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Sun Pharma: Dom biz and Taro witness healthy growth - Views on News from Equitymaster
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  • Nov 19, 2014 - Sun Pharma: Dom biz and Taro witness healthy growth

Sun Pharma: Dom biz and Taro witness healthy growth
Nov 19, 2014

Sun Pharma has announced its 2QFY15 results. The company has reported 13.3% YoY growth in sales with 15.4% growth in the net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by robust 13.3% YoY during the quarter led by growth in domestic formulations and its Taro subsidiary.
  • The operating margins improve by 1.9% to 45.7% during the quarter.
  • The bottomline is up by 15.4% YoY. While there is a sharp run up in interest and depreciation costs, lower taxes nullify this impact to a certain extent.

(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 41,921 47,505 13.3% 76,742 86,774 13.1%
Other operating income 145 190 30.4% 351 277  
Expenditure 23,636 25,894 9.6% 43,152 47,924 11.1%
Operating profit (EBDITA) 18,430 21,801 18.3% 33,941 39,127 15.3%
EBDITA margin (%) 43.8% 45.7%   44.0% 44.9%  
Other income 1,050 527   1,799 1,450 -19.4%
Interest (net) 117 245 109.6% 336 310 -7.7%
Depreciation 1,005 1,672 66.4% 1,983 2,951 48.8%
Profit before tax 18,358 20,411 11.2% 33,421 37,316 11.7%
Exceptional (loss) -   -      (25,174) -    
Minority Interest 1,975 2,745 39.0% 3,114 3,625  
Tax 2,760 1,942 -29.6% 4,271 4,061 -4.9%
Profit after tax/(loss) 13,623 15,723 15.4% 863 29,630 3335.4%
Net profit margin (%) 32.5% 33.1%   1.1% 34.1%  
No. of shares (m)         2,071.0  
Adj Diluted earnings per share (Rs)         29.1  
Price to earnings ratio (x)*         30.9  
*based on trailing 12 months earnings

What has driven performance in 2QFY15?
  • Topline (including other operating income) grows by 13.4% YoY during the quarter led by growth in its domestic business.

    Consolidated Business Snapshot
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Formulations
    India 9,495 11,517 21.3% 17,981  21,441 19.2%
    US 25,880 29,118 12.5% 46,194  52,352 13.3%
    Row 4,924 5,362 8.9% 9,431  10,275 8.9%
    Total 40,298 45,997 14.1% 73,606 84,068 14.2%
    Bulk 2,117 2,101 -0.7% 4,045 3,845 -4.9%
    Others (20) 62   14 95 596.3%
    Total Revenues 42,395 48,160 13.6% 77,665 88,008 13.3%

  • The domestic business was up by 21.3% YoY, on back of good growth in its key therapies. The company launched six new products during the quarter. The US segment, grew by 15% YoY (in constant dollar terms). This was largely attributable to robust performance in its Taro subsidiary. Doxycycline, has witnessed some pressure and the sales of from this drug have declined to some extent. Another development that took place is, that the company has entered into an exclusive worldwide in-licensing agreement with Merck for US$ 80 m. Sun Pharma expects to spend approximately US$ 250 m over the next five years on the R&D of this drug. The said drug is an antibody candidate, tildrakizumab, (MK-3222), which is currently being evaluated in Phase 3 registration trials for the treatment of chronic plaque psoriasis, a skin ailment.

  • The operating margins improved by 1.9% to 45.7% during the quarter. The operating expenses were high during the quarter because of expenses related to compliance, transaction and integration costs related to Ranbaxy. Despite this, Sun Pharma was still able to witness better margins.

  • The bottomline was up by 15.4% YoY. While there was a sharp run up in interest and depreciation costs, lower taxes nullified this impact to a certain extent. The interest and depreciation costs were up by 109% YoY and 66% YoY respectively.
What to expect?
At the current price of Rs 886, the stock is trading at a multiple of 20.3 times our estimated FY17 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.

Sun Pharma had proposed acquisition of Ranbaxy in April 2014. This deal is awaiting approval from various authorities. Sun Pharma has been among the few successful companies to bring about a turnaround in the acquisitions it makes. But it will be interesting to see how the company is able to improve Ranbaxy's fortunes given the numerous issues that the latter has with the US FDA. We continue to remain confident about Sun Pharma'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 note that favorable currency movement has helped the company too. Thus going forward when the currency reverses, the company might face some pressure. Other than that, while the company is enjoying higher market share in various drugs, entry of new players might have a negative impact on the company's revenues. While we believe that Sun Pharma is among the strongest pharma players, current valuations do not leave room for buying the stock. Hence we reiterate 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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