Sun Pharma
BUY
Price: Rs1,542 Target Price (Mar 11): Rs1,775

Relative underperformance is over

* Multiple factors have led to earnings cut: Sun has barely given
any return since Aug-08. Peers like DRL, Lupin and Cipla, on the other
hand, have given 50-100% returns. This is mainly due to loss of
certain opportunities (Venlafaxine XR), lower than expected domestic
formulation business in 1HFY10 and issues facing Caraco. As a result,
consensus earnings for FY10/11E have been cut over 21/14% since
Aug-08 and target prices have been reduced.

* Underperformance is over. BUY: Our Mar-11 target price of Rs1775
is based on 20x FY12E EPS, additional Rs30/share for Para-IVs and
Rs80/share for Taro (20x annualized FY10 profits for 42% stake). Most
stocks in our coverage universe have limited upside and hence, we
believe Sun’s underperformance may be over. The downside risk is
that our assumption of $70m annual incremental sales for US may turn
out a bit aggressive (Sun added $35m annually for last three years)
and the stock may not outperform. However, with large pipeline and
track record, we think expectations will remain high from Sun. Further,
a successful completion of Taro will add to upside. Downside could be
from negative outcomes in litigations and at-risk launch of
pantoprazole.