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Sun Pharma: Dampened by Caraco - Views on News from Equitymaster

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Sun Pharma: Dampened by Caraco

Jun 1, 2009

Performance summary
  • Revenues grow by 27% YoY during FY09 led by the domestic formulations and export bulk businesses.
  • Operating margins shrink by 2.6% YoY during the year owing to a rise in staff costs and other expenditure (as percentage of sales).
  • PAT grows by 22% YoY. Growth is lower than that in topline on account of the contraction in operating margins, and higher depreciation charges and tax expenses.
  • The Board recommends a dividend of Rs 13.75 per share for the year (dividend yield of 1%).

Consolidated snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 12,572 11,344 -9.8% 33,565 42,723 27.3%
Expenditure 5,165 7,599 47.1% 18,054 24,084 33.4%
Operating profit (EBIDTA) 7,407 3,746 -49.4% 15,511 18,639 20.2%
Operating profit margin (%) 58.9% 33.0%   46.2% 43.6%  
Other income 556 627 12.7% 1,451 2,086 43.7%
Depreciation 268 359 33.8% 969 1,233 27.3%
Profit before tax 7,695 4,013 -47.8% 15,994 19,492 21.9%
Tax 270 (45)   485 712 46.8%
Minority interest 197 109 -44.7% 640 603 -5.8%
Profit after tax/ (loss) 7,228 3,949 -45.4% 14,869 18,177 22.2%
Net profit margin (%) 57.5% 34.8%   44.3% 42.5%  
No. of shares (m)       207.1 207.1  
Diluted earnings per share (Rs)         87.8  
P/E ratio (x)         14.1  

What has driven performance in FY09?
  • Sun Pharma’s topline grew by 27% YoY during FY09, led by the growth of the domestic formulations (up 33%) and the export API (up 47%) businesses. Having said that, performance for the fourth quarter was severely impacted as overall sales registered a 10% YoY decline. This was largely due to two factors. The first was that Sun Pharma had recorded substantial revenues and profits from the product ‘Protonix’ (for which it had 180-day exclusivity) in 4QFY08, the magnitude of which was not replicated in the last quarter of FY09.

    Secondly, Sun Pharma’s subsidiary Caraco undertook to recall many products from the US market since its manufacturing facility at Detroit had received warning letters from the US FDA. The issue has not yet been resolved and is taking longer than what Sun Pharma had anticipated. Thus, revenues from the export formulations business plunged by 57% YoY in 4QFY08, while for the full year, they recorded an 18% YoY growth.

  • Between Sun Pharma and Caraco, ANDAs (abbreviated new drug application) corresponding to 71 products have now been approved. For the year, a total of 37 ANDAs were filed. With this, ANDAs representing 108 products await USFDA approval, including 7 tentative approvals. As regards the domestic business, formulations grew by 33% YoY, driven by the core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology. More than 25 new products were launched in the domestic market during the year.

    Revenue break-up
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Formulations 3,615 6,526 80.5% 14,762 19,597 32.7%
    Bulk 218 212 -2.8% 879 1,042 18.5%
    Others 1 3 440.0% 9 11 28.2%
    Total (A) 3,834 6,740 75.8% 15,650 20,650 31.9%
    Formulations 8,241 3,520 -57.3% 16,339 19,256 17.8%
    Bulk 705 1,305 85.0% 2,583 3,804 47.3%
    Others 18 0 -98.9% 33 41 24.2%
    Total (B) 8,964 4,825 -46.2% 18,956 23,101 21.9%
    Grand Total ((A)+(B)) 12,798 11,565 -9.6% 34,606 43,751 26.4%

  • Operating margins reduced by 2.6% YoY during FY09, due to the rise in staff costs and other expenditure (as percentage of sales). Other expenses considerably increased from 23.2% in FY08 to 26% in FY09 largely due to costs incurred on the recall of products mainly in the US, write-offs, increase in R&D and forex losses. The bottomline registered a 22% YoY growth and was lower than the growth in the topline on account of the contraction in operating margins and higher depreciation charges and tax expenses.

What to expect?
At the current price of Rs 1,240, the stock is trading at a multiple of 15.4 times our estimated FY11 earnings. Caraco’s performance for the full year has been impacted largely due to the delay in the approval of products by the US FDA, the warning letter received by Caraco with respect to its manufacturing plant at Detroit and pricing pressure. Given that the issue with the US FDA has yet to be resolved, subdued performance at Caraco in the near term cannot be ruled out. Despite this, Sun Pharma is confident of growing its topline by 13-15% in FY10 led by the domestic market and the sales to emerging markets. Over the long term, however, the large number of ANDA filings in the highly competitive US generics market will continue to drive growth from this region.

On the Taro front, given the uncertainty surrounding its attempts to acquire this Israel-based company, we have not factored this acquisition in our estimates and have further assumed that Sun Pharma will have to write off US$ 60 m that it had invested in Taro. The company has performed better than our estimates both on the topline and the bottomline front. We shall soon update our research report on the company.

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Aug 26, 2019 09:57 AM


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