The much-awaited approval from the Competition Commission of India, or CCI, for the proposed merger between Sun Pharmaceuticals Industries and Ranbaxy, came through earlier this week. The CCI has, however, recommended divestment of seven key products where it believes the combined entity will significantly reduce competition or result in a near monopoly. The products to be divested during the next six months include those sold under the brand names: Tamlet, Rozavel EZ, Lupride, Terlyz, Oleanz Plus, Sompraz L, and Triolmezest.
According to management, these products constitute less than 1% of the combined entity's revenue in India. As a result we don't see a significant impact to our outlook on the stock. We continue to be positive on the merger, as we believe Ranbaxy's OTC and specialty drugs portfolio will complement Sun Pharmaceuticals Industries' existing portfolio.
We maintain our post-combination fair value estimate of Rs 992 per share, and narrow economic moat rating on Sun Pharmaceuticals Industries. Sun Pharmaceuticals Industries' moat emanates from its low-cost manufacturing base in India and vertical integration of API molecules produced in-house, advantages that are also present in the acquired Ranbaxy business. We believe the stock is significantly undervalued, and would be a great addition to clients looking for exposure to Indian pharmaceuticals.
To read a detailed analysis of the stock, click here.
