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Sun Pharma: Impacted by supply constraints - Views on News from Equitymaster
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Sun Pharma: Impacted by supply constraints
Mar 10, 2015

Sun Pharma has announced its 3QFY15 results. The company has reported flat sales growth and a decline of 7% in the net profits. Here is our analysis of the results.

Performance summary
  • Net sales growth was flat for the quarter. US and RoW sales both declined during the quarter.
  • On the back of poor topline performance, the operating margins too declined by 1.5% to 44.9% during the quarter.
  • The bottom line was down by 7% YoY despite the sharp decline in taxes for the quarter.

Standalone and Consolidated financials
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 42,866 42,795 -0.2% 119,608 129,569 8.3%
Other operating income 259 158 -39.1% 609 435 -28.7%
Expenditure 23,115 23,670 2.4% 66,268 71,593 8.0%
Operating profit (EBDITA) 20,010 19,283 -3.6% 53,950 58,410 8.3%
EBDITA margin (%) 46.4% 44.9%   44.9% 44.9%  
Other income 1,344 666 -50.5% 3,143 2,116 -32.7%
Interest (net) 67 180 167.1% 403 489 21.5%
Depreciation 1,050 1,316 25.4% 3,033 4,268 40.7%
Profit before tax 20,237 18,453 -8.8% 53,657 55,769 3.9%
Exceptional (loss) - -   (25,174) -  
Minority Interest 2,487 2,795 12.4% 5,602 6,420  
Tax 2,438 1,408 -42.3% 6,708 5,469 -18.5%
Profit after tax/(loss) 15,311 14,251 -6.9% 16,173 43,881 171.3%
Net profit margin (%) 35.7% 33.3%   13.5% 33.9%  
No. of shares (m)         2,071.0  
Adj Diluted earnings per share (Rs)         29.1  
Price to earnings ratio (x)*         36.1  
*based on trailing 12 months earnings

What has driven performance in 3QFY15?
  • Revenues from the US and RoW markets declined during the quarter. India business witnessed good growth.

    Consolidated Business Snapshot
    (Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
    Formulations
    India 9,472 11,500 21.4% 27,453 32,941 20.0%
    US 26,789 25,602 -4.4% 72,983 77,954 6.8%
    Row 5,207 4,444 -14.7% 14,638 14,719 0.6%
    Total 41,468 41,546 0.2% 115,074 125,614 9.2%
    Bulk  1,742 1,811 4.0% 5,787 5,656 -2.3%
    Others 109 49 -55.5% 123 143 16.6%
    Total Revenues 43,319 43,406 0.2% 120,984 131,414 8.6%

  • The domestic business was up by 21.4% YoY, on back of good growth in its key therapies. The growth in US segment, was down by 5% YoY (in constant dollar terms). This was largely due to temporary supply constraints on the back of remedial actions taken by the company to resolve its 483s at the Halol facility. Over and above, lack of new approvals and further pricing pressure in Doxycycline also impacted US generic sales.

  • The operating margins declined by 1.5% to 44.9% during the quarter. This was largely due to poor US sales and higher R&D expenses on account of funding the clinical development of a drug.

  • Consequently, led by the poor performance at the operating level and higher depreciation charges, net profits fell by 7% YoY. Even a sharp drop in tax expenses was not enough to arrest the drop in profits.
What to expect?
At the current price of Rs 1,050, the stock is trading at a multiple of 24.3 times our estimated FY17 earnings. Sun Pharma is one among the Indian pharma companies having robust portfolios in domestic and international markets. The company 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. Substantial number of these products are having niche opportunity. Over and above this, its subsidiaries too will help fuel growth going forward.

We continue to remain confident about Sun Pharma's ability to launch varied products having high entry barriers and derive growth from both the domestic and international markets.

Having said that, current valuations do not leave enough room to buy the stock. Hence, we reiterate 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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