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Sun Pharma: Limping back to normalcy? - Views on News from Equitymaster

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Sun Pharma: Limping back to normalcy?

Oct 28, 2009

Performance summary
  • Revenues grow by a lukewarm 1% YoY due to lower sales reported by Caraco and the tepid performance of the domestic formulations business.
  • Operating margins shrink by 8% YoY during the quarter owing to a rise in all costs (as percentage of sales).
  • Decline in operating profits trickle down to the bottomline, which registers a fall of 12% YoY .

Consolidated snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 11,778 11,852 0.6% 22,196 19,728 -11.1%
Expenditure 6,399 7,379 15.3% 11,437 13,969 22.1%
Operating profit (EBIDTA) 5,380 4,473 -16.9% 10,759 5,759 -46.5%
Operating profit margin (%) 45.7% 37.7%   48.5% 29.2%  
Other income 545 988 81.3% 1,017 1,592 56.5%
Depreciation 287 379 32.3% 563 755 34.0%
Profit before tax 5,638 5,082 -9.9% 11,213 6,596 -41.2%
Tax 288 400 39.0% 587 431 -26.6%
Minority interest 223 145 -35.1% 484 (12)  
Profit after tax/ (loss) 5,128 4,538 -11.5% 10,142 6,177 -39.1%
Net profit margin (%) 43.5% 38.3%   45.7% 31.3%  
No. of shares (m)       207.1 207.1  
Diluted earnings per share (Rs)*         68.6  
P/E ratio (x)         19.9  
* on a trailing twelve months basis

What has driven performance in 2QFY10?
  • Sun Pharma’s topline grew by a mere 1% YoY during 2QFY10, owing to the 5% YoY decline in the export formulations business and the tepid 5% YoY growth in the domestic business. What also needs to be noted is that sales this quarter reflected income that Sun Pharma received on settling a legal suit with Forest Laboratories, the extent of which has not been quantified. Thus, on excluding this, sales recorded during the quarter would have been lower. As far as the domestic business is concerned, the lukewarm growth in sales was attributed to certain one-time sales that were recorded in 4QFY09, the effect of which has spilled over in 1QFY10 and 2QFY10. Having said that, the company’s market share in the domestic market stands at 3.6% and the 5 key therapeutic areas in the chronic segment accounted for 70% of total domestic formulation sales.

  • Revenues from the export formulations business declined by 5% YoY. This was largely due to two factors. The first was that Sun Pharma had recorded substantial revenues and profits from the products ‘Protonix’ and ‘Ethyol’ for which it had 180-day exclusivity in 2QFY09, the magnitude of which was not replicated in this quarter.

  • Secondly, Sun Pharma’s subsidiary Caraco had issues with the US FDA wherein the former had to recall many products from the US market in 4QFY09 since its manufacturing facility at Detroit had received warning letters from the US FDA. The issue has not yet been resolved and is taking longer than what Sun Pharma had anticipated. Infact, Caraco’s sales dropped during the quarter, thereby impacting Sun Pharma’s exports business as well. However, if one looks at Caraco’s performance on a QoQ basis, sales grew by an impressive 63% YoY. Export formulations (excluding Caraco) clocked an impressive growth of 29% YoY, which is a positive sign.

  • In the US, between Sun Pharma and all its subsidiaries, ANDAs (abbreviated new drug application) for 79 products have now been approved. During the quarter, a total of 3 ANDAs were filed, between Sun Pharma and Caraco and ANDAs for 6 products were approved. With this, ANDAs representing 108 products await USFDA approval, including 10 tentative approvals.

    Revenue break-up
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Formulations 4,473 4,710 5.3% 8,769 7,839 -10.6%
    Bulk 344 286 -16.9% 586 565 -3.6%
    Others 2 2 0.0% 6 6 1.7%
    Total (A) 4,819 4,999 3.7% 9,361 8,410 -10.2%
    Formulations 6,245 5,929 -5.1% 11,555 9,333 -19.2%
    Bulk 1,008 1,159 15.0% 1,789 2,349 31.3%
    Others 17 9 -49.4% 26 18 -30.7%
    Total (B) 7,270 7,097 -2.4% 13,369 11,700 -12.5%
    Grand Total ((A)+(B)) 12,089 12,095 0.1% 22,730 20,110 -11.5%

  • Operating margins shrank by 8% to 37.7% during 2QFY10, due to a rise in all costs (as percentage of sales). For the half year period, operating margins plunged to 29.2% of sales as compared to 48.5% in 1HFY09. The impact of the 17% YoY fall in operating profits percolated down to the bottomline which fell by 12% YoY.

What to expect?
At the current price of Rs 1,390, the stock is trading at a multiple of 14 times our estimated FY12 earnings. Sun Pharma’s management has stated that it will be working closely with Caraco to resolve the issue with US FDA as soon as possible. Caraco has signed a consent decree with the US FDA which details the steps to be taken to address the issue. Having said that, while there is likely to be clarity with respect to the path ahead, uncertainty still remains with respect to the exact time by when the issue will be fully resolved. The management, however, is confident that while performance will be impacted in the short term, in the medium and long term, the business will continue to do well.

Going forward, while we expect sales from the US to be subdued in FY10 and FY11, the same should pick up in FY12 on the assumption that the issue gets resolved by then and keeping in mind the fact that the number of drugs going off patent in that year is considerable. Further, its businesses excluding Caraco will continue to do well. Therefore, even after factoring in all the nagatives, we maintain our positive view on the stock from a long term perspective.

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