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Sun Pharma: Good show throughout the year - Views on News from Equitymaster
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Sun Pharma: Good show throughout the year
Jun 5, 2014

Sun Pharma has announced its 4QFY14 results. The company has reported 31.6% YoY growth in sales and increase of 56.9% YoY in the net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by robust 31.6% YoY during the quarter led by growth in domestic and international formulations. US continued to witness robust growth led by the company's key brands.
  • Operating margins are up by 3.1% to 44.4% for the quarter. Ramp up in high margin products help in margin expansion.
  • Profit after tax grows by 56.9% on the back of lower tax expenses and higher other income during the quarter.

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 30,715 40,436 31.6% 112,389 160,044 42.4%
Other op income 155 150 -3.0% 610 760 24.6%
Expenditure 18,116 22,580 24.6% 63,326 88,848 40.3%
Operating profit (EBDITA) 12,754 18,006 41.2% 49,673 71,956 44.9%
EBDITA margin (%) 41.3% 44.4%   44.0% 44.7%  
Other income 1,018 1,938 90.4% 3,117 5,081 63.0%
Interest (net) 72 39 -45.3% 443 442 -0.3%
Depreciation 887 1,061 19.6% 3,362 4,094 21.8%
Profit before tax 12,813 18,844 47.1% 48,985 72,501 48.0%
Exceptional (loss) - -   (5,836) (25,174)  
Minority Interest 925 1,774 91.7% 4,863 7,375 51.7%
Tax 1,773 1,199 -32.4% 8,456 7,907 -6.5%
Profit after tax/(loss) 10,115 15,871 56.9% 29,831 32,045 7.4%
Net profit margin (%) 32.9% 39.3%   26.5% 20.0%  
No. of shares (m)         2,071.0  
Adj Diluted earnings per share (Rs)         27.6  
Price to earnings ratio (x)*         21.7  
*based on trailing 12 months earnings

What has driven performance in 4QFY14?
  • Net sales grew by 31.6% YoY during the quarter led by growth in domestic and international formulations.

    Consolidated Business Snapshot
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Formulations
    India 7,797 9,472 21.5% 29,657 36,918 24.5%
    US 17,879 24,861 39.1% 61,538 97,844 59.0%
    Row 3,937 4,446 12.9% 15,271 19,084 25.0%
    Total 29,613 38,779 31.0% 106,465 153,846 44.5%
    Bulk 1,699 2,223 30.8% 7,548 8,010 6.1%
    Others (130) 15   73 138 89.2%
    Total Revenues 31,183 41,018 31.5% 114,086 161,995 42.0%

  • Domestic business grew by 21% YoY for 4QFY14. For the full year, the company registered healthy growth of 17% YoY (after adjusting for one off sales). Including one offs, growth in India formulations segment was at 25% YoY) despite implementation of the new pricing policy and disruptions in the trade channel. Company continues to maintain leadership in majority of the chronic segments.

  • During the quarter, the US business grew by 39.1% YoY. In constant currency terms, the growth was 22% YoY. During the quarter, the company launched four new products. Launches like Cymbalta (Branded market size - US$ 5 bn) and Temodar (Branded market size US$ 400 m-) were made during the quarter. Company continues to witness good traction in Doxil sales. Sales from Taro's US geography witnessed double digit growth during the quarter. In our view, growth from Taro was approx 20% YoY for the quarter.

  • ROW markets grew by 12.9% YoY for the quarter. In constant currency terms, the growth was flat. Excluding Taro, the RoW sales for Sun grew by 9% YoY in dollar terms during the said period. We believe Taro contributed around US$ 48 m to Sun's RoW segment for the quarter.

  • Operating margins were up by 3.1% to 44.4% for the quarter. Better product mix and favorable currency movement were the key reasons for margin expansion.

  • Profit after tax grew by 56.9% on the back of lower tax expenses and higher other income during the quarter.
Update on major events
  • Guidance for FY15: Management has guided for topline growth of 13-15%, while R&D spending is likely to be around 6-8% of sales. The company is aiming to file 25 ANDAs in the US and incur capex of Rs 9 bn.

  • Deal with Pfizer: During the conference call, the management announced a deal with Pfizer. This deal was part of Protonix settlement done with Pfizer Inc in FY13. As per this deal, Sun will be supplying some drugs to Pfizer worth US$ 400 m. Sun Pharma has already received this amount and it is being shown on the Liability side of the balance sheet. As and when Sun will make supplies to Pfizer, it will reduce its liability by the said amount.

  • Ban on company's Kharkhadi plant: Recently, the US FDA had imposed a ban on Sun Pharma's Kharkhadi plant. The said ban will impact the company's US sales by around 1%.
What to expect?
At the current price of Rs 602, the stock is trading at a multiple of 19.3 times our estimated FY16 earnings. Sun Pharma has a strong chronic franchise which will help it grow in the domestic market. The company has been successful in the US by exploring various lucrative opportunities. Other than this, the company also has filed various ANDAs which focus on complex technology. Substantial number of the company's filings target niche therapies.

In order to expand in various markets, Sun Pharma had announced its acquisition with Ranbaxy. As per the management, Sun pharma expects to realise operating synergies of around US$ 250 m by the third year, post the closing of the transaction. The transaction is expected to close by the end of FY15.

Sun Pharma has been among the few successful companies to bring about a turnaround in the acquisitions it makes. But it will be interesting to see how the company is able to improve Ranbaxy's fortunes given the numerous issues that the latter has with the US FDA. 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.

On the negative side, one should note that favorable currency movement has helped the company too. Thus going forward when the currency reverses, the company might face some pressure. Other than that, while the company is enjoying higher market share in various drugs, entry of new players might have a negative impact on the company's revenues. Overall, we continue to reiterate a Hold rating on 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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