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Sun Pharma: Caraco effect visible

Nov 4, 2004

Performance Summary
Sun Pharmaceutical declared its 2QFY05 results recently. The topline of the company grew by 10% while the growth in bottomline was 29% on a YoY basis. The improvement in bottomline was mainly due to a huge 490 basis points improvement in its operating profit margin in 2QFY05, on the back of savings made in raw material costs and other expenditure.

(Rs m) 2QFY04 2QFY04 % Change 2QFY04 2QFY04 % Change
Net sales 2,833 3,122 10.2% 5,273 6315 19.8%
Total Expenditure 1,915 1,955 2.1% 3,524 4,129 17.2%
Opearting profit 919 1,167 27.0% 1,749 2,185.2 24.9%
Operating Profit margin(%) 32.4% 37.4%   33.2% 34.6%  
Other Income 48 24 -49.0% 91 68 -25.4%
Interest 18 5 -73.9% 38 11 -71.1%
Depreciation 63 86 38.1% 127 166 30.8%
Profit before tax 887 1,101 24.1% 1,674 2,076 24.0%
Tax 57 31 -46.8% 104 68 -34.3%
Profit after tax 829 1,070 29.0% 1,571 2,007.5 27.8%
Profit after tax margin (%) 29.3% 34.3%   29.8% 31.8%  
Minority interest 127 39 -69.6% 231 92 -60.1%
Net profit 702 1031 46.9% 1,339 1,915 43.0%
No. of shares 186 186   186 186  
Earning per share* 15 22   14 21  
P/E ratio         22.4  

Company's background
Sun Pharma is a leading domestic pharma company with a strong presence in the lifestyle therapeutic segment. However, it started focusing in the exports market and in FY02 it acquired Caraco Pharma in the US. Further, it increased its stake in Caraco pharma in FY04 to 61% taking over majority control. With the help of its US subsidiary, the company has been able to grow its US business, which brings in synergies with Sun's business by backward integration in both manufacturing and R&D.

What has driven performance in 2QFY05?
Sales: Sun Pharma’s topline growth was fuelled by a strong performance in its formulations business, which recorded a 15% growth during 2QFY05. In the first half of FY05 the sales growth was 21% in formulations exports, which basically grew due to strong growth shown by Sun pharma's US based subsidiary Caraco Pharma. Caraco Pharma has shown a growth of 50% in the topline in the September quarter. However, revenues from the bulk drugs segment have slipped marginally due to the company's focus on formulations business. Sun Pharma’s core therapeutic segments of psychiatry, neurology, cardiology, diabetology, and gastroenterology, which make up for 70% of the domestic formulations sales, grew by about 12% as a whole during the quarter.

Sales Break-up
(Rs m) 2QFY04 2QFY05 %Change 1HFY03 1HFY04 %Change
Formulations 1,563 1,725 10.4% 2,854 3,504 22.8%
Bulk 297 290 -2.4% 554 551 -0.5%
Others - 19 - - 30 -
Total (A) 1,860 2,034 9.3% 3,408 4,085 19.9%
Formulations 743 862 16.0% 1,392 1,687 21.2%
Bulk 230 226 -1.5% 473 543 14.9%
Total (B) 973 1,088 11.8% 1,865 2,230 19.6%
Grand Total ((A)+(B)) 2,833 3,122 10.2% 5,273 6,315 19.8%

Operating margin: The operating margin of the company expanded by 490 basis points basically due to increased contribution from the exports business. With the company transferring Caraco pharma's manufacturing activities to the Indian plants, the company has been able to expand margins further. Despite a huge surge in R&D expenditure (8.2% of sales in 2QFY05), company managed to increase its operating profit due the savings in raw material costs and other expenditures.

Net Profit: The profit after tax has risen by 29% and the net profit margin expanded by 500 basis points. The major contribution to this expansion comes from improvement in its operating performance, however, lower tax charges due to increasing contribution from exports has also helped the cause.

What to expect?
At 462 the stock is trading at a P/E ratio of 22.4 times its annaulised 1HFY05 earnings. With its US subsidiary now turning profitable, the company is in a position to leverage its cost advantage in manufacturing and R&D by launching new drugs through Caraco Pharma in the US markets. Also, being a dominant player in the lifestyle segment in the domestic market, the company might see a good growth rate going forward as these segment are amongst the fastest growing therapeutic segments in the domestic market.

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