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Sun Pharma: Caraco effect still lingers - Views on News from Equitymaster
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Sun Pharma: Caraco effect still lingers
Feb 4, 2010

Performance summary
  • Revenues grow by 11% YoY in 3QFY10 driven by the domestic formulations business which grows by 24% YoY.
  • Operating margins shrink by 8.9% YoY during the quarter owing to a substantial rise in raw material costs (as percentage of sales).
  • An11% YoY fall in operating profits, lower other income and higher tax expenses lead to the 17% YoY decline in the bottomline.


Consolidated snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 9,183 10,209 11.2% 31,379 29,936 -4.6%
Expenditure 5,048 6,525 29.2% 16,486 20,493 24.3%
Operating profit (EBIDTA) 4,134 3,684 -10.9% 14,893 9,443 -36.6%
Operating profit margin (%) 45.0% 36.1%   47.5% 31.5%  
Other income 443 325 -26.7% 1,459 1,916 31.3%
Depreciation 311 359 15.6% 874 1,114 27.5%
Profit before tax 4,266 3,650 -14.5% 15,479 10,245 -33.8%
Tax 170 261 53.6% 756 691 -8.6%
Minority interest 10 (0) -102.9% 494 (12)  
Profit after tax/ (loss) 4,086 3,390 -17.1% 14,229 9,566 -32.8%
Net profit margin (%) 44.5% 33.2%   45.3% 32.0%  
No. of shares (m)       207.1 207.1  
Diluted earnings per share (Rs)*         65.3  
P/E ratio (x)         22.9  
* on a trailing twelve months basis

What has driven performance in 3QFY10?
  • Sun Pharma’s topline grew by 11% YoY during 3QFY10 led by the 24% YoY growth in the domestic formulations business. While the growth in this business was lukewarm in 1HFY10 due to certain one-time sales that were recorded in 4QFY09 the effect of which spilled over in the subsequent 2 quarters, growth in the third quarter was back on track. The company’s market share in the domestic market stands at 3.6% and the 5 key therapeutic areas in the chronic segment accounted for 75% of total domestic formulation sales.

  • Revenues from the export formulations business declined by 13% YoY. This was largely due to the 7% YoY fall in sales at Sun Pharma’s subsidiary Caraco, which is facing issues with the US FDA. Meanwhile the generic version of ‘Protonix’, launched at risk with patent litigation pending, continues to be sold in the US. Currently, three players (Sun Pharma, Teva and an authorized generic) are present in the ‘Protonix’ market and two more players have received tentative approvals. Export formulations (excluding Caraco) clocked an impressive growth of 32% YoY, which is a positive sign.

  • In the US, between Sun Pharma and all its subsidiaries, ANDAs (abbreviated new drug application) for 83 products have now been approved. During the quarter, a total of 4 ANDAs were filed between Sun Pharma and Caraco and ANDAs for 4 products were approved. With this, ANDAs representing 108 products await USFDA approval, including 12 tentative approvals.

    Revenue break-up
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Domestic            
    Formulations 4,302 5,326 23.8% 13,071 13,165 0.7%
    Bulk 245 287 17.2% 831 851 2.5%
    Others 3 2 -8.0% 8 8 2.4%
    Total (A) 4,549 5,615 23.4% 13,910 14,025 0.8%
    Exports            
    Formulations 4,182 3,648 -12.8% 15,736 12,981 -17.5%
    Bulk 711 1,125 58.4% 2,499 3,474 39.0%
    Others 18 12 -31.1% 41 28 -32.3%
    Total (B) 4,910 4,785 -2.5% 18,276 16,483 -9.8%
    Grand Total ((A)+(B)) 9,459 10,400 10.0% 32,186 30,508 -5.2%

  • Operating margins shrank from 45% in 3QFY09 to 36.1% during 3QFY10, due to a substantial rise in raw material costs (as percentage of sales). Raw material costs were higher during this quarter because of limited competition for certain products in the US in 3QFY09, the benefits of which were not present in 3QFY10. Also, margins during the quarter were impacted by the loss of revenues on Caraco manufactured products compounded by additional costs of regaining FDA compliance. The impact of the 11% YoY fall in operating profits percolated down to the bottomline which fell by 17% YoY. Lower other income and higher tax expenses also played a part in contributing to the fall in bottomline.

What to expect?
At the current price of Rs 1,496, the stock is trading at a multiple of 15 times our estimated FY12 earnings. With respect to the issues that Caraco has been facing with the US FDA, the former has submitted a work plan to the US regulator for remedial actions that would lead to resuming manufacturing at its Michigan facilities. However, uncertainty still remains with respect to the exact time by when the issue will be fully resolved. While this is going on, Caraco has transferred some of its own products to alternate manufacturing sites in an effort to generate some revenues from these products which is an encouraging sign. The management is confident that while performance will be impacted in the short term, in the long term, the business will continue to do well.

Going forward, while we expect sales from the US to be subdued in FY10 and FY11, the same should pick up in FY12 on the assumption that the issue gets resolved by then and keeping in mind the fact that the number of drugs going off patent in that year is considerable. Further, its businesses excluding Caraco will continue to do well. So far the performance of the company has been in line with our estimates for the full year. Overall, we maintain our positive view on the stock from a long term perspective.

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