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Sun Pharma: Domestic growth continues - Views on News from Equitymaster

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Sun Pharma: Domestic growth continues
Nov 24, 2011

Sun Pharma announced its second quarter results for 2012 (2QFY12). The company has reported 42.3% YoY and 18.7% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales increase by 42.3% YoY primarily due to full consolidation of Taro's financials.
  • Operating margins increase by 630 bps (6.3%) due to lower material costs. However this is not sustainable for a longer period.
  • Net profits grow by 18.7% YoY, lower than operating profit growth due to higher depreciation and huge increase in tax outgo.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
Net sales 13,314 18,946 42.3% 26,965 35,303 30.9%
Expenditure 8,644 11,106 28.5% 16,135 21,988 36.3%
Operating profit (EBIDTA) 4,670 7,840 67.9% 10,830 13,315 22.9%
EBDITA margin (%) 35.1% 41.4%   40.2% 37.7%  
Other income 556 765 37.7% 468 1,419 202.9%
Depreciation 352 668 89.8% 754 1,315 74.4%
Interest (368) (417) 13.4% (571) (733) 28.3%
Profit before tax 5,242 8,355 59.4% 11,116 14,151 27.3%
Tax 172 1,281 644.3% 269 1,424 429.1%
Exceptional Gain / (Loss) - -   - -  
Forex Gain / (Loss) - -   - -  
Minority Interest (34) (1,097)   (167) (1,740)  
Profit after tax/(loss) 5,037 5,977 18.7% 10,680 10,987 2.9%
Net profit margin (%) 38% 32%   40% 31%  
No. of shares (m) 207 1,036   207 1,036  
Diluted earnings per share (Rs)   5.8     10.6  
Price to earnings ratio (x)*   27        
* On a trailing 12 months basis

What has driven performance in 1QFY12?
  • Sun Pharma's sales increased by 42.3% YoY primarily due to full consolidation of Taro's financials as against 10 days of consolidation in 2QFY11. This is despite the fact that the company enjoyed a one-off sales opportunity from generic Eloxatin in 2QFY11, a product which is currently not being sold. Adjusting for Taro and Eloxatin one-off, the sales grew at a strong pace of 25% YoY. The domestic formulations sales (~37% of revenues) grew by 15% YoY and was impacted a bit by the discontinuation of the third party manufacturing business. However, adjusting for the same, the growth was around 18% YoY. Further, Sun Pharma is expected to continue growing faster than the industry due to its strong position in the key chronic therapies. 7 key products were launched during the quarter. Overall, the company is ranked no. 1 based on share of prescriptions with 6 classes of specialists: psychiatrists, neurologists, cardiologists, ophthalmologists, orthopedics and gastroenterologists. Revenues from the US formulations business (~41% of sales) increased by 77.1% YoY led by the consolidation of Taro. The non US export market (ROW Formulations) grew by 85% YoY to Rs 2.5 bn (~13% of total sales).

  • Operating margins increased by 630 bps (6.3%) to 41.4% due to lower material costs. The lower raw material cost was due to the higher value of the closing stock held in foreign countries due to exchange gains. However this is not sustainable for a longer period.

  • Net profits growth at 19% YoY nwas lower than operating profit growth due to higher depreciation and huge increase in tax outgo. The tax outgo increase by 644% YoY during the quarter. The management has given a tax rate guidance of around 10% for the consolidated entity for FY12.

    Revenue break-up
    (Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
    India Formulations 6,105 7,046 15.4% 11,812 13,431 13.7%
    US Formulations 4,511 7,991 77.1% 10,169 14,211 39.7%
    ROW Formulations 1,388 2,567 85.0% 2,463 5,089 106.6%
    Total Formulations 12,004 17,604 46.7% 24,445 32,730 33.9%
    Bulk 1,491 1,603 7.5% 2,909 3,079 5.9%
    Others 33 4 -87.3% 37 6 -84.6%
    Total Sales 13,527 19,211 42.0% 27,390 35,815 30.8%

  • The company's cumulative filing stands at 388 ANDAs with the US FDA, of which 238 have been approved. In this quarter, the company received 8 approvals and filed 5 new ANDAs.

What to expect?
At the current price of Rs 497, the stock is trading at a multiple of 18.4 times our estimated FY14 earnings.

Sun Pharma has a strong chronic franchise which will help it grow in the domestic market. In the US market, sales should pick up keeping in mind the fact that the number of drugs going off patent in next 2 to 3 years is quite large. Besides this, the consolidation of Taro and a healthy ANDA pipeline will also enable Sun Pharma to enhance its presence in the highly competitive US market.

With its strong cash levels, the company has also geared up for acquisitions in emerging markets like Brazil, Mexico, Russia and China. Last year, Sun Pharma announced the creation of a joint venture with Merck & Co. of the US to develop, manufacture and commercialize new drugs in the branded generics space. On a long term basis, this will help Sun Pharma augment its sales from the semi regulated markets which also enjoy higher margins. Having said that, the current valuations do not leave much on the table for investors.

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