a value- and earning-accretive inorganic opportunity arises.
- We are revising our FY2007 and FY2008 earnings estimates to incorporate the Fiancée acquisition and the current equity dilution. Our FY2007 and FY2008 earnings estimate are higher by 0.5% each at Rs19.3 and Rs25.1 respectively.
- The stock is trading at attractive valuations of a price/earnings ratio (PER) of 22.0x FY2008E and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.4x FY2008E. We continue to remain bullish on Marico and reiterate a Buy on the stock with an unchanged price target of Rs634.
Cluster: Emerging Star
Price target: Rs1,760
Current market price: Rs1,170
Open offer to hike stake in Sinvest
- Open offer for Sinvest: Aban Offshore Ltd (AOL) is likely to fund the open offer to acquire an additional stake in Sinvest through the placement of a 25-30% stake in its subsidiary Aban Singapore Pte Ltd (ASPL) for around $250 million, as per media reports. This essentially means that ASPL is valued in the range of $833-1,000 million and has an implied value of Rs656-844 per share for AOL’s remaining stake in ASPL. Adding this to the stand-alone value of AOL, the consolidated value per share works out to around Rs1,763-1,950.
- Earnings accretive: A successful acquisition of 100% stake in Sinvest through an open offer could strain the company’s consolidated balance sheet but the same would be earnings accretive. After accounting for the additional debt on the books, the incremental share from Sinvest’s earnings would add Rs35.4 to the earnings per share in FY2008 (and Rs45.6 in FY2009). Consequently, the acquisition of the additional stake would positively affect the valuation per share by Rs709 and Rs814 based on the incremental earnings in FY2008 and FY2009 respectively.
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Price target: Rs1,200
Current market price: Rs1,017
- Sun Pharmaceutical Industries’ (Sun Pharma) domestic formulation business has been growing in line with the industry, clocking growth rates of around 15-17%. With approximately 30 new launches per year and a strong brand building capability, we believe Sun Pharma's domestic business will continue to grow by 16-17%.
- An abbreviated new drug application (ANDA) pipeline of 56 pending approvals combined with the 30+ filings per year is likely to translate into strong growth for Sun Pharma's US business. We anticipate Sun Pharma's US business to reach Rs515.6 crore and Rs688.1 crore in FY2007E and FY2008E respectively. Further, Sun Pharma has roughly seven Para IV litigations, a favourable outcome of which will result in further gains.
- Capitalising on the huge opportunity in the rest of the world (ROW) markets, Sun Pharma is replicating its successful domestic strategy of targeting niche and chronic segments in branded generic markets. Sun Pharma has 750 products registered and another 300+ products pending approval in these markets. We estimate Sun Pharma's formulation revenues in the ROW markets to grow at a compounded annual growth rate (CAGR) of 59.2% over FY2006-08E.
- The demerger of Sun Pharma's innovative research division is likely to be completed by the end of the current fiscal. Sun Pharma's innovative research and development (R&D) pipeline currently consists of one new chemical entity (NCE) and two novel drug delivery system (NDDS) products. The NCE is an anti-allergic molecule undergoing Phase II trials in the USA, whereas the NDDS products are waiting for the USFDA signal to commence the Phase III trials directly. Considering the reduced R&D expenses post-demerger and the implications of the same, we estimate the demerger to add Rs2.1 and Rs2.6 per share to the estimated FY2007 and FY2008 earnings respectively.
- At the current market price of Rs1,017, Sun Pharma is quoting at 22.2x its estimated FY2008 earnings. As per the sum-of-the-parts valuation, the base business is valued at Rs1,081 per share, the demerger would add Rs66 to Sun Pharma and the demerged R&D company would be valued at Rs54 per share. This gives us a fair value of Rs1,200 for Sun Pharma. Hence, we maintain our Buy recommendation on Sun Pharma with a revised price target of Rs1,200