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Sun Pharma: Led by product upsides - Views on News from Equitymaster

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Sun Pharma: Led by product upsides
May 30, 2008

Performance summary
  • Revenues grow by a robust 57% YoY during FY08 led by a healthy 25% YoY and 124% YoY growth in domestic and export formulations respectively.
  • Operating margins soar by an impressive 14.7% YoY during the fiscal. Improvement owing to a substantial fall in all expenses (as percentage of sales).

  • PAT growth, though splendid at 90% YoY, is slower than the 131% YoY growth in operating profits due to substantial reduction in other income and higher tax expenses.

Consolidated snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 5,485 12,572 129.2% 21,359 33,565 57.1%
Expenditure 4,014 5,165 28.7% 14,636 18,054 23.4%
Operating profit (EBIDTA) 1,471 7,407 403.7% 6,724 15,511 130.7%
Operating profit margin (%) 26.8% 58.9%   31.5% 46.2%  
Other income 1,114 556 -50.1% 2,425 1,451 -40.1%
Depreciation 196 268 36.7% 813 969 19.1%
Profit before tax 2,388 7,695 222.2% 8,335 15,994 91.9%
Tax (18) 270   (67) 485  
Minority interest 183 197 7.5% 559 640 14.5%
Profit after tax/ (loss) 2,223 7,228 225.2% 7,843 14,869 89.6%
Net profit margin (%) 40.5% 57.5%   36.7% 44.3%  
No. of shares (m)       193.4 207.1  
Diluted earnings per share (Rs)*         71.8  
P/E ratio (x)*         19.5  
(* on a trailing 12-month basis)

What has driven performance in FY08?
  • Sun Pharma recorded a healthy 57% YoY topline growth during FY08. Growth was led by both the domestic (up 25% YoY) and exports (up 124% YoY) formulations businesses. Caraco’s (75% subsidiary) superlative topline growth of 199% YoY during the year enabled Sun Pharma’s export formulations to grow at a healthy pace. This growth was largely due to the exclusivity window garnered for three products namely ‘Trileptal’, ‘Protonix’ and ‘Ethyol’. Sun Pharma had launched generic ‘Trileptal’ tablets for which it had received approval in September 2007 with shared 180-day exclusivity. Besides this, the other two drugs were ‘at-risk’ launches. This means that while the US FDA has granted approval (after the expiry of the 30 month stay), the outcome of the legal suits is yet to be decided by the court of law. Besides this, in December 2007, Sun Pharma executed a settlement regarding its ANDA for a generic version of ‘Exelon’. As per the terms, Sun Pharma will not market the generic version of this drug until sometime prior to the expiration of the patents covering ‘Exelon’.

  • Between Sun Pharma and Caraco, ANDAs corresponding to 53 products were approved as compared to 29 at the end of FY07. ANDAs corresponding to 48 products were filed during FY08, 41 from Sun Pharma and 7 from Caraco. With this, ANDAs representing 89 products await USFDA approval, including 8 tentative approvals (3 from Sun Pharma and 5 from Caraco). As regards the domestic business, formulations grew by 25% YoY, driven by the core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology. These segments contributed around 78% to the domestic formulations sales during the year. Launch of 37 new products during the year also played a key role in propelling growth in the domestic market.

    Revenue break-up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Domestic            
    Formulations 3,122 3,615 15.8% 11,810 14,762 25.0%
    Bulk 139 218 57.0% 862 879 2.0%
    Others 4 1 -88.6% 15 9 -42.2%
    Total (A) 3,265 3,834 17.4% 12,686 15,650 23.4%
    Exports            
    Formulations 1,966 8,241 319.2% 7,290 16,339 124.1%
    Bulk 479 705 47.3% 2,362 2,583 9.4%
    Others 15 18 20.3% 35 33 -5.2%
    Total (B) 2,459 8,964 264.5% 9,687 18,956 95.7%
    Grand Total ((A)+(B)) 5,725 12,798 123.6% 22,373 34,606 54.7%

  • Operating margins surged by 14.7% YoY during FY08, duly helped by the sizeable fall in all expenses (as percentage of sales). The fall in raw material costs was attributed to the change in product mix. The 180-day exclusivity window that the company received for ‘Trileptal’, ‘Protonix’ and ‘Ethyol’ has also played a major part in shoring up margins.

  • A 40% YoY drop in other income slammed the brakes on the bottomline (up 90% YoY). While this net profit growth was remarkable, it was nevertheless slower than the 131% YoY growth in operating profits on the back of lower other income and higher tax expenses. Other income reduced due to the adverse impact of foreign exchange fluctuations and lower interest income as investment was made in acquiring 25% stake in Taro.

What to expect?
At the current price of Rs 1,400, the stock is trading at a multiple of 19.5 times its FY08 earnings. Sun Pharma’s domestic and international formulations businesses are likely to witness strong growth going forward, due to the company’s focus on the lifestyle segment and technologically complex products. In the US generics market, the company is in a position to leverage its cost advantage in manufacturing and R&D by launching new drugs through Caraco Pharma. The company has received 180-day exclusivity for the drugs ‘Trileptal’, ‘Protonix’ and ‘Ethyol’, which is expected to drive revenue growth from the US in the near term. However, the pricing pressure in the US is likely to be an area of concern going forward.

The management of Taro, in which Sun Pharma had invested US$ 60 m for a 25% stake in May 2007, has terminated its merger with the latter. Sun Pharma is evaluating various options in this regard. Thus, till such time, uncertainty with regards the acquisition remains. It must be noted that Taro had incurred considerable losses in the past two years and Sun Pharma had infused cash to the tune of US$ 60 m in the beleaguered company. We shall soon update our research report on the company. However, we shall not be incorporating Taro’s financials in our numbers for want of clarity.

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