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Sun Pharma: Exclusivity benefits - Views on News from Equitymaster
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Sun Pharma: Exclusivity benefits
Jul 31, 2008

Performance summary
  • Revenues grow by a robust 66% YoY during 1QFY09 led by a healthy 17% YoY and 174% YoY growth in domestic and export formulations respectively.
  • Operating margins soar by an impressive 17.4% YoY during the quarter. Improvement owing to a substantial fall in all expenses (as percentage of sales).
  • PAT growth, though splendid at 121% YoY, is slower than the 150% YoY growth in operating profits due to substantial reduction in other income and higher tax expenses.

Consolidated snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 6,275 10,418 66.0%
Expenditure 4,127 5,038 22.1%
Operating profit (EBIDTA) 2,148 5,379 150.4%
Operating profit margin (%) 34.2% 51.6%  
Other income 606 472 -22.1%
Depreciation 226 277 22.7%
Profit before tax 2,528 5,574 120.5%
Tax 98 299 205.1%
Minority interest 158 261 64.6%
Profit after tax/ (loss) 2,272 5,015 120.7%
Net profit margin (%) 36.2% 48.1%  
No. of shares (m) 197.1 207.1  
Diluted earnings per share (Rs)*   85.0  
P/E ratio (x)*   16.7  
(* on a trailing 12-month basis)

What has driven performance in 1QFY09?
  • Sun Pharma recorded a healthy 66% YoY topline growth during 1QFY09. Growth was led by both the domestic (up 17% YoY) and exports (up 174% YoY) formulations businesses. Caraco’s (76% subsidiary) superlative topline growth of 206% YoY during the quarter enabled Sun Pharma’s export formulations to grow at a healthy pace. This growth was largely due to the exclusivity window garnered for two products namely ‘Protonix’ and ‘Ethyol’. Both these drugs were ‘at-risk’ launches. This means that while the US FDA has granted approval (after the expiry of the 30 month stay), the outcome of the legal suits is yet to be decided by the court of law.

  • Between Sun Pharma and Caraco, ANDAs corresponding to 56 products have now been approved. For the quarter, ANDAs corresponding to 5 products were filed. ANDAs for 3 products each from Sun Pharma and Caraco were approved during the quarter. With this, ANDAs representing 88 products await USFDA approval, including 8 tentative approvals (3 from Sun Pharma and 5 from Caraco). As regards the domestic business, formulations grew by 17% YoY, driven by the core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology. These segments contributed around 78% to the domestic formulations sales during the quarter. Launch of 7 new products during the quarter also played a key role in propelling growth in the domestic market.

    Revenue break-up
    (Rs m) 1QFY08 1QFY09 Change
    Formulations 3,669 4,296 17.1%
    Bulk 274 245 -10.8%
    Others 4 4 5.7%
    Total (A) 3,947 4,545 15.1%
    Formulations 1,939 5,310 173.9%
    Bulk 663 780 17.7%
    Others 5 9 70.0%
    Total (B) 2,607 6,099 134.0%
    Grand Total ((A)+(B)) 6,554 10,643 62.4%

  • Operating margins surged by 17.4% YoY during 1QFY09, duly helped by the sizeable fall in all expenses (as percentage of sales). The fall in raw material costs was attributed to the change in product mix. The 180-day exclusivity window that the company received for ‘Protonix' and ‘Ethyol’ has also played a major part in shoring up margins.

  • A 22% YoY drop in other income slammed the brakes on the bottomline (up 121% YoY). While this net profit growth was remarkable, it was nevertheless slower than the 150% YoY growth in operating profits on the back of lower other income and higher tax expenses.

What to expect?
At the current price of Rs 1,421, the stock is trading at a multiple of 16.7 times our estimated FY11 earnings. Sun Pharma’s domestic and international formulations businesses are likely to witness strong growth going forward, due to the company’s focus on the lifestyle segment and technologically complex products. In the US generics market, the company is in a position to leverage its cost advantage in manufacturing and R&D by launching new drugs through Caraco Pharma. The company has received 180-day exclusivity for the drugs ‘Protonix’ and ‘Ethyol’, which is expected to drive revenue growth from the US in the near term. However, the pricing pressure in the US is likely to be an area of concern going forward.

The management of Taro, in which Sun Pharma had invested US$ 60 m for a 25% stake in May 2007, has terminated its merger with the latter. Sun Pharma is evaluating various options in this regard. Thus, till such time, uncertainty with regards the acquisition remains. As a result, we have not incorporated Taro’s financials in our numbers for want of clarity. It must be noted that Taro had incurred considerable losses in the past two years and Sun Pharma had infused cash to the tune of US$ 60 m in the beleaguered company.

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