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Sun Pharma: Consistency is the key - Views on News from Equitymaster
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Sun Pharma: Consistency is the key
May 21, 2007

Performance summary
Sun Pharma has reported a strong set of numbers for the fourth quarter and full year ended March 2007. For both the periods under review, the topline has grown at a robust pace, led by both the domestic and export formulations businesses. Operating margins have expanded due to a sharp fall in raw material costs (as percentage of sales) and this impact has been more pronounced in the fourth quarter. All these factors put together, along with the higher other income, have resulted in the bottomline growing at a healthy double-digit pace for both the periods under review.

Consolidated snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 4,067 5,442 33.8% 16,368 21,321 30.3%
Expenditure 3,159 3,897 23.4% 11,454 14,523 26.8%
Operating profit (EBIDTA) 909 1,545 70.0% 4,914 6,798 38.3%
Operating profit margin (%) 22.3% 28.4%   30.0% 31.9%  
Other income 754 942 24.9% 1,665 2,253 35.3%
Depreciation 184 201 9.0% 610 818 34.0%
Profit before tax 1,478 2,286 54.7% 5,969 8,233 37.9%
Tax 113 (18)   239 (67)  
Minority interest (65) 183   (3) 559  
Profit after tax/ (loss) 1,429 2,121 48.4% 5,733 7,741 35.0%
Net profit margin (%) 35.1% 39.0%   35.0% 36.3%  
No. of shares (m) 190.1 193.4   190.1 193.4  
Diluted earnings per share (Rs)*         40.0  
P/E ratio (x)*         26.6  
(* on a trailing 12-month basis)

What is the company’s business?
Sun Pharma holds a 3.2% share of the domestic pharma market (as per the latest ORG IMS MAT data) and has a strong presence in the lifestyle therapeutic segment such as cardiology, neurology and diabetology. It started focusing on the exports market by acquiring Caraco Pharma in the US in FY02. Further, it has increased its stake in the latter to 75% at present, thus taking over the majority control. Exports contributed to around 43% to the company’s revenues in FY07. With the help of Caraco, the company has been able to grow its US business, which brings in synergies in terms of backward integration in both manufacturing and R&D.

What has driven performance in FY07?
Exports drive topline: Sun Pharma recorded a robust 30% YoY topline growth during the year, largely led by its exports business, which contributed 43% to the total sales of the company. Caraco’s robust topline growth at 41% YoY during the year enabled Sun Pharma’s export formulations to grow by 45% YoY. This growth is commendable given the fact that the US has been facing severe pricing pressure. At present, Sun Pharma has 34 ANDA approvals in the US market with 77 ANDAs awaiting US FDA approval. The latter includes 7 tentative approvals (6 from Sun Pharma and 1 from Caraco). Some of the important approvals that the company received during the year include ‘Phenytoin’, ‘Nimodipine’, ‘Gabapentin’, all of which have been launched in the US market and a tentative approval for ‘Amifostine’ injection for which Sun Pharma enjoys first-to-file status.

As regards the domestic business, formulations grew by 23% YoY driven by the core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology. These segments contributed around 71% to the domestic formulations sales during the year. Launch of 36 new products during the year were also instrumental in bolstering the growth in the domestic market.

Revenue break-up
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Domestic            
Formulations 2,132 3,122 46.5% 9,596 11,810 23.1%
Bulk 144 139 -3.7% 815 862 5.7%
Others 2 4 91.3% 3 15 465.4%
Total (A) 2,278 3,265 43.4% 10,414 12,686 21.8%
Exports            
Formulations 1,525 1,966 28.9% 5,036 7,290 44.8%
Bulk 464 479 3.2% 1,888 2,362 25.1%
Others 34 15 -56.6% 34 35 1.5%
Total (B) 2,023 2,459 21.6% 6,958 9,687 39.2%
Grand Total ((A)+(B)) 4,301 5,725 33.1% 17,372 22,373 28.8%

Margins improve: Margins during the year have expanded by 190 basis points (1.9%) owing to a fall in raw material costs and other expenditure (as percentage of sales). Staff costs, however, witnessed an increase. Going forward, we expect operating margins to improve given the fact that Sun Pharma has hived off the innovative R&D business into a separate company. An improvement in product mix is also expected to contribute to the margin expansion going forward.

Cost break-up
(% of sales) 4QFY06 4QFY07 FY06 FY07
Raw material costs 31.7% 27.3% 32.4% 29.9%
Staff cost 10.6% 12.2% 10.5% 12.0%
Other expenditure 35.3% 32.1% 27.1% 26.2%

Outpacing the topline: Led by a strong performance at the topline and the operating level, the 35% YoY growth in the bottomline has surpassed the topline growth. A lower tax outgo and higher other income have also played a part in boosting the bottomline.

Quarterly trend
(%) 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07
Net sales growth 35.0% 40.5% 31.1% 29.1% 27.1% 33.8%
Operating profit margin 34.8% 23.9% 35.4% 31.9% 32.1% 28.4%
Net profit margin 34.6% 35.2% 29.9% 34.8% 36.8% 39.0%

What to expect?
At the current price of Rs 1,065, the stock is trading at a multiple of 23.2 times our estimated FY09 earnings. Sun Pharma’s domestic formulations business is likely to witness strong growth going forward, due to the company’s focus on the lifestyle segment and technologically complex products. In the international arena, branded formulation sales to the CIS countries, China, South East Asia, South Africa and the Middle East are expected to pick up momentum. As far as the US markets are concerned, Sun Pharma is in a position to leverage its cost advantage in manufacturing and R&D by launching new drugs through Caraco Pharma. However, the pricing pressure in the US is likely to be an area of concern going forward. As on April 30, 2007, Sun Pharma floated a separate listed entity called Sun pharma Advanced Research Company (SPARC), which will carry out the innovative R&D activities of the company. This demerger is expected to contribute to the margin expansion going forward. We shall soon update our research report on the company.

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