Emkay Global Financial Assigns Buy Rating to Sun Pharma, Sets Price Target at Rs 2100

Sun Pharma's Organon Acquisition: A Strategic Shift

Sun Pharma's acquisition of Organon marks a significant departure from its recent acquisition strategy, which has involved multiple smaller assets worth less than $500 million. Over the past five years, the company has been transitioning towards a branded/specialty-focused player, but the pace and scale of this transition have been a concern for investors.

The acquisition of Organon, a company of its own scale, addresses investor concerns around growth, leverage, and earnings per share (EPS) accretion. Sun Pharma has committed to reducing debt quickly and generating free cash flow (FCF) of over $1 billion, along with Organon. The company has also provided clear visibility on EPS accretion from Year 1.

Comparing Domestic Sales Contribution

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The acquisition has led to a decline in domestic sales contribution to 1/6th of Sun Pharma's overall sales, compared to 1/3rd currently. However, the company's estimated branded contribution is around 80%.

Outlook and Valuation

Sun Pharma is now trading in line with Dr Reddy's, with a similar domestic sales share of 1/6th. The company's valuation multiple is around 20x FY28E pro forma EPS, assuming no growth in Organon and partly building-in cost synergies. Our bear case scenario, based on Mar-28E pro forma EBITDA, still implies a 15% upside in the stock price.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

We retain a BUY recommendation for Sun Pharma, despite the sharp move in the stock price on April 27.