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STOCK UPDATE: TCS and Sun Pharma

SI Reporter/New Delhi 19 Dec 12 | 08:48 AM

Tata Consultancy Services
Recommendation: Hold
Target price: Rs 1,364
CMP: Rs 1,211

We attended the pre-result analyst meet of Tata Consultancy Services (TCS). The management has indicated at a soft volume performance in the seasonally weak December quarter impacted due to furloughs in the USA and Europe and also due to the Hurricane Sandy in the USA. The company’s margin would also be soft due to lower volume and addition of fresher recruits. However, the management has reiterated its margin aspiration at 27% for the full year.

Overall, for FY2013, the management commentary on the demand environment remains intact, with the company confident of comfortably posting industry-leading growth. The commentary exhibits more confidence than some of its peers. For CY2013, the management expects stable information technology (IT) budgets with more clarity emerging in January next year. We maintain our preference of TCS over Infosys. In the large-cap space, we maintain our preference of TCS and HCL Technologies while in the mid-cap space, we prefer Persistent Systems and CMC. We maintain our Hold rating on the stock with a price target of Rs 1,364.

Sun Pharmaceutical Industries
Recommendation: Buy
Target price: Rs 775
CMP: Rs 736

Sun Pharma to acquire URL Pharma, annual revenue potential of $180-190 million: Sun Pharmaceutical (Sun Pharma)’s US arm Caraco Pharmaceutical (Caraco) has entered into a definitive agreement with Takeda Pharmaceuticals (Takeda) to buy the non-Colcrys business (which is mainly a generic business) of URL Pharma, Inc (URL Pharma; a wholly owned subsidiary of Takeda) for an undisclosed consideration. URL Pharma’s non-Colcryl business has 288 abbreviated new drug application (ANDA) approvals from the US Food and Drug Administration (USFDA). It has the potential to generate $180-190 million in FY2013 with an annual growth rate of 8-10%. This is set to give Sun Pharma incremental revenues and strengthen its products pipeline.

Acquisitions to fast track growth: This is second strategic acquisition by Sun Pharma within a span of two months in the US market, where it does business through its two major subsidiaries, namely Taro Pharmaceutical (Taro) and Caraco. The company acquired the US-based DUSA Pharmaceuticals, Inc (DUSA Pharma) in November 2012 for $230 million to strengthen its product portfolio in the dermatology segment. Both these acquisitions are set to give Sun Pharma additional revenues of $220-230 million, which will fast track its growth. Although, considering the weaker margin in generic business of URL Pharma due to the additional costs to increase the sales and distribution, the overall operating margin would tend to erode marginally, we expect the net profit to record an incremental growth of 5-6% in FY2014.

We revise estimate and price target: We have revised our earnings estimate up by 4% for FY2014, to factor the impact Sun Pharma had due to the acquisition of URL Pharma. Consequently, our price target stands revised up by 4% to Rs775 (23x FY2014E). We maintain Buy rating the stock.

Source: Sharekhan Fundamental Research

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