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Sun Pharma: It's domestic this time
Nov 1, 2010

Sun Pharma has announced its 2QFY11 results. The company has reported 16% YoY and 11% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 16% YoY led by the strong sales from the domestic market.
  • Operating margins reduced by 3.6% on account of higher raw material costs (as percentage of sales).
  • Bottomline growth at 11% is higher than the growth in operating profits due to lower tax expenses and depreciation charges.


(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales      11,852       13,701 15.6%     19,728      27,698 40.4%
Expenditure        7,379         9,030 22.4%     13,969      16,868 20.8%
Operating profit (EBIDTA)        4,473         4,670 4.4%       5,759      10,830 88.1%
Operating profit margin (%) 37.7% 34.1% 29.2% 39.1%
Other income           988            924 -6.5%       1,592        1,039 -34.7%
Depreciation           379            352 -7.2%          755           754 -0.1%
Profit before tax        5,082         5,242 3.1%       6,596      11,116 68.5%
Tax           400            172 -56.9%          431           269 -37.5%
Minority interest           145              34 -76.7%           (12)           167
Profit after tax/ (loss)        4,538         5,037 11.0%       6,177      10,680 72.9%
Net profit margin (%) 38.3% 36.8%   31.3% 38.6%
No. of shares (m)             207.1        207.1  
Diluted earnings per share (Rs)*                  87.0  
P/E ratio (x)                  24.7  
* on a trailing twelve months basis

What has driven performance in 2QFY11?
  • Sun Pharma's topline grew by 16% YoY during the quarter. This was largely due to the strong performance of its domestic formulations business which grew by 36% YoY. The company's market share in the domestic market stands at 3.7% and the 5 key therapeutic areas in the chronic segment accounted for 75% of total domestic formulation sales. The company launched 11 new products during the quarter in this market.

  • As far as the US generics business is concerned, this quarter saw Taro turn into an indirect subsidiary of Sun Pharma. For the nine months Jan to September of this year, Taro recorded revenues of US$ 291 m. For the quarter, sales of Taro stood at US$ 103 m although revenues of only 10 days have been reflected in Sun Pharma's financials for the quarter. Caraco, meanwhile reported a growth of 25% YoY in sales. The company is in touch with the US FDA for remedial measures at its Detroit plant. This process is expected to be gradual and hence Caraco's revenue growth for the next 2 quarters is expected to slow down. During the quarter, 6 ANDAs were filed. 3 products received approvals. Further, Taro has a pipeline of 150 filings of which 123 ANDAs have been approved and the remaining 27 are pending approval. Thus, the cumulative ANDA filings between Sun Pharma, Caraco and Taro now stand at 363. Out of these, 217 have been approved and 146 products await US FDA approval. That said, the overall growth in the international formulations was flat due to the subdued performance of the Rest of the World (ROW) markets.

    Revenue break-up
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Domestic            
    Formulations      4,710       6,409 36.1%     7,839     12,393 58.1%
    Bulk          286          293 2.6%        565         629 11.3%
    Others            2             5 126.1%           6          10 55.7%
    Total (A)      4,999       6,707 34.2%     8,410     13,031 54.9%
    Exports          
    Formulations      5,929       5,960 0.5%    17,172     25,135 46.4%
    Bulk       1,159       1,218 5.1%     2,914      2,950 1.3%
    Others            9           28 218.4%          24          38 59.0%
    Total (B)      7,097       7,206 1.5%    20,110     28,123 39.8%
    Grand Total ((A)+(B))    12,095     13,913 15.0%   28,520    41,154 44.3%

  • Operating margins shrunk by 3.6% from 37.7% in 2QFY10 to 34.1% in 2QFY11 largely due to higher raw material costs (as a percentage of sales). Raw material costs increased from 24.1% of sales in 2QFY10 to 27.7% in 2QFY11. As a result, operating profits grew by a tepid 4% YoY. Having said that, the performance at the net profit level (up 11%) was much better primarily on account of lower tax expenses and depreciation charges.

What to expect?
At the current price of Rs 2,150, the stock is trading at a multiple of 19.1 times our estimated FY13 earnings. Going forward, India, the semi-regulated markets and the US will be the key growth drivers. Sales from the US should pick up in FY12 on the assumption that Caraco's issues with the US FDA 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. Also, the company's financials will also now reflect the acquisition of the Israeli based Taro. We are in the process of reviewing our estimates for Sun Pharma and will update our research report on the company soon.

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