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Sun Pharma: All round growth - Views on News from Equitymaster

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Sun Pharma: All round growth
Feb 20, 2014

Sun Pharma has announced results for the third quarter and nine months ended December 2013. The company has reported 51% YoY growth in sales and increase of 74% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by robust 51% YoY during the quarter led by growth in domestic and international formulations.
  • Operating margins improve by 1.9% to 46.4% for the quarter largely on account of reduction in raw material and staff costs (as percentage of sales).
  • Led by the strong growth in operating profits, higher other income and miniscule growth in tax expenses, bottomline grows by a healthy 74% YoY.

Consolidated snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 28,655 43,124 50.5% 82,128 120,218 46.4%
Expenditure 15,910 23,115 45.3% 45,210 66,268 46.6%
Operating profit (EBIDTA) 12,745 20,009 57.0% 36,918 53,950 46.1%
Operating profit margin (%) 44.5% 46.4%   45.0% 44.9%  
Other income 678 1,344 98.1% 2,099 3,143 49.7%
Depreciation 844 1,050 24.3% 2,475 3,033 22.6%
Finance costs (123) 67   372 403 8.4%
Profit before tax 12,703 20,236 59.3% 36,171 53,657 48.3%
Tax 2,369 2,438 2.9% 6,432 6,708 4.3%
Exceptional item - -   (5,836) (25,174)  
Minority interest 1,521 2,487 63.5% 3,938 5,602 42.3%
Profit after tax/ (loss) 8,813 15,311 73.7% 19,965 16,173 -19.0%
Net profit margin (%) 30.8% 35.5%   24.3% 13.5%  
No. of shares (m)       1,035.6 2,071.2  
Diluted earnings per share (Rs)*         24.8  
P/E ratio (x)         25.1  
* on a trailing twelve months basis

What has driven performance in 3QFY14?
  • Sun Pharma's topline grew by 51% YoY during the quarter. This was largely on account of the healthy 55% YoY growth reported by the formulations business. The domestic formulations business grew by a decent 20% YoY during the quarter. This is commendable given the challenges that the domestic industry has been facing since the implementation of the new drug pricing policy.

    The company's market share in the domestic market stands at 5.3% and it is now ranked the highest on share of prescriptions with 7 classes of specialists.

    The US generics business did well to grow by 79% YoY during the quarter. The company continued to benefit from drugs such as Doxil where it is the sole supplier in the US in light of the problems that the innovator Johnson & Johnson is facing. The acquired business of URL and Dusa also contributed to this robust performance (These businesses have been recently acquired and hence in 3QFY13, revenues from Dusa and URL were not there). The US business also included sales from Taro, which were up 15% YoY in dollar terms. The Rest of the World (ROW) markets also put in a strong show as sales from these regions were up by 32% YoY.

    Revenue break-up
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Formulations
    India 7,885 9,472 20.1% 21,860 27,453 25.6%
    US 14,946 26,789 79.2% 43,659 72,983 67.2%
    Rest of the World (ROW) 3,942 5,207 32.1% 11,333 14,638 29.2%
    Total 26,773 41,468 54.9% 76,852 115,074 49.7%
    Bulk  2,090 1,742 -16.7% 5,850 5,787 -1.1%
    Others 59 109 84.3% 203 123 -39.5%
    Grand Total 28,922 43,319 49.8% 82,904 120,984 45.9%

  • Operating margins improved by 1.9% to 46.4% in 3QFY14 led by lower raw material and staff costs (as a percentage of sales). Raw material costs fell from 19.5% of sales in 3QFY13 to 18.1% of sales in 3QFY14 on account of a healthy product mix. Staff costs also fell by 1.5% to 12% of sales. As a result, operating profits grew by 57% YoY during the quarter. Led by the strong growth in operating profits, higher other income and miniscule growth in tax expenses, bottomline grew by a healthy 74% YoY. For 9mFY14, net profits declined 19% YoY. However, this included the exceptional item of Rs 25 bn with respect to the liability on Protonix. Excluding the extraordinary items for both the periods, growth in net profits stood at 60% YoY on the back of a 46% YoY growth in both sales and operating profits for 9mFY14.
What to expect?
At the current price of Rs 624, the stock is trading at a multiple of 19.6 times our estimated FY16 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 various ANDAs which focus on complex technology. A significant number of these products are in the niche space. Over and above this, its subsidiaries too will help fuel growth going forward.

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. On the other hand, while Sun Pharma is enjoying higher market share in various drugs, entry of new players might have a negative impact on the company's revenues. Given the healthy performance in 9mFY14, the company has revised its topline guidance from the earlier stated 25% to 29% for FY14. We maintain HOLD rating on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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