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Sun Pharma: URL & Dusa boost US growth - Views on News from Equitymaster
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Sun Pharma: URL & Dusa boost US growth
May 30, 2013

Sun Pharma has announced its 4QFY13 results. The company has reported 32% YoY growth in sales and an increase of 23% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 32% YoY during the quarter led by growth in international formulations. The US business includes revenues of its recently acquired companies viz., Dusa and URL for the quarter.
  • Operating margins remain almost flat at 41.3% vs. 41.2% in 4QFY12.
  • Bottomline increases by 23% YoY during 4QFY13. PAT margins are at 32.8% for the quarter, a decline of 2.3% compared to 4QFY12.

Financial performance: A snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 23,362 30,870 32.1% 80,197  112,998 40.9%
Expenditure 13,735 18,116 31.9% 47,549 63,326 33.2%
Operating profit (EBDITA) 9,627 12,754 32.5% 32,648 49,672 52.1%
EBDITA margin (%) 41.2% 41.3%   40.7% 44.0%  
Other income 2,119 1,018 -51.9% 4,099 3,117 -24.0%
Interest (net) 112 72 -36.2% 282 443 57.2%
Depreciation 823 887 7.9% 2,912 3,362 15.5%
Profit before tax 10,811 12,814 18.5% 33,554 48,984 46.0%
Exceptional (loss) - -   - (5,836)  
Minority Interest 841 925   3,855 4,863  
Tax 1,768 1,773 0.3% 3,132 8,206 162.0%
Profit after tax/(loss) 8,202 10,116 23.3% 26,567 30,080 13.2%
Net profit margin (%) 35.1% 32.8%   33.1% 26.6%  
No. of shares (m)         1,035.6  
Diluted earnings per share (Rs)         29.0  
Price to earnings ratio (x)*         36.9  
*based on trailing 12 months earnings

What has driven performance in 4QFY13?
  • Topline grows by 32% YoY during the quarter led by growth in international formulations. The US business includes revenues of its recently acquired companies Dusa and URL for the quarter.

    Consolidated Business Snapshot
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Formulations
    India 8,767 7,797 -11.1% 29,154 29,657 1.7%
    US 10,106 17,879 76.9% 34,716 61,538 77.3%
    Row 3,226 3,937 22.1% 11,124 15,271 37.3%
    Total 22,099 29,614 34.0% 74,995 106,465 42.0%
    Bulk 1,531 1,699 11.0% 6,147 7,549 22.8%
    Others 8 (130)   31 73 134.0%
    Total Revenues 23,638 31,183 31.9% 81,173 114,087 40.5%

  • Domestic business witnessed decline of 11% YoY for the quarter. This was due to change in the accounting treatment of sales returns and discounts. Thus the previous quarter sales in 4QFY12 are adjusted accordingly. Adjusting the impact of this, the domestic sales grew by 16% YoY for the said period. Company launched 3 new products for the quarter and 25 new products for the FY13. As per the management, the implementation of new pricing policy will impact domestic revenues by approximately Rs 400-500 m. That is approximately 1.5% impact on the topline of FY13 sales.

  • During the quarter, the US business continued to witness robust growth of 77% YoY. In constant currency terms, the growth was ~63% YoY. During the quarter, the company had incorporated revenues from DUSA and URL Pharma for 3 months and 2 months respectively. We believe both the companies generated approximately US$ 30 m for the quarter. Further, Taro and Lipodex were the major contributors to the company's growth. Though Taro posted better growth, its products have witnessed some decline in the sales volume. Sun Pharma has good market share for Lipodex and this product is an important contributor to the US. As on date, the company has approximately 138 products that await approval in the US.

  • ROW markets grew by 22% YoY for the quarter. In constant currency terms, the growth was at ~13% YoY. Excluding Taro, the RoW sales for Sun grew by 64% YoY during the said period. We believe Taro contributed around US$ 29 m to Sun's RoW segment for the quarter.

  • Operating margins remained almost flat at 41.3% vs., 41.2% in 4QFY12. Large part of growth in the operating profits was helped by favorable currency, Taro's products and Lipodex sales.

  • Bottomline increased by 23% YoY during 4QFY13. PAT margins were at 32.8% for the quarter, a decline of 2.3% compared to 4QFY12.

Conference call highlights
  • FY14 guidance -
    1. Topline growth at 18%-20% (includes revenues from Dusa and URL).
    2. Research and Development expenses at 6%-8% of net sales.
    3. Capex - Rs 8 bn for the year.
    4. 25 New ANDAs will be filed in the US.
    5. Tax rate will be approx 18%-20%.

  • Lipodex: Lipodex, generically known as Doxorubicin HCl Liposomal injection, involves complex development technology. This technology was developed by Sun Pharma's listed subsidiary SPARC (Sun Pharma Advanced Research Center). Thus Sun Pharma had paid some amount to SPARC for developing the drug, which forms part of Sun Pharma's intangible assets. Sun Pharma also makes some payment to SPARC based on sales of this product.

  • Sitagliptin and Sitagliptin+Metformin: Both the drugs are sold by Sun Pharma in the domestic market as per the agreement with global pharma company Merck. These drugs are patent protected and thus cannot be sold by any other generic company. However recently, Glenmark Pharma launched both the drugs in the domestic market, which resulted in patent litigation. Both Merck and Sun had filed a suit against Glenmark for this launch. As per Sun, the company believes they have strong arguments in the case.

  • Bonus declared: Company has declared bonus shares of 1:1 and dividend of Rs 5 per share.

What to expect?

At the current price of Rs 1,069, the stock is trading at a multiple of 25.6 times our estimated FY15 earnings. Sun Pharma has a strong chronic franchise which will help it grow in the domestic market. Even the implementation of pricing policy, seems to hardly impact the company's revenues. The company has been successful in the US by exploring various lucrative opportunities. Other than this, the company also has filed Para IVs which include FTFs such as Prandin and Gleevec. These products as well as the newly acquired companies will help fuel growth going forward. Company continues to focus on complex technology products helping it fetch better margins. These factors will enable the company to enhance its presence in the highly competitive US market. We remain confident about company's ability to launch varied products having high entry barriers and derive growth from both the domestic and international markets. We will soon incorporate the financials of Dusa and revise our estimates. Till then we recommend our investors to Hold on to 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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