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Sun Pharma: International biz drives growth
Feb 8, 2013

Sun Pharma has announced its 3QFY13 results. The company has reported 33% YoY growth in sales and an increase of 32% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 33% YoY during the quarter led by growth in its international formulations and API businesses.
  • Operating margins reduce marginally by 0.5%, while operating profits grow by 32% YoY.
  • Bottomline increases by 32% YoY during 3QFY13, despite higher tax expenses (up 273% YoY) on account of substantial other income.

Consolidated picture
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 21,494 28,654 33.3% 56,830 82,128 44.5%
Expenditure 11,814 15,910 34.7% 33,802 45,210 33.8%
Operating profit (EBDITA) 9,680 12,745 31.7% 23,027 36,917 60.3%
EBDITA margin (%) 45.0% 44.5%   40.5% 45.0%  
Other income (337) 679   1,970 2,099 6.6%
Interest (net) (22) (123)   170 371 118.4%
Depreciation 774 844 9.1% 2,089 2,475 18.5%
Profit before tax 8,591 12,702 47.9% 22,739 36,171 59.1%
Exceptional (loss) - -   - (5,836)  
Minority Interest 1,274 1,521 19.4% 3,014 3,938 30.6%
Tax 634 2,369 273.4% 2,058 6,432 212.6%
Profit after tax/(loss) 6,683 8,813 31.9% 17,667 19,965 13.0%
Net profit margin (%) 31.1% 30.8%   31.1% 24.3%  
No. of shares (m)         1,035.6  
Diluted earnings per share (Rs)         22.8  
Price to earnings ratio (x)*         32.8  
*based on trailing 12 months earnings

What has driven performance in 2QFY13?
  • Topline grew by 33% YoY during the quarter led by growth in the international formulations and API segments.

    Consolidated business snapshot
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Formulations
    India 6,956 7,885 13.3% 20,387 21,860 7.2%
    US 10,400 14,946 43.7% 24,611 43,659 77.4%
    Row 2,809 3,942 40.3% 7,899 11,333 43.5%
    Total 20,165 26,772 32.8% 52,896 76,852 45.3%
    Bulk 1,536 2,090 36.1% 4,616 5,850 26.7%
    Others 17 59 240.8% 23 203 778.8%
    Total revenues 21,719 28,922 33.2% 57,535 82,904 44.1%

  • Domestic business witnessed growth of 13% YoY. The company continues to maintain No 1 position in prescriptions for its Top 5 therapies. Adjusting for the change in treatment of discounts and the expected sales returns, the growth was 19% YoY for the quarter.

  • During the quarter, the US business continued to witness robust growth of 43% YoY. In the constant currency terms the growth was ~32% YoY. Taro, Lipodex and other new launches were the major contributors to this growth. Lipodex has not only contributed to the company's top-line, but has also helped on the margin front. Though the company has not revealed the amount of revenues from Lipodex, we expect this product to generate around US$100 -US$ 120 m for FY13. As on date total cumulative ANDAs filed are 403, of which 142 products await approvals. The recent acquisition of URL's generic business adds 107 products to Sun's product basket.

  • ROW markets grew by 40% YoY for the quarter. In constant currency terms, the growth was at ~31% YoY. Excluding Taro, the RoW sales for Sun grew by 58% YoY, during the said period. We believe Taro contributed around US$ 30 m to Sun's RoW segment.

  • Operating margins declined marginally by 0.5% leading to a 32% YoY growth in operating profits. Large part of growth in the operating profits was helped by favorable currency, Taro products and Lipodex sales.

  • Bottomline increased by 32% YoY during 3QFY13 led by higher other income despite higher incidence of tax, which grew by 273% YoY.

    Update on Sun's acquisitions and subsidiaries

  • Taro Pharma: Sun Pharma has announced, that both the companies have mutually agreed to terminate the agreement, for buying the outstanding stake of Taro. The shareholders of Taro wanted to increase the bid price of US$ 39.5 per share by Sun. However, as Sun was averse to offer more than the stated price, both the companies mutually decided to terminate the deal. During the quarter, Taro generated revenues of US$ 186 m (up 25% YoY). However, the company has witnessed some volume decline in its products during the quarter and in 9mFY13.

  • Takeda URL (generics segment): Sun Pharma has completed the acquisition of Takeda's URL generic business (non-Colcrys business). The sales of this business have been pegged at US$110-120 m per annum. With the acquisition of this business, the company will now add URL's products to its US product basket. URL also has some branded products and some 505(b)2 products. Some of them await approval. Further Sun Pharma will continue to manufacture Colcrys products for Takeda for some period. On back of completion of this acquisition in FY13, revenues for two months from URL will be accounted for by Sun Pharma.

    Though the management did not disclose the EBITDA margins of the URL business, we believe URL's acquisition will help Sun Pharma fuel its top-line. However, at the EBITDA level the margins will not be very impressive. This will suppress the overall margins of Sun to some extent.

  • Caraco (Detroit facility): The management of the Sun mentioned that the current utilization of Detroit facility of Caraco is very low. The growth from Caraco will be dependent on the number of products that are cleared by USFDA.

What to expect?
At the current price of Rs 773, the stock is trading at a multiple of 18.5 times our estimated FY15 earnings. Sun Pharma has a strong chronic franchise which will help it grow in the domestic market. The company has been successful in the US by exploring various lucrative opportunities. Other than this, the company also has filed Para IVs which include FTFs such as Prandin and Gleevec. These products will help to fuel the growth. The current acquisitions will also help in the top line expansion. These factors will enable the company it to enhance its presence in the highly competitive US market. We remain confident about the company's ability to launch varied products having high entry barriers and derive growth from both the domestic and international markets.

We had recommended a Buy on the stock in November 2012. At the current price, the stock offers compounded annual return of 9% taking into account the EPS for FY15. Thus, in light of current valuations, we now recommend our investors to HOLD on to the stock.

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