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Sun Pharma: One-time costs hurt bottomline
Aug 13, 2013

Sun Pharma has announced its 1QFY14 results. The company has reported 31% YoY growth in sales and a loss of 12.7 bn at the net level. Here is our analysis of the results.

Performance summary
  • Topline grows by robust 31% YoY during the quarter led by growth in domestic and international formulations. This was inspite of one time charge incurred by its Taro subsidiary.
  • Operating margins declined by 200 bps to 44.3% for the quarter. This was due sharp rise in employee costs and other operating expenditure.
  • The company reports a loss of Rs 12.7 bn at the net level. This is largely due to exceptional losses related to Protonix liability of Rs 25.1bn bn. Excluding this one-time cost, net profit was up by 56.03% for the quarter.

Financial performance: A snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 26,835 35,027 30.5%
Expenditure 14,413 19,515 35.4%
Operating profit (EBDITA) 12,422 15,512 24.9%
EBDITA margin (%) 46.3% 44.3%  
Other income (272) 748  
Interest (net) 212 219 3.2%
Depreciation 801 978 22.1%
Profit before tax 11,136 15,063 35.3%
Exceptional (loss) -   (25,174)  
Minority Interest 1,256 1,139  
Tax 1,925 1,511 -21.5%
Profit after tax/(loss) 7,955 (12,761)  
Net profit margin (%) 29.6% -36.4%  
No. of shares (m)   2,071.2  
Adj Diluted earnings per share (Rs)   19.4  
Price to earnings ratio (x)*   27.5  
*based on trailing 12 months earnings

What has driven performance in 1QFY14?
  • Topline grows by 31% YoY during the quarter led by growth in international formulations. The US business includes revenues of its recently acquired companies Dusa and URL for the quarter which were not there in the previous quarter last year.

    Consolidated Business Snapshot
    (Rs m) 1QFY13 1QFY14 Change
    Formulations
    India 5,877 8,486 44.4%
    US 15,411 20,314 31.8%
    Row 3,666 4,508 23.0%
    Total 24,954 33,308 33.5%
    Bulk 2,002 1,928 -3.7%
    Others 18 34 86.7%
    Total Revenues 26,974 35,270 30.8%

  • Domestic business grew by 44% YoY for the 1QFY14. However this robust growth was due to low base sales in 1QFY13. Adjusting these sales, the segment witnessed growth of 11% YoY for the said period. The company's sales were impacted due to disruptions in the trade channels on back of strike and temporary ban on Pioglitazone in Indian markets. As per the management, the company generates approx Rs1 bn per annum from the sale of brands having Piogliatazone. The sales for 1.5 months was impacted due to this ban. On the implementation of pricing policy company expects impact of Rs 450-500 m. Approx 40 products of the company will fall under the purview of NLEM (National list for essential medicines)

  • During the quarter, the US business grew by 32% YoY for the quarter. In constant currency terms, the growth was ~28% YoY. During the quarter, the company had incorporated revenues from DUSA and URL Pharma for the full quarter during the year. As per the management, good performance at DUSA and URL were the important drivers for the company's growth. However Taro witnessed sales decline of approx 4% due to some contractual obligation, excluding this impact sales grew by 10%. During the quarter company got approval for 9 ANDAs of which some were launched during the 1QFY14

  • ROW markets grew by 23% YoY for the quarter. In constant currency terms, the growth was at ~19% YoY. Excluding Taro, the RoW sales for Sun grew by 23% YoY during the said period. We believe Taro contributed around US$ 33 m to Sun's RoW segment for the quarter.

  • Operating margins declined by 0.2% to 44.3% for the quarter. This was due sharp rise in employee costs and other operating expenditure. This was due to increase in the employee costs on back of consolidation of DUSA and URL and bunch up of some expenses included in other expenses.

  • The company reported a loss of Rs 12.7 bn at the net level. This is largely due to exceptional losses related to protonix liability of Rs 25.1bn bn. Excluding this one time cost, net profit was up by 56.03% for the quarter. The company has also revised its FY14 tax guidance from 17% earlier to 15%.

    Update on various products

  • Lipodex: Sun has good market share in this market, current market share stands at 50%. Johnson and Johnson the only other company who sells this product, has entered into contract manufacturing deal in order to increase its sales. Sun pharma continues to remain positive on this drug.

  • Pradin Generics launched - Post approval Sun pharma has already launched Prandin in US . The company holds 180-days exclusivity and expects atleast 3 generic companies to enter the market post 180-days.

  • Sitagliptin and Sitagliptin+Metformin: Hearing expected in some time.

  • Other Niche products in pipeline - As on date the company has pipeline of 453 drugs in US of which 103 are pending approval. Among these pending drugs, company has some low competition drugs viz Depo Testerome and Advair in its pipeline. The brand size of both the drugs is $130 m and $5 bn respectively. Both these products have high entry barriers especially for Advair. This is because Advair being a respiratory product, it requires various trials and thus the approval procedure is very stringent. Sun pharma is already selling brand which is equivalent to Advair in some parts of Indian markets. Company is in process to launch the same through country. Going forward, company is targeting to launch in various developed and emerging markets.

  • Taro's brands face some pressures - As per the conference call, Nystatin & Triamacinolone brands are witnessing pricing pressures as couple of generic companies have got the approval for this product. We had highlighted this concern in our recent report on Sun pharma dated 19-July-2013
What to expect?
At the current price of Rs 541, the stock is trading at a multiple of 17.7 times our estimated FY16 earnings. Sun Pharma has a strong chronic franchise which will help it grow in the domestic market. Even the implementation of pricing policy, seems to hardly impact the company's revenues. 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 these products are having niche opportunity. Over and above this, its subsidiaries too will help fuel growth going forward.

These factors will enable the company to enhance its presence in the highly competitive US market. We remain confident about company's ability to launch varied products having high entry barriers and derive growth from both the domestic and international markets. We maintain 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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