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Sun Pharma: US witnesses robust growth - Views on News from Equitymaster
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Sun Pharma: US witnesses robust growth
Nov 14, 2013

Sun Pharma has announced its 2QFY14 results. The company has reported 58% YoY growth in sales and increase of 327.5% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by robust 58% YoY during the quarter led by growth in domestic and international formulations. US reports strong performance on the back of Prandin launch, contribution from Dusa and URL and robust growth from Taro.
  • Operating margins decline marginally by 0.3% to 43.8% for the quarter. This is due to increase in raw material costs.
  • Profit after tax grows by 327.5% YoY in 2QFY14 on account of the extraordinary expense in 2QFY13 (damages with respect to the drug Protonix). Excluding this one time impact, bottom line grows by 51% YoY.

Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 26,639 42,066 57.9% 53,473 77,093 44.2%
Expenditure 14,898 23,636 58.7% 29,301 43,151 47.3%
Operating profit (EBDITA) 11,741 18,430 57.0% 24,173 33,942 40.4%
EBDITA margin (%) 44.1% 43.8%   45.2% 44.0%  
Other income 1,693 1,050 -38.0% 1,421 1,798 26.6%
Interest (net) 283 117 -58.7% 495 336 -32.1%
Depreciation 829 1,005 21.2% 1,630 1,983 21.6%
Profit before tax 12,322 18,358 49.0% 23,468 33,421 42.4%
Exceptional (loss) (5,836) -   (5,836) (25,174)  
Minority Interest 1,161 1,975 70.1% 2,417 3,114 28.9%
Tax 2,139 2,760 29.0% 4,064 4,271 5.1%
Profit after tax/(loss) 3,186 13,623 327.5% 11,152 863 -92.3%
Net profit margin (%) 12.0% 32.4%   20.9% 1.1%  
No. of shares (m)         2,071.0  
Adj Diluted earnings per share (Rs)         21.2  
Price to earnings ratio (x)*         28.2  
*based on trailing 12 months earnings

What has driven performance in 2QFY14?
  • The revenues during the quarter were up by 5.6% YoY. This was due to improvement in market sales volumes and Government support to compensate for the loss on sales of sensitive petroleum products.

  • Topline grew by 58% YoY during the quarter led by growth in domestic and international formulations.

    Consolidated Business Snapshot
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    India 8,099 9,495 17.2% 13,975 17,981 28.7%
    US 13,301 25,880 94.6% 28,712 46,194 60.9%
    Row 3,726 4,924 32.2% 7,392 9,431 27.6%
    Total 25,125 40,298 60.4% 50,079 73,606 47.0%
    Bulk 1,758 2,117 20.4% 3,759 4,045 7.6%
    Others 125 (20)   143 14 -90.5%
    Total Revenues 27,008 42,395 57.0% 53,981 77,665 43.9%

  • Domestic business grew by 17.2% YoY for 2QFY14. Company registered healthy growth despite implementation of the new pricing policy, disruptions at trade channel and lower sales in Pioglitazone due to temporary withdrawal order. Company continues to maintain its leadership in various chronic therapies viz., psychiatrists, neurologists, cardiologists, ophthalmologists and so on.

  • During the quarter, the US business grew by a robust 94% YoY for the quarter. In constant currency terms, the growth was ~74% YoY. During the quarter, the company benefited from Prandin launch as we believe that it has garnered better market share in this drug as no authorized generic was launched. Sun's subsidiary Taro too, witnessed healthy growth. We believe Taro generated sales of US$ 170 m from US geography (Taro has generated sales of US$ 205 from the US and RoW markets). The acquired business of URL and Dusa also contributed to this robust performance (These businesses have been recently acquired and hence in 2QFY13, revenues from Dusa and URL were not there). Company continues to benefit from Doxil supply, as now Sun is the sole supplier for this drug after J&J discontinued the supply.

  • ROW markets grew by 32.2% YoY for the quarter. In constant currency terms, the growth was at ~17% YoY. Excluding Taro, the RoW sales for Sun grew by 16% YoY in dollar terms during the said period. We believe Taro contributed around US$ 44 m to Sun's RoW segment for the quarter.

  • Operating margins declined marginally by 0.3% to 43.8% for the quarter. This was due to increase in raw material costs. The acquisitions of DUSA and URL also led to an increase in overall costs and this too impacted margins.

  • Profit after tax grew by 327.5% YoY. However, this was on back of the extraordinary liability with respect to the drug Protonix liability paid during 2QFY13. Excluding this one-time impact, bottom line grew by 51% YoY.

    Key takeaways from the conference call

  • Revision in guidance: Company has revised its guidance from 20% YoY growth in sales to 25% YoY for FY14.

  • Lipodex: Lipodex is generically known as Doxorubicin HCl Liposomal injection. Post J&J's withdrawal, Sun Pharma is the only company supplying drug in the US market. Various generic companies have made filings for Lipodex generics.

  • Doryx: Doryx, a URL's product, has been witnessing better market share on back of shortages and thus the company had taken some price hikes in the past. Recently, Mylan entered the market and this might impact the company's sales.

  • US pipeline: Sun Pharma launched Depo Testosterone in the beginning of 3QFY14. This product too has market size of US$ 130 m and has low competition. Thus, impact of this launch will be seen in 3QFY14 quarter onwards. During the quarter, company filed 10 ANDAs and received approvals for 9 ANDAs. Till date, Sun Pharma + Taro have filed 463 ANDAs of which 333 are approved, and 130 are pending for approval. This includes 15 tentative approvals.

  • Taro's brands once again witness robust growth: This was because Taro was able to hike prices of some of its top selling brands. The company also witnessed increase in volumes.
What to expect?
At the current price of Rs 585, the stock is trading at a multiple of 19.1 times our estimated FY16 earnings. Sun Pharma has a strong chronic franchise which will help it grow in the domestic market. The company has been successful in the US by exploring various lucrative opportunities. Other than this, the company also has filed various ANDAs which focus on complex technology. Substantial number of these products are having niche opportunity. Over and above this, its subsidiaries too will help fuel growth going forward.

These factors will enable the company to enhance its presence in the highly competitive US market. We remain confident about company's ability to launch varied products having high entry barriers and derive growth from both the domestic and international markets. On the negative side, one should also note that favorable currency movement has helped company too. Thus going forward when the currency reverses, the company might face some pressures. Other than that, the company is enjoying higher market share in various drugs, and so entry of new players might have a negative impact on the company's revenues.

We have revised our estimates on the back of upward revision in guidance. We maintain HOLD rating on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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