Sun Pharma: Impressive results, attractive valuation
Sun Pharma has reported results as per expectations with net profits up 41% on the back of 35% growth in the topline. The topline has been led by a 79% increase in bulk drug sales apart from a 20% increase in the formulation sales. This is due to the fact that Gujarat Lyka (which produces bulk drugs) has been amalgamated with Sun Pharma in the current year. This also explains the drop in operating margins since the contribution of bulk drugs to the total turnover has increased to 32% in the current year from 24% last year.
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However, the growth in formulation sales by 20% is impressive when seen in the light of the fact that the overall industry growth for the first five months has been in the range of 11% only. Sun Pharmaceuticals manufactures formulations in niche segments such as psychiatry, cardiovascular, gastroentology and neurology.
What is particularly encouraging for the company is the fact that formulation exports have picked up in the second quarter. Overall formulation exports in the second quarter (this includes the performance of its 99.38% subsidiary Sun Pharmaceutical Exports) have risen by almost 50% in the second quarter vis-ŕ-vis a 39% growth in the full first half. Thus the company has successfully fine–tuned its strategy of exports of finished dosage forms.
Also, Sun has been extremely aggressive in the launch of new products in the domestic market with almost 24 new product launches in its niche areas, slated for the current year itself (10 of these have already been launched). The company derives almost 40% of its revenues from products introduced in the past five years. Consequently its exposure to revenues accruing from products under the DPCO is a relatively low 19% of domestic formulation sales.
Perhaps the only area of concern is the continuing losses of its US based affiliate Caraco Pharma, which is the company’s vehicle for launch of generics. (Sun has invested Rs 288.63 m towards equity and Rs 252.86 m towards debt in Caraco, which has registered a loss of over $ 9.5 m for the year ended December 1999.) Caraco has submitted around nine abbreviated new drug applications (ANDA) which are awaiting US FDA approval. Besides, Caraco needs further cash infusion for which it is planning to raise debt in the US market. Sun has however not provided for this dimunition in the value of its investments in the current year as the management feels that in view of the future growth potential and long term nature of investments.
The stock has come off almost 25% over the last six months to its current levels of 448. The fall in valuation is partially due to the fact that the overall valuations in the market have come down over the last one week and partially due to the concerns over its US–based affiliate Caraco’s losses. At the current valuation the stock rules at 16.25 times FY2001 earnings.
The management has already stated its intention to amalgamate Sun Pharma Exports, the company’s 99.38% subsidiary into Sun Pharma. This would add roughly another Rs 130 m to the company’s expected profits of Rs 1265 m in FY2001. The per share earnings work out to around Rs 29.85 and this implies an earning multiple of 15 at current valuations. If one were to deduct the entire losses accrued by Caraco so far (i.e. Rs 437 m) the earnings work out Rs 20.50 and the current stock price implies an earnings multiple of 22 times.
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