Sun Pharma buyback offer a no-show

Given the offer size, it is hardly a blip on the screen

The buyback price announced by Sun Pharmaceutical Industries is at a 20 per cent premium to Thursday’s closing price. While this is positive, the number of shares (7.5 million) to be bought back barely moves the needle, given the 2,400 million equity share base, translating to 0.3 per cent.

As the promoters, too, intend to participate, the chance of acceptance could be low. The stock, which gained 1.6 per cent on Thursday (the details weren't announced till closing of market hours), could lose some gains in Friday's trade. If the purpose was to support a sliding stock price, the offer size should have been higher. An analyst who did not wish to be named said it was a mockery of the whole process.

Prior to the details being known, some analysts such as those at ICICI Securities had argued the company was better off deploying this money in accretive acquisitions. Others believed, given the recent buybacks and market purchases (Dr Reddy’s, Lupin), there do not seem many opportunities in the generic market. Hence the reason to deploy cash in this manner.

Further, in case companies find an opportunity, given their balance sheet strength (Sun’s debt-equity ratio is 0.3), they can always fund it partly through debt.  

At the consolidated level, Sun’s cash and investments stood at Rs 15,297 crore at the end of March, of which Rs 9,000 crore was on the books of its US subsidiary, Taro, which it cannot use. Leaving about Rs 6,000 crore to use in the buyback. Given the limit of 25 per cent of combined paid-up capital and free reserves for buyback, analysts  say the company can use Rs 5,700 crore (three per cent of the market capitalisation). It is spending a tenth of that.

On the operations side, the trigger for Sun is resolution of US Food and Drug Administration-related issues at its Halol unit, as the US accounts for half its consolidated annual revenue of Rs 28,000 crore. Pricing pressures in the generic market, single-digit revenue growth for Taro and lack of limited-competition products are compounding the problem.

What will buffer sales in the US during the quarter ending June are those under exclusivity of oncology drug Gleevec. New product launches (including in the dermatology segment) and revenue growth from the Japanese market could add to incremental sales. Analysts consider the revenue expectation it has given, of eight to 10 per cent growth for FY17, a conservative one. If Sun performs ahead of Street estimates, it could be a big trigger for the stock.