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Sun Pharma: Taro bolsters performance

Mar 2, 2012

Sun Pharma announced the third quarter results of financial year 2011-2012 (3QFY12). The company reported a 37% YoY and 91% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 37% YoY largely led the 37% YoY growth in the overall formulations business.
  • Operating margins significant expand by 16.7% on account of lower cost heads (as percentage of sales).
  • Bottomline growth at 91% YoY is lower than the growth in operating profits on account of higher forex losses.

Consolidated snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 15,617 21,451 37.4% 42,582 56,755 33.3%
Expenditure 11,212 11,814 5.4% 27,346 33,802 23.6%
Operating profit (EBIDTA) 4,405 9,638 118.8% 15,235 22,953 50.7%
Operating profit margin (%) 28.2% 44.9%   35.8% 40.4%  
Other income 580 (272)   1,619 1,879 16.0%
Depreciation 805 774 -3.8% 1,559 2,089 34.0%
Profit before tax 4,181 8,591 105.5% 15,296 22,742 48.7%
Tax 545 634 16.4% 814 2,058 152.9%
Minority interest 134 1,274 847.8% 301 3,014  
Profit after tax/ (loss) 3,502 6,683 90.9% 14,181 17,670 24.6%
Net profit margin (%) 22.4% 31.2%   33.3% 31.1%  
No. of shares (m)       1,035.6 1,035.6  
Diluted earnings per share (Rs)*         21.3  
P/E ratio (x)         26.5  
* on a trailing twelve months basis

What has driven performance in 3QFY12?
  • Sun Pharma's topline grew by 37% YoY during the quarter. This was largely on account of the healthy 37% YoY growth reported by the formulations business. The domestic formulations business grew by a decent 14% YoY during the quarter. On excluding the third party manufacturing business, growth was better at 17% YoY. The company’s market share in the domestic market stands at 4.5% and the company is now ranked the highest with 7 classes of specialists. The company launched 6 new products during the quarter in this market taking the total to 20 for 9mFY12.

  • The US generics business did well to grow by 63% YoY during the quarter. This was enhanced by a strong performance reported by Taro. The latter’s revenues grew by 44% YoY as the company had raised prices on select products in the US market even as overall volumes were flat. As far as Caraco is concerned, remediation efforts at the company’s Detroit plant are still ongoing. The Rest of the World (ROW) markets also put in a strong show as sales from these regions were up by 27% YoY.

    Revenue break-up
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    India 6,102 6,956 14.0% 17,914 20,387 13.8%
    US 6,376 10,400 63.1% 16,545 24,611 48.7%
    Rest of the World (ROW) 2,213 2,810 27.0% 4,676 7,899 68.9%
    Total 14,691 20,166 37.3% 39,135 52,896 35.2%
    Bulk 1,136 1,536 35.2% 4,045 4,616 14.1%
    Others 4 17 324.4% 41 23 -44.2%
    Grand Total 15,831 21,720 37.2% 43,221 57,535 33.1%

  • Operating margins improved significantly by 16.7% to 44.9% in 3QFY12 as all costs declined (as a percentage of sales). The largest difference was visible in raw material costs which fell from 27.7% of sales in 3QFY11 to 17.6% of sales in 3QFY12. One of the reasons for the expansion in margins was attributed to Taro increasing prices of some of its products, a trend the management does not expect to be sustainable going forward. As a result, operating profits more than doubled during the quarter. Growth in net profits, although very healthy, came in lower at 91% YoY primarily on account of reduction in other income. It must be noted that other income was in the red this quarter largely on account of forex losses of Rs 863 m as against gains of Rs 322 m in 3QFY11.

What to expect?
At the current price of Rs 566, the stock is trading at a multiple of 19.7 times our estimated FY14 earnings. Sun Pharma has a strong chronic franchise which will help it grow in the domestic market. In the US market, sales should pick up keeping in mind the fact that the number of drugs going off patent in next 2 to 3 years is quite large. Besides this, the consolidation of Taro and a healthy ANDA pipeline will also enable Sun Pharma to enhance its presence in the highly competitive US market.

With its strong cash levels, the company has also geared up for acquisitions in emerging markets like Brazil, Mexico, Russia and China. Last year, Sun Pharma announced the creation of a joint venture with Merck & Co. of the US to develop, manufacture and commercialize new drugs in the branded generics space. On a long term basis, this will help Sun Pharma augment its sales from the semi regulated markets which also enjoy higher margins. Having said that, the current valuations do not leave much on the table for investors.

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