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Sun Pharma: Misses FY15 guidance - Views on News from Equitymaster
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Sun Pharma: Misses FY15 guidance
Jun 2, 2015

Sun Pharma has announced its 4QFY15 results. The company has reported 52% YoY growth in sales and a decline of 44% YoY in the net profits. Here is our analysis of the results.

Please note, this is the first quarter post consolidation with Ranbaxy, hence the financials are not comparable. In the subsequent paragraphs, we shall discuss about key highlights in this consolidation.

Performance summary
  • Though the sales grew by 52% YoY, since the current quarter sales include Ranbaxy revenues, the same cannot be compared. Even after excluding the losses or expenses incurred on account of Ranbaxy, the company's performance was impacted by supply constraints and price erosion in some of its key products. This has impacted the EBITDA as well the profits of the company. Consequently, the company missed its guidance for FY15.

Consolidated financial summary
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 40,436 61,449 52.0% 160,044 272,865 70.5%
Other operating income 150 122 -19.2% 760 1,469 93.4%
Expenditure 22,580 52,647 133.2% 88,903 193,698 117.9%
Operating profit (EBDITA) 18,006 8,924 -50.4% 71,901 80,636 12.1%
EBDITA margin (%) 44.4% 14.5%   44.7% 29.4%  
Other income 1,938 3,837 98.0% 3,624 4,521 24.7%
Interest (net) 39 1,248 3091.3% 442 5,790 1210.2%
Depreciation 1,061 5,619 429.6% 4,092 12,948 216.4%
Profit before tax 18,844 5,894 -68.7% 70,991 66,419 -6.4%
Exceptional (loss) - -   (25,174) (2,378)  
Minority Interest 1,774 3,012 69.8% 7,375 9,488 28.6%
Tax 1,199 (5,999)   7,027 9,147 30.2%
Profit after tax/(loss) 15,871 8,881 -44.0% 31,415 45,406 44.5%
Net profit margin (%) 39.3% 14.5%   19.6% 16.6%  
No. of shares (m)         2,071.0  
Adj Diluted earnings per share (Rs)         18.8  
Price to earnings ratio (x)*         46.9  
*based on trailing 12 months earnings

What has driven performance in 4QFY15?
  • The performance in the US business was impacted despite robust performance in the company's Taro's subsidiary. As per the management, Sun Pharma's sales were adversely impacted by price erosion in some products like Doxycycline and Duloxetine. Further, the company's supply was interrupted by remedial processes ongoing in its Halol facility. One should note the company had received 483s under which it is submitting responses to USFDA regarding its remedial steps. While this is expected to impact the upcoming quarters too, the management did not quantify the amount. While the sales impacted by price erosion cannot be reinstated, however the revenue impacted by supply side constraints can be restored. As per the conference call, it is believed approximately US$ 80-100 m of Sun's revenues are hit by these events.

  • As per the management, the company had incurred additional expenses of Rs 6 bn (before EBITDA) under various heads on the back of few items. These expenses are related to professional charges, harmonization of polices (non cash however included in the expenses) and so on. The impact of this is approximately 10% of net sales for the quarter.

  • Non recurring expenses had impacted the net profits too, however tax credit saved the day. Going forward, the management expects taxes to be lower post consolidation with Ranbaxy. The management has not given any specific tax rate guidance.

    Consolidated Business Snapshot
    (Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
    Formulations
    India 9,465 15,690 65.8% 36,918 67,166 81.9%
    US 24,861 30,477 22.6% 97,844 137,196 40.2%
    Row 2,334 5,242 124.6% 8,777 23,320 165.7%
    Emerging markets 2,112 7,706 264.9% 10,308 37,326 262.1%
    Total 38,772 59,115 52.5% 153,847 265,007 72.3%
    Bulk  2,223 2,860 28.7% 8,010 9,910 23.7%
    Others 15 122 693.5% 138 792 472.5%
    Total Revenues 41,011 62,097 51.4% 161,995 275,709 70.2%
What to expect?
At the current price of Rs 851, the stock is trading at a multiple of 20.3 times our estimated FY17 earnings. Sun Pharma is one of the stronger pharma companies having robust portfolios in both the domestic and international markets.

However, the recent quarter's performance has raised questions pertaining to future launches. The company's business was not only impacted by the integration of Ranbaxy but also by compliance issues. The company had received 483s, which has created temporary supply constraints. The company has not only missed its FY15 guidance, but also did not give any outlook for the upcoming year.

We continue to believe that Sun remains one of the leading players in the pharma space with strong presence in the US and the domestic market. Historically, the company has been successful in the US by exploring various lucrative opportunities. Other than this, the company has filed various ANDAs which focus on complex technology.

We continue to remain confident about Sun Pharma's ability to launch varied products having high entry barriers and derive growth from both the domestic and international markets. However, in light of the recent developments we will update our estimates. We recommend that investors who have the stock of Sun Pharma can Hold on to it.

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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