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Sun Pharma: Slowdown in the US - Views on News from Equitymaster

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Sun Pharma: Slowdown in the US
Feb 2, 2009

Performance summary
  • Revenues grow by 14% YoY during 3QFY09 led by the domestic formulations and export bulk businesses.
  • Operating margins improve by 2.6% YoY during the quarter owing to a fall in raw material costs and other expenditure (as percentage of sales).
  • PAT grows by 28% YoY led by the 21% YoY growth in operating profits and higher other income.


Consolidated snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 8,040 9,183 14.2% 20,994 31,379 49.5%
Expenditure 4,628 5,048 9.1% 13,053 16,486 26.3%
Operating profit (EBIDTA) 3,411 4,134 21.2% 7,941 14,893 87.5%
Operating profit margin (%) 42.4% 45.0%   37.8% 47.5%  
Other income 314 443 40.8% 1,059 1,459 37.9%
Depreciation 245 311 26.8% 700 874 24.8%
Profit before tax 3,481 4,266 22.6% 8,299 15,479 86.5%
Tax 116 170 46.2% 215 756 251.7%
Minority interest 181 10 -94.4% 443 494 11.4%
Profit after tax/ (loss) 3,183 4,086 28.4% 7,641 14,229 86.2%
Net profit margin (%) 39.6% 44.5%   36.4% 45.3%  
No. of shares (m)       201.4 207.1  
Diluted earnings per share (Rs)*         103.6  
P/E ratio (x)*         10.1  
(* on a trailing 12-month basis)

What has driven performance in 3QFY09?
  • Sun Pharma’s topline grew by 14% YoY during 3QFY09, much lower than the 76% YoY growth in topline recorded in 2QFY09. This was largely due to the slowdown in export formulations business which grew by a mere 7% YoY. Caraco’s (76% subsidiary) topline declined by 32% YoY during the quarter which was due to delay in product approvals and the 180-day exclusivity for the drug ‘Trileptal’ in 3QFY08 which was not present this quarter. However, the company continues to benefit from limited competition for two products namely ‘Protonix’ and ‘Ethyol’, which are ‘at-risk’ launches. This means that while the US FDA has granted approval (after the expiry of the 30 month stay), the outcome of the legal suits is yet to be decided by the court of law.

  • Between Sun Pharma and Caraco, ANDAs corresponding to 67 products have now been approved. For the quarter, ANDAs for 13 products were filed, of which 11 were from Sun Pharma and 2 from Caraco. ANDAs for 6 products from Sun Pharma were approved during the quarter. With this, ANDAs representing 103 products await USFDA approval, including 7 tentative approvals. As regards the domestic business, formulations grew by 15% YoY, driven by the core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology. Launch of 9 new products during the quarter also played a key role in propelling growth in the domestic market. 25 new products have now been launched in the domestic market in the year so far.

    Revenue break-up
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Domestic            
    Formulations 3,758 4,302 14.5% 11,147 13,071 17.3%
    Bulk 177 245 38.4% 662 831 25.6%
    Others 2 3 13.6% 8 8 2.5%
    Total (A) 3,937 4,549 15.6% 11,817 13,910 17.7%
    Exports            
    Formulations 3,902 4,182 7.2% 8,098 15,736 94.3%
    Bulk 466 711 52.6% 1,878 2,499 33.1%
    Others 5 15 216.7% 15 41 167.3%
    Total (B) 4,372 4,907 12.2% 9,991 18,276 82.9%
    Grand Total ((A)+(B)) 8,309 9,456 13.8% 21,808 32,186 47.6%

  • Operating margins improved by 2.6% YoY during 3QFY09, duly helped by the fall in raw material costs and other expenditure (as percentage of sales). The fall in raw material costs was attributed to the change in product mix. The limited competition for the drugs ‘Protonix’ and ‘Ethyol’ has also played a major part in shoring up margins.

  • The bottomline registered a 28% YoY growth led by the 21% YoY growth in operating profits and higher other income.

What to expect?
At the current price of Rs 1,050, the stock is trading at a multiple of 15.4 times our estimated FY11 earnings. While Caraco was optimistic about its growth prospects in the beginning of the year, the company now expects sales to be flat for the full year. The global crisis, delay in the approval of products by the US FDA, the warning letter received by Caraco with respect to its manufacturing plant at Detroit (which could also delay launch of products) and pricing pressure are the reasons for the same. Despite this, Sun Pharma is confident of growing its topline by 20-25% in FY09 led by the domestic market and the sales to emerging markets. Over the long term, however, the large number of ANDA filings in the highly competitive US generics market will continue to drive growth from this region.

On the Taro front, given the uncertainty surrounding its attempts to acquire this Israel-based company, we have not factored this acquisition in our estimates and have further assumed that Sun Pharma will have to write off US$ 60 m that it had invested in Taro. We maintain our positive view on the stock. SUNP, RANB, REDY, CIPL Pharma

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