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Sun Pharma: Other income saves the day

Aug 26, 2003

Speciality pharma company, Sun Pharma has announced its June quarter results recently. The company has reported a 9% increase in topline and a 14% growth in bottomline. While the operating profit margins declined, sharp growth in the other income has helped the company improve its net profit margins. In this context, let us review the performance of the company.

Results analysis
(Rs m) 1QFY03 1QFY04 Change
Net Sales 1,901 2,074 9.1%
Other Income 19 90 374.7%
Expenditure 1,340 1,518 13.3%
Operating Profit (EBDIT) 561 556 -1.0%
Operating Profit Margin (%) 29.5% 26.8%  
Depreciation 50 53 6.5%
Profit before Tax 531 593 11.8%
Tax 50 46 -8.0%
Profit after Tax/(Loss) 480 547 13.9%
Net profit margin (%) 25.3% 26.4%  
No. of Shares 93.6 92.9  
Diluted Earnings per share* 20.5 23.6  
P/E Ratio   19.9  
(* annualised)      

Let us briefly understand the performance of the different business segments of the company.

Exports were the key growth driver for the company. On the domestic front, although the generics business grew by a sharp 14%, domestic formulations business recorded a marginal growth. The core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology (contributing 72% of domestic formulation sales) grew in the range of 17 to 20%. The company has projected a growth of 10-15% in the domestic formulations business in FY04. On the exports front, the growth was fuelled by a sharp growth in the export of formulations. For FY04, Sun Pharma has given a growth guidance of 40% in the export of formulations.

Sales break-up
(Rs m) 1QFY03 1QFY04 Change Contribution to
total revenues
Domestic
Formulations 1,262 1,288 2.1% 66.4%
Generics 304 347 14.2% 16.0%
Others 2 0 - 0.1%
Total (A) 1,567 1,635 4.3% 82.4%
Exports
Formulations 71 112 56.4% 3.8%
Generics 259 318 22.8% 13.6%
Others 3 8 - 0.2%
Total (B) 334 439 31.4% 17.6%
Grand Total ((A)+(B)) 1,901 2,074 9.1% 100.0%

Although, Sun Pharma recorded a marginal growth in topline, a sharp rise in staff cost and other expenditure has adversely affected the operating profit margins of the company. The rise in the staff cost is on account of an increase in the R&D personnel, while other expenditure has increased due to the fact that it includes expenditure incurred on sales made in the previous quarter. Despite the drop in the operating profits, a sharp increase in the other income coupled with a drop in the tax provision helped Sun Pharma register a 14% growth in net profits. The other income increased on account of the receipt of Rs 42 m as share of income from ‘Sun Pharmaceutical Industries” a partnership firm engaged in the manufacture of formulations.

Expenditure break up
(Rs m) 1QFY03 1QFY04 Change
Material 734 772 5.2%
Staff cost 121 164 35.1%
Indirect cost 203 243 19.8%
Other expenses 282 340 20.4%
Total 1,340 1,518 13.3%

On the R&D front, Sun Pharma has incurred R&D expenditure of Rs 91 m in 1QFY04 as against Rs 61 m in the corresponding previous quarter. The company plans to focus of four broad platform technologies - targeted drug delivery system, biodegradable injectibles system, dry powder inhaler system and control release oral product. Sun Pharma expects its 1st NCE to be synthesized by 2005.

Sun Pharma ‘s associate company (49.39% stake), Caraco has posted a 111% topline growth to US$ 11 m during June quarter 2003 and net profits of US$ 4.3 m as against a net loss of US$ 1.9 m during the corresponding previous quarter. For the first six months of year 2003, Caraco has recorded sales of US$ 20.6 m and net profits of US$ 6.5 m. The company’s policy of sourcing part of its 3 bulk drugs requirements from Sun Pharma has resulted in a sharp drop in the raw material cost and a consequent improvement in performance.

Sun Pharma is currently trading at Rs 469, implying a P/E of 20x its annualised 1QFY04 earnings. The turnaround in the associate company, Caraco is a big plus for the company. Although, the company is now gradually increasing its exports thrust, since most of its revenues are still generated from the domestic markets, its performance going forward could be influenced by the government’s drug pricing policy and intense competition prevalent in the domestic markets. Also, the domestic performance of the company during the quarter is concerning.


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