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Sun Pharma: The 'Taro' impact - Views on News from Equitymaster

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Sun Pharma: The 'Taro' impact
Jan 31, 2011

Sun Pharma has announced its 3QFY11 results. The company has reported 57% YoY and 3% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 57% YoY largely led by the inclusion of Taro's financials this quarter.
  • Operating margins reduce by 8.6% on account of higher staff costs and other expenditure (as percentage of sales).
  • Bottomline growth is much lower at 3% YoY largely on account of higher depreciation charges and tax expenses.

(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 10,209 16,011 56.8% 29,936 43,708 46.0%
Expenditure 6,525 11,605 77.9% 20,493 28,473 38.9%
Operating profit (EBIDTA) 3,684 4,405 19.6% 9,443 15,235 61.3%
Operating profit margin (%) 36.1% 27.5% 31.5% 34.9%
Other income 325 580 78.8% 1,916 1,619 -15.5%
Depreciation 359 805 124.2% 1,114 1,559 39.9%
Profit before tax 3,650 4,181 14.5% 10,245 15,296 49.3%
Tax 261 545 109.1% 691 814 17.8%
Minority interest (0) 134 (12) 301
Profit after tax/ (loss) 3,390 3,502 3.3% 9,566 14,181 48.2%
Net profit margin (%) 33.2% 21.9%   32.0% 32.4%
No. of shares (m)       1,035.6 1,035.6  
Diluted earnings per share (Rs)*         17.5  
P/E ratio (x)         25.0  
* on a trailing twelve months basis

What has driven performance in 3QFY11?
  • Sun Pharma's topline grew by 57% YoY during the quarter. This was largely on account of the inclusion of Taro's financials this quarter which was not present in 3QFY10. The domestic formulations business grew by a healthy 20% YoY during the quarter and was largely attributed to the lower base effect in the first half of FY10. The company's market share in the domestic market stands at 3.7%. The company launched 9 new products during the quarter in this market.

  • The US generics business continued to witness challenges. During the quarter, Taro's revenues grew by 23% YoY, while profits declined largely on account of higher tax expenses. Caraco, meanwhile, reported 22% YoY decline in sales. With respect to Caraco's issues with the US FDA, the same is expected to take a longer time in getting resolved and hence Caraco's revenue growth for the next few quarters is likely to slow down. During the quarter, 5 ANDAs were filed and 2 products received approvals. Further, Taro filed ANDAs for 2 products and received 1 approval. Thus, the cumulative ANDA filings between Sun Pharma, Caraco and Taro now stand at 369. Out of these, 220 have been approved and 149 products await US FDA approval.

    Revenue break-up
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Domestic            
    Formulations 5,326 6,403 20.2% 13,165  18,796 42.8%
    Bulk  287 270 -5.8%  851 899 5.6%
    Others 2  4 69.6% 8 13 59.5%
    Total (A) 5,615 6,677 18.9% 14,025  19,708 40.5%
    Exports            
    Formulations 3,648 8,661 137.4% 12,981  21,403 64.9%
    Bulk  1,125 887 -21.2%  3,474 3,209 -7.6%
    Others 10  0 -96.0% 28 29 4.3%
    Total (B) 4,783 9,548 99.6% 16,483 24,641 49.5%
    Grand Total ((A)+(B)) 10,398 16,225 56.0% 30,508 44,348 45.4%

  • Operating margins shrunk by 8.6% from 36.1% in 3QFY10 to 27.5% in 3QFY11 largely due to higher staff costs and other expenditure (as a percentage of sales). Staff costs increased from 11.4% of sales in 3QFY10 to 17.2% in 3QFY11 primarily on account of the acquisition of Taro. As a result, growth in operating profits slowed down to 19.6% YoY. Growth in net profits came in even lower at 3% YoY primarily on account of higher tax expenses and depreciation charges.

What to expect?
At the current price of Rs 438, the stock is trading at a multiple of 18 times our estimated FY13 earnings. Going forward, India, the semi-regulated markets and the US will be the key growth drivers. Sales from the US should pick up going forward led by its acquisition of Taro and a large number of drugs are going off patent over the next 2-3 years. That said, Caraco is expected to witness pressure in the medium term at least. Sun Pharma’s businesses excluding Caraco will continue to do well. We are in the process of reviewing our estimates for Sun Pharma and will update our research report on the company soon.

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