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Sun Pharma: The Caraco juggernaut - Views on News from Equitymaster
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Sun Pharma: The Caraco juggernaut
Jan 30, 2008

Performance summary
  • Revenues grow by a robust 49% YoY during 3QFY08 led by a healthy 28% YoY and 102.5% YoY growth in domestic and export formulations respectively.
  • Operating margins soar by an impressive 12% during the quarter, owing to a substantial fall in raw material and staff costs (both as percentage of sales).

  • PAT growth, though healthy at 60% YoY, is slower than the 105% YoY growth in operating profits due to substantial reduction in other income and higher tax expenses.

Consolidated snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 5,400 8,040 48.9% 15,879 20,994 32.2%
Expenditure 3,667 4,493 22.5% 10,626 12,890 21.3%
Operating profit (EBIDTA) 1,733 3,547 104.6% 5,253 8,104 54.3%
Operating profit margin (%) 32.1% 44.1%   33.1% 38.6%  
Other income 636 179 -71.8% 1,311 896 -31.7%
Depreciation 212 245 15.8% 617 700 13.5%
Profit before tax 2,157 3,481 61.3% 5,947 8,299 39.6%
Tax (29) 116   (49) 215  
Minority interest 198 181 -8.3% 376 443 18.0%
Profit after tax/ (loss) 1,989 3,184 60.1% 5,620 7,641 36.0%
Net profit margin (%) 36.8% 39.6%   35.4% 36.4%  
No. of shares (m) 190.1 201.4   190.1 201.4  
Diluted earnings per share (Rs)*         48.5  
P/E ratio (x)*         23.7  
(* on a trailing 12-month basis)

What has driven performance in 3QFY08?
  • Sun Pharma recorded a healthy 49% YoY topline growth during the quarter, led by both the domestic (up 28% YoY) and exports (up 102.5% YoY) formulations businesses. Caraco’s (75% subsidiary) robust topline growth at 162% YoY during the quarter enabled Sun Pharma’s export formulations to grow at a healthy pace. This growth is commendable given the fact that the US has been facing severe pricing pressure. Sun Pharma had launched generic ‘Trileptal’ tablets for which it had received approval in September 2007 with a shared 180-day exclusivity and this drug was instrumental in bolstering revenue growth from the US. Besides this, in December 2007, Sun Pharma executed a settlement regarding its ANDA for a generic version of ‘Exelon’. As per the terms, Sun Pharma will not market the generic version of this drug until sometime prior to the expiration of the patents covering ‘Exelon’.

  • Between Sun Pharma and Caraco, ANDAs corresponding to 46 products have been approved as compared to 29 at the end of FY07. ANDAs corresponding to 20 products were filed during 3QFY08, 16 from Sun Pharma and 4 from Caraco. With this, ANDAs representing 87 products await USFDA approval, including 8 tentative approvals (3 from Sun Pharma and 5 from Caraco). As regards the domestic business, formulations grew by 28% YoY, driven by the core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology. These segments contributed around 70% to the domestic formulations sales during the quarter. Launch of 24 new products during the nine-month period also played a key role in propelling growth in the domestic market.

    Revenue break-up
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Domestic            
    Formulations 2,935 3,758 28.0% 8,687 11,147 28.3%
    Bulk 227 177 -22.1% 723 662 -8.5%
    Others 6 2 -65.6% 10 8 -22.3%
    Total (A) 3,168 3,937 24.3% 9,421 11,817 25.4%
    Exports            
    Formulations 1,927 3,902 102.5% 5,324 8,098 52.1%
    Bulk 556 466 -16.2% 1,883 1,878 -0.3%
    Others 7 5 -30.4% 20 15 -23.9%
    Total (B) 2,490 4,372 75.6% 7,227 9,991 38.2%
    Grand Total ((A)+(B)) 5,658 8,309 46.9% 16,648 21,808 31.0%

  • Operating margins surged by 12% during 3QFY08, duly helped by the sizeable fall in raw material and staff costs (as percentage of sales). The fall in raw material costs was attributed to the change in product mix with the proportion of formulations (enjoying higher margins as compared to APIs) increasing to 90% of overall sales. The 180-day exclusivity window that the company received for ‘Trileptal’ has also played its part in shoring up margins. Going forward, we expect operating margins to improve given the fact that Sun Pharma has hived off the innovative R&D business into a separate company. An improvement in product mix is also expected to contribute to the margin expansion going forward.

  • A sizeable 72% YoY drop in other income slammed the brakes on the bottomline (up 60% YoY). While this net profit growth was remarkable, it was nevertheless slower than the 105% YoY growth in operating profits. Other income reduced due to the adverse impact of foreign exchange fluctuations and lower interest income as investment was made in acquiring 25% stake in Taro.

What to expect?
At the current price of Rs 1,151, the stock is trading at a multiple of 19.7 times our estimated FY10 earnings (excluding Taro). Sun Pharma’s domestic and international formulations businesses are likely to witness strong growth going forward, due to the company’s focus on the lifestyle segment and technologically complex products. In the US generics market, Sun Pharma is in a position to leverage its cost advantage in manufacturing and R&D by launching new drugs through Caraco Pharma. The company has received shared 180-day exclusivity for the drugs ‘Trileptal’ and ‘Protonix’, which is expected to drive revenue growth from the US in the near term. However, the pricing pressure in the US is likely to be an area of concern going forward. As far as Taro is concerned, Sun Pharma currently has a 25% stake in the company and a shareholders meeting has been scheduled in 1QCY08 to discuss the same. Thus, till such time, uncertainty with regards the acquisition remains.

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