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Sun Pharma: Taro witnesses some pressures - Views on News from Equitymaster
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Sun Pharma: Taro witnesses some pressures
Aug 18, 2014

Sun Pharma has announced its 1QFY15 results. The company has reported 12.4% YoY growth in sales with net profits of Rs3.9 bn vs loss in 1QFY14. Here is our analysis of the results.

Performance summary
  • Topline grows by robust 12.4% YoY during the quarter led by growth in domestic formulations. The growth in US and RoW markets was modest during the quarter
  • The operating margins of the company were flat during the quarter. However the operating profits were up by 11.7% during the said period
  • The company reports a profit of Rs 13.9 bn at the net level vs net loss of Rs 12.7 bn in 1QFY14.

Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 35,027 39,356 12.4%
Expenditure 19,515 22,030 12.9%
Operating profit (EBDITA) 15,512 17,326 11.7%
EBDITA margin (%) 44.3% 44.0%  
Other income 748 924  
Interest (net) 219 66 -69.9%
Depreciation 978 1,280 30.9%
Profit before tax 15,063 16,904 12.2%
Exceptional (loss) (25,174)  -  
Minority Interest 1,139 880  
Tax 1,511 2,119 40.3%
Profit after tax/(loss) (12,761) 13,905  
Net profit margin (%) -36.4% 35.3%  
No. of shares (m)   2,071.2  
Adj Diluted earnings per share (Rs)   21.4  
Price to earnings ratio (x)*   37.4  
*based on trailing 12 months earnings

What has driven performance in 1QFY15?
  • Topline grows by 12.4% YoY during the quarter led by growth in its domestic business.

    Consolidated Business Snapshot
    (Rs m) 1QFY14 1QFY15 Change
    Formulations
    India 8,486 9,923 16.9%
    US 20,314 23,234 14.4%
    Row 4,508 4,913 9.0%
    Total 33,308 38,071 14.3%
    Bulk 1,928 1,744 -9.6%
    Others 34 33 -3.0%
    Total Revenues 35,270 39,848 13.0%

  • The domestic business was up by 16.9% YoY, on back of good growth in its key therapies. The US segment witnessed modest growth of 7% (in constant dollar terms). This was largely attributable to poor performance in its Taro subsidiary. Taro had taken cuts in prices of some drugs due to which the company had taken chargeback during the quarter. As per the management this was one time impact and does not expect any charge backs in near future. One should note Taro is an important contributor for the company; hence Taro’s delivery is an important catalyst for the US growth. Over and above US had some one time sales during the quarter, these sales were not quantified by the management.
  • Operating margins were flat at 44% for the quarter. This was helped by lower other expenses and R&D expenses as percentage of total sales.

  • The company reports a profit of Rs 13.9 bn at the net level vs net loss of Rs 12.7 bn in 1QFY15. This is largely due to exceptional losses related to protonix liability of Rs 25.1 bn. Adjusting for this one off losses, the profits were up by 12% YoY.
What to expect?
At the current price of Rs 812, the stock is trading at a multiple of 25.2 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 new pricing policy, as declared during July 2014, is expected to have negligible impact on the company’s revenues. The company has been successful in the US by exploring various lucrative opportunities. Other than this, the company has also 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.

Sun pharma had proposed acquisition of Ranbaxy in April 2014. This deal is awaiting approval from various authorities. 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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