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Sun Pharma: All round growth - Views on News from Equitymaster
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Sun Pharma: All round growth
Jul 26, 2006

Performance summary
Sun Pharma has reported a strong set of numbers for the first quarter ended June 2006. For the quarter, topline has grown at a robust pace, led by its domestic formulations business and strong performance by Caraco in the US generics market. Decline in raw material costs as a percentage of sales has contributed to the operating margin expansion. All these factors put together, along with a lower tax outgo, has resulted in the bottomline growing at the same pace as the topline.

Consolidated snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 3,902 5,116 31.1%
Expenditure 2,621 3,305 26.1%
Operating profit (EBIDTA) 1,281 1,811 41.4%
Operating profit margin (%) 32.8% 35.4%  
Other income 284 274 -3.5%
Depreciation 119 202 69.2%
Profit before tax 1,446 1,883 30.3%
Tax 33 2 -95.4%
Minority interest 52 115  
Profit after tax/ (loss) 1,361 1,767 29.9%
Net profit margin (%) 34.9% 34.5%  
No. of shares (m) 185.5 186.1  
Diluted earnings per share (Rs)*   32.6  
P/E ratio (x)*   25.3  
(* on a trailing 12-month basis)

What is the company’s business?
Sun Pharma holds a 3.3% share of the domestic pharma market (as per May 2006 ORG IMS MAT data) and has a strong presence in the lifestyle therapeutic segment such as cardiology, neurology and diabetology. It started focusing on the exports market by acquiring Caraco Pharma in the US in FY02. Further, it has increased its stake in the latter to 75% at present, thus taking over the majority control. Exports contributed to around 40% to the company’s revenues in FY06. With the help of Caraco, the company has been able to grow its US business, which brings in synergies in terms of backward integration in both manufacturing and R&D.

What has driven performance in 1QFY07?
Exports drive topline: Sun Pharma recorded a superlative 31% YoY topline growth during the quarter outpacing most of its peers in the pharma market. The growth was largely led by its exports business, which contributed 41% to the total sales of the company. Caraco’s topline growth at 41% YoY during the quarter enabled Sun Pharma’s export formulations to grow by 59% YoY. At present, Sun Pharma has 24 products in the US market, out of which 22 belong to Caraco. The latter’s robust topline performance has been attributed to growth from the existing products, as well as growth from new products like ‘Ultracet’ for which Caraco had received the 180-day exclusivity period. As of date, Caraco has 15 ANDAs pending US FDA approval, while Sun Pharma has 35 filings pending approval. This takes the total ANDAs pending approval to 50, out of which the company has received tentative approvals for 10 ANDAs.

As regards the domestic business, formulations grew by 16% YoY driven by the core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology. These segments contributed 71% to the domestic formulations sales.

Revenue break-up
(Rs m) 1QFY06 1QFY07 Change
Domestic      
Formulations 2,526 2,918 15.5%
Bulk 230 218 -5.1%
Others 0 3  
Total (A) 2,756 3,139 13.9%
Exports      
Formulations 1,005 1,601 59.3%
Bulk 382 601 57.5%
Others - 7  
Total (B) 1,387 2,209 59.3%
Grand Total ((A)+(B)) 4,143 5,348 29.1%

Improvement in margins: Margins during the quarter have expanded by 260 basis points on the back of a considerable reduction in raw material costs as a percentage of sales. While there has not been a significant change in the product mix, the decline has been attributed to the increasing use of material from India. While staff costs as a percentage of sales have risen, the company has managed to keep its other expenses under control. Going forward, while the hiving off of the innovative R&D business into a separate company is expected to improve margins, the extent of improvement is not likely to be very significant. This is because of the acquisitions that the company made in FY06, which are expected to keep margins under pressure.

Cost break-up
(% of sales) 1QFY06 1QFY07
Raw material costs 35.0% 30.3%
Staff cost 9.4% 12.1%
Other expenditure 22.8% 22.2%

Bottomline in line with topline: Led by a strong performance at the topline level and operating margin expansion, bottomline has clocked an impressive 30% YoY growth. A lower tax outgo has also lent a hand in boosting the bottomline.

Quarterly trend
(%) 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
Net sales growth 24.9% 38.3% 41.5% 35.0% 40.5% 31.1%
Operating profit margin 35.6% 35.0% 33.5% 34.8% 23.9% 35.4%
Net profit margin 36.9% 35.3% 35.0% 34.6% 35.2% 29.9%

What to expect?
At the current price of Rs 824, the stock is trading at a price to earnings multiple of 25.3 times its trailing twelve months’ earnings. Sun Pharma’s domestic formulations business is likely to witness strong growth going forward, due to the company’s focus on the lifestyle segment and technological complex products. In the international arena, branded formulation sales to the CIS countries, China, South East Asia, South Africa and the Middle East are expected to pick up momentum.

As far as the US markets are concerned, Sun Pharma is in a position to leverage its cost advantage in manufacturing and R&D by launching new drugs through Caraco Pharma. However, the pricing pressure in the US is likely to be an area of concern going forward. Sun Pharma is planning to float a separate listed entity, which will carry out the innovative R&D activities of the company. The process is expected to be completed in 2HFY07 and is expected to improve margins going forward.

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