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Sun Pharma: The best of the lot - Views on News from Equitymaster

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Sun Pharma: The best of the lot

Oct 27, 2008

Performance summary
  • Revenues grow by a robust 76% YoY during 2QFY09 led by a healthy 20% YoY and 174% YoY growth in domestic and export formulations respectively.

  • Operating margins soar by an impressive 12.9% YoY during the quarter. Improvement owing to a substantial fall in all expenses (as percentage of sales).

  • PAT grows by a splendid at 135% YoY due to the strong performance at the operating level and higher other income.

Consolidated snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 6,679 11,778 76.3% 12,954 22,196 71.3%
Expenditure 4,486 6,399 42.6% 8,424 11,437 35.8%
Operating profit (EBIDTA) 2,193 5,380 145.3% 4,530 10,759 137.5%
Operating profit margin (%) 32.8% 45.7%   35.0% 48.5%  
Other income 327 545 66.6% 744 1,017 36.6%
Depreciation 230 287 24.7% 455 563 23.7%
Profit before tax 2,290 5,638 146.2% 4,819 11,213 132.7%
Tax 1 288   99 587 492.1%
Minority interest 104 223 114.6% 262 484 84.5%
Profit after tax/ (loss) 2,186 5,128 134.6% 4,457 10,142 127.5%
Net profit margin (%) 32.7% 43.5%   34.4% 45.7%  
No. of shares (m)       199.1 207.1  
Diluted earnings per share (Rs)*         99.3  
P/E ratio (x)*         12.2  
(* on a trailing 12-month basis)

What has driven performance in 2QFY09?
  • Sun Pharma recorded a healthy 76% YoY topline growth during 2QFY09. Growth was led by both the domestic (up 20% YoY) and exports (up 174% YoY) formulations businesses. Caraco’s (76% subsidiary) superlative topline growth of 195% YoY during the quarter enabled Sun Pharma’s export formulations to grow at a healthy pace. This growth was largely due to the exclusivity window garnered for two products namely ‘Protonix’ and ‘Ethyol’. Both these drugs were ‘at-risk’ launches. This means that while the US FDA has granted approval (after the expiry of the 30 month stay), the outcome of the legal suits is yet to be decided by the court of law.

  • Between Sun Pharma and Caraco, ANDAs corresponding to 61 products have now been approved. For the quarter, ANDAs corresponding to 10 products were filed. ANDAs for 3 products from Sun Pharma were approved during the quarter. With this, ANDAs representing 96 products await USFDA approval, including 7 tentative approvals. As regards the domestic business, formulations grew by 20% YoY, driven by the core therapeutic segments of psychiatry, neurology, cardiology, diabetology and gastroenterology. Launch of 9 new products during the quarter also played a key role in propelling growth in the domestic market.

    Revenue break-up
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Formulations 3,720 4,473 20.3% 7,389 8,769 18.7%
    Bulk 211 341 61.9% 485 586 20.8%
    Others 2 2 0.0% 6 6 3.4%
    Total (A) 3,933 4,816 22.5% 7,880 9,361 18.8%
    Formulations 2,283 6,245 173.6% 4,221 11,555 173.7%
    Bulk 725 1,008 39.1% 1,388 1,789 28.9%
    Others 6 17 212.7% 11 26 144.8%
    Total (B) 3,013 7,270 141.3% 5,619 13,369 137.9%
    Grand Total ((A)+(B)) 6,945 12,086 74.0% 13,499 22,730 68.4%

  • Operating margins surged by 12.9% YoY during 2QFY09, duly helped by the sizeable fall in all expenses (as percentage of sales). The fall in raw material costs was attributed to the change in product mix. The 180-day exclusivity window that the company received for ‘Protonix’ and ‘Ethyol’ has also played a major part in shoring up margins.

  • The bottomline registered an impressive 135% YoY growth largely due to the strong performance at the operating level and higher other income.

What to expect?
At the current price of Rs 1,213, the stock is trading at a multiple of 14.3 times our estimated FY11 earnings. Sun Pharma’s domestic and international formulations businesses are likely to witness strong growth going forward, due to the company’s focus on the lifestyle segment and technologically complex products. In the US generics market, the company is in a position to leverage its cost advantage in manufacturing and R&D by launching new drugs through Caraco Pharma. The company has received 180-day exclusivity for the drugs ‘Protonix’ and ‘Ethyol’, which is expected to drive revenue growth from the US in the near term. However, the pricing pressure in the US is likely to be an area of concern going forward.

As far as Taro is concerned, since the uncertainty with regards the acquisition still remains, we have not incorporated Taro’s financials in our numbers. It must be noted that Taro had incurred considerable losses in the past two years and Sun Pharma had infused cash to the tune of US$ 60 m in the beleaguered company.

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