India’s Leading Generic Drug maker, Sun Pharma announced the $4.0 Bn acquisition of Troubled Ranbaxy Labs from Daiichi Sankyo of Japan. The all share swap merger will give 0.8 Shares of Sun Pharma for 1 Share of Ranbaxy after all the approvals.
Sun’s management has a successful track record of turning around distressed assets with recent cases such as Taro and URL. While we acknowledge that Ranbaxy will likely have its own challenges, we highlight that Ranbaxy’s gross margins (63-64%) are largely in-line with other Indian peers (indicates that geography mix or product-mix is not an issue). Regulatory overhangs and high fixed costs have depressed Ranbaxy’s profitability, where Sun Pharma can bring its operational strength.
While the deal will be earnings dilutive in the near term (-4% in FY16), we see significant synergies over the next 3-4 years which we believe will lead to 10-12% incremental EPS in year 3 from the acquisition. Per management, acquisition will be cash EPS accretive in the first year. Sun Pharma (Ranbaxy Merged) is expected to report an EPS of Rs 28 and Rs 33 for FY 2015 and FY 2016 respectively. Accumulate the Stock on Correction.