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Sun Pharma: Peer discount narrowing - Views on News from Equitymaster
 
 
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  • Aug 19, 2002

    Sun Pharma: Peer discount narrowing

    Sustained improvement in operating margins (160 basis points), despite lower than expected sales growth was the highlight of 1QFY03 results of Sun Pharma. The company reported a 14% growth in sales and a 160 basis points expansion in operating margins. This has been on account of the company's conscious efforts to exit from low margin commodity bulk drug business.

    (Rs m) 1QFY02 1QFY03 Change
    Sales 1,672 1,901 13.7%
    Other Income 10 7 -27.8%
    Expenditure 1,205 1,340 11.2%
    Operating Profit (EBDIT) 467 561 20.1%
    Operating Profit Margin (%) 27.9% 29.5%  
    Interest (8.7) (12.4) 42.5%
    Depreciation 41 50 19.9%
    Profit before Tax 444.1 530.9 19.5%
    Tax 37 50 35.7%
    Profit after Tax/(Loss) 407 481 18.1%
    Net profit margin (%) 24.3% 25.3%  
    No. of Shares (eoy) (m) 46.8 46.8  
    Diluted Earnings per share*   41.1  
    P/E (at current price)   13.3  
    *(annualised)      

    Formulations business, domestic (growth of 16%) as well as exports (growth of 36%), posted robust growth and contributed to improvement in margins. In the bulk drug business, revenues where lower than expected on account of sluggish bulk exports (growth of 7%). Bulk exports were negatively impacted by reduction of commodity bulk actives, while domestic bulk sales were also impacted due to discontinuation of bulk Cephalosporins.

    Sun Pharma- Revenue Mix
    Particulars 1QFY02 1QFY03 % change
    Domestic
    Formulations 1,092 1,262 15.6%
    Bulk 268 304 13.6%
    Others 18 5 -
    Sub Total 1,377 1,570 14.0%
    Exports
    Formulations 52 71 36.3%
    Bulk 242 259 7.2%
    Sub Total 294 331 12.3%
    TOTAL 1,672 1,901 13.7%

    The US affiliate of Sun Pharma, Caraco, has also posted impressive results for 2QFY02. The company reported an impressive 509% growth in topline (albeit on a very low base) with operating margins also inching ahead aided by extended product portfolio. The net loss (including US$1.3m non-cash R&D charge) was US $ 1 m. Caraco recently received approval for marketing generic anti-pain drug of Sanofi-Synthelabo's with a market size of US $ 18 m. Caraco has received 5 drug approvals during the last three quarters and 5 more are in the pipeline.

    Caraco's stock recently gained attention for receiving tentative approval for generic version of Glucophage, which is a multi billion dollar diabetic product from Bristol Myers with sales currently pegged at US $ 1.8 bn annually. Though Glucophage is a blockbuster product, we do not expect major revenues for Sun Pharma. This is due to the fact that there would be several other generic companies marketing the same product. Goldline Inc., which is a subsidiary of generic major Ivax, has already received approval for marketing the drug, a week before Sun Pharma and there are atleast 5 other companies whose application is pending. Further, Bristol Myers, the originator for the product, has already launched once a day formulation for Glucophage and is aggressively trying to switch patients to this new delivery system.

    Sun Pharma plans to supply bulk drugs to the formulation unit of Caraco. This supply is expected to start by end of current calendar year, once the FDA accepts Sun Pharma's DMF filings, particularly for Metformin (bulk active for Glucophage). Export margins are expected to receive a boost post this approval. We reiterate, that though the product ramp up for Caraco has remained strong, most of the approvals secured by the company are non-exclusive and comparatively small in size.

    A major new product introduction from the company's R&D stable was Lupride depot used for the treatement of prostate cancer. The domestic consumption for this drug is currently met through imports and the company has competitively priced the product at 50% discount to the imported make. The domestic market for Lupride is about Rs 100 m. The company is exploring the possibility of developing futher intellectual property for this product and taking it to the developed markets.

    Sun pharma has recently annouced a redeemable preference bonus shares of the company. The bonus preference shares, with a face value of Rs.1/- be issued in the ratio of 4 preference shares for one equity share held in the company (effectively Rs 4 bonus per share). The preference shares would bear a coupon of 6%, and would be redeemable after 5 years. However, there would be no lock in period and the company has a call option on the security. These bonus preference shares will be listed on the stock exchange.

    At Rs 548, the scrip trades on a multiple of 12.3x FY03 expected earnings. Healthy domestic growth, strong product flow ahead of competition and rising export momentum seem to summarise positives for Sun Pharma. On the other hand, heavy dependence on reverse engineered products, slow penetration in export markets, loss making US affiliate (Caraco) and lack of clarity on the NCE research pipeline of the company are the key concerns for Sun Pharma. While Sun Pharma is still trying to penetrate the US generics market, Dr. Reddy's and Ranbaxy already derive a significant portion of their revenues from this market. With a sharp slide in Dr. Reddy's valuations and strong earnings growth recorded by Ranbaxy, the historical gap in valuations of Sun Pharma compared to these companies has narrowed considerably.

    Comparative Valuations
    Particulars Dr. Reddy's Ranbaxy Sun Pharma
    CMP (Rs.) 849 893 549
    Market Capitalisation (Rs.m) 64,949 103,588 25,693
    Mkt Cap/ sales- FY02 (x) 4.3 3.6 3.4
    Mkt Cap/ sales- FY03 E (x) 3.8 2.8 3.0
    P/e - 2002 14.1 37.8 15.3
    P/e - 2003 E 13.9 17.2 12.3
    Note: Figures for Dr. Reddy's and Ranbaxy are on a consolidated basis.

     

     

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