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Sun Pharma: US business thwarts growth - Views on News from Equitymaster

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Sun Pharma: US business thwarts growth
May 24, 2010

Sun Pharma has announced its FY10 results. The company has reported 4% YoY and 26% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues fall by 5% YoY in FY10 largely due to the fall in revenues from the domestic business and international formulations.
  • Operating margins shrink by 10.4% YoY during the year owing to a substantial rise in raw material costs and other expenditure (as percentage of sales).
  • A 27% YoY decline in operating profits and higher depreciation charges leads to the 26% YoY fall in net profits.
  • Board recommends a dividend of Rs 13.75 per share (dividend yield of 1%).


Consolidated snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 11,344 11,092 -2.2% 42,723 41,028 -4.0%
Expenditure 7,599 6,906 -9.1% 24,084 27,400 13.8%
Operating profit (EBIDTA) 3,746 4,185 11.7% 18,639 13,628 -26.9%
Operating profit margin (%) 33.0% 37.7%   43.6% 33.2%  
Other income 627 137 -78.1% 2,086 2,053 -1.6%
Depreciation 359 419 16.8% 1,233 1,533 24.3%
Profit before tax 4,013 3,903 -2.7% 19,492 14,148 -27.4%
Tax (45) (13)   712 679 -4.6%
Minority interest 109 (29)   603 (41)  
Profit after tax/ (loss) 3,949 3,945 -0.1% 18,177 13,511 -25.7%
Net profit margin (%) 34.8% 35.6%   42.5% 32.9%  
No. of shares (m)       207.1 207.1  
Diluted earnings per share (Rs)*         65.2  
P/E ratio (x)         23.7  

What has driven performance in FY10?
  • Sun Pharma's topline declined by 4% YoY during FY10 largely due to the decline in sales from the domestic formulations and the US business. Revenues from the domestic business declined largely due to the impact of certain one-time sales that were recorded in the last quarter of FY09. On a like to like basis sales grew by a decent 15% YoY. The company's market share in the domestic market stands at 3.7% and the 5 key therapeutic areas in the chronic segment accounted for 75% of total domestic formulation sales. Overall 49 new products were launched during the year.

  • Revenues from the export formulations business declined by 12% YoY. This was largely due to the fall in sales at Sun Pharma's subsidiary Caraco, which is facing https://www.equitymaster.com/detail.asp?story=6&date=6/27/2009. Further, the US courts found the patent on ‘Protonix' to be valid and hence further shipments of this drug have now been stopped. Having said that, export formulations (other than the US business) clocked an impressive growth of 29% YoY, which is a positive sign.

  • In the US, between Sun Pharma and all its subsidiaries, ANDAs (abbreviated new drug application) for 84 products have now been approved. During the year, a total of 30 ANDAs were filed between Sun Pharma and Caraco. With this, ANDAs representing 123 products await USFDA approval, including 12 tentative approvals.

    Revenue break-up
    (Rs m) 3QFY09 3QFY10 Change FY09 FY10 Change
    Domestic
    Formulations      6,526    5,136 -21.3%   19,597   18,301 -6.6%
    Bulk          212       170 -19.8%    1,042    1,021 -2.1%
    Others            3          3 7.4%        11        11 3.7%
    Total (A) 6,740 5,309 -21.2% 20,650 19,334 -6.4%
    Exports
    Formulations      3,519    3,911 11.1%   19,256   16,892 -12.3%
    Bulk       1,305       996 -23.7%    3,804    4,470 17.5%
    Others            0        39 19250.0%        41        66 61.6%
    Total (B) 4,825 4,945 2.5% 23,101 21,428 -7.2%
    Grand Total ((A)+(B)) 11,565 10,254 -11.3% 43,751 40,761 -6.8%

  • Operating margins shrank from 43.6% in FY09 to 33.2% during FY10, due to a substantial rise in raw material costs (as percentage of sales). Raw material costs were higher during this year because of limited competition for certain products in the US in FY09, the benefits of which were not present in FY10. Also, margins during the year were impacted by the loss of revenues on Caraco manufactured products compounded by additional costs of regaining FDA compliance. The impact of the 27% YoY fall in operating profits percolated down to the bottomline which fell by 26% YoY. Higher depreciation charges also played a part in contributing to the fall in bottomline.

What to expect?
At the current price of Rs 1,543, the stock is trading at a multiple of 15.5 times our estimated FY12 earnings. With respect to the issues that Caraco has been facing with the US FDA, the former has submitted a work plan to the US regulator for remedial actions that would lead to resuming manufacturing at its Michigan facilities. This has now been approved, which is a positive sign. While this is going on, Caraco has transferred some of its own products to alternate manufacturing sites in an effort to generate some revenues from these products which is an encouraging sign. The management is confident that while performance will be impacted in the short term, in the long term, the business will continue to do well.

Going forward, while we expect sales from the US to be subdued in FY10 and FY11, the same should pick up in FY12 on the assumption that the issue gets resolved by then and keeping in mind the fact that the number of drugs going off patent in that year is considerable. Further, its businesses excluding Caraco will continue to do well. We shall soon update our research report on the company.

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