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Sun Pharma: Taro consolidation boosts sales
Jun 1, 2011

Sun Pharma has announced its fourth quarter results for 2011 (4QFY11). The company has reported 35.5% YoY and 12.2% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales increase by 35.5% YoY in 4QFY11. This is primarily due to inclusion of Taro's (subsidiary's) financials into the consolidated statements of Sun Pharma and better performance of branded domestic sales.
  • Operating margins shrink by 8.4% YoY during the quarter owing to increase in employee costs and other manufacturing costs (as percentage of sales).
  • Net profits increase by mere 12.2% YoY due to low operating margins and higher base effect due to low taxes in the same quarter previous year
  • Board recommends a dividend of Rs 3.5 per share (dividend yield of 0.8%).


Financial performance: A snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 10,801 14,633 35.5% 40,074 57,214 42.8%
Expenditure 6,616 10,197 54.1% 26,446 37,543 42.0%
Operating profit (EBDITA) 4,185 4,436 6.0% 13,628 19,672 44.3%
EBDITA margin (%) 38.7% 30.3%   34.0% 34.4%  
Other income 137 1,108 707.3% 2,053 2,727 32.8%
Depreciation 419 482 14.9% 1,533 2,041 33.1%
Profit before tax 3,903 5,062 29.7% 14,148 20,358 43.9%
Minority Interest -29 612   -41 913  
Tax -13 22   679 1,284 89.3%
Profit after tax/(loss) 3,945 4,427 12.2% 13,511 18,161 34.4%
Net profit margin (%) 36.5% 30.3%   33.7% 31.7%  
No. of shares (m)         1035.7  
Diluted earnings per share (Rs)         17.5  
Price to earnings ratio (x)         26.5  

What has driven performance in 4QFY11?
  • Sun Pharma's sales increased by 35.5% YoY in 4QFY11. This was primarily due to inclusion of Taro's (subsidiary's) financials into the consolidated statements of Sun Pharma and better performance of branded domestic sales. The domestic formulations sales increased by 20.2% YoY to Rs 5,887 m, higher than the industry growth with strong position in the key chronic therapies. 9 key products were launched during the quarter, taking the total to 39 for FY11. Overall, the company is ranked no. 1 based on share of prescriptions with 6 classes of specialists: psychiatrists, neurologists, cardiologists, ophthalmologists, orthopedics and gastroenterologists.

    Revenue break-up
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Domestic
    Formulations 4,898 5,887 20.2% 17,412 23,801 36.7%
    Bulk 117 264 124.5% 958 1,130 17.9%
    Others 3 4 57.7% 10 17 59.6%
    Total (A) 5,018 6,155 22.6% 18,380 24,947 35.7%
    Exports
    Formulations 3,911 7,761 98.5% 16,892 28,982 71.6%
    Bulk 996 904 -9.2% 4,470 4,082 -8.7%
    Others 39 25 -35.7% 66 54 -19.0%
    Total (B) 4,945 8,690 75.7% 21,428 33,119 54.6%
    Grand Total ((A)+(B)) 9,963 14,844 49.0% 39,808 58,066 45.9%

  • Revenues from the export formulations business almost doubled due to the consolidation effect by inclusion of Taro. Taro recently announced its unaudited financials for the Jan-Mar quarter. Net sales for March quarter stood at US$ 107.7 m, a growth of 21% over same period last year, while the net profit for the quarter stood at US$ 25.7 m, higher by 199% when compared to the same quarter last year.

  • Operating margins shrank from 38.7% in 4QFY10 to 30.3% 4QFY11, due to a substantial rise in employee costs and other manufacturing charges (as percentage of sales). Again this was due to the inclusion of Taro's financials in the consolidated financial statements.

  • Net profits increased by mere 12.2% YoY to Rs 4,427 m due to low operating margins and higher base effect due to low taxes in the same quarter previous year. In addition to this, the current quarter did not see any onetime exclusive opportunities that were there in the fourth quarter of the previous year.

  • In the quarter, ANDAs (abbreviated new drug application) for 8 products were filed by Sun Pharma. With, in FY11, ANDAs for a total of 25 products were filed by Sun Pharma. During this quarter, ANDAs for 2 products from Sun Pharma were approved taking the total approvals to 14 in FY11.

What to expect?
At the current price of Rs 432, the stock is trading at a multiple of 17.6 times our estimated FY13 earnings.

Going forward, Sun Pharma has a strong chronic franchise which will help it grow in the domestic markets. In the US markets, although Caraco is still under the US FDA scanner, sales should pick up keeping in mind the fact that the number of drugs going off patent in that year is considerable. Besides this, the acquisition of Taro has will also enable Sun Pharma to enhance its presence in the highly competitive US market.

Further, Sun Pharma announced the creation of a joint venture with Merck & Co. of the US to develop, manufacture and commercialize new drugs in the branded generics space. On a long term basis, this will help Sun Pharma augment its sales from the semi regulated markets which also enjoy higher margins. Having said that, current valuations do not leave much on the table for investors.

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