Sun Pharma (Q1 FY13)

• Revenue growth of 62% yoy and 14% qoq at Rs26.5bn; higher than our expectations (constant currency growth of 34% is largely in line with estimates)

• Higher than expected growth was primarily led by better than expected growth in its US subsidiary, one-off like cancer drug Doxil in US and higher $ realisation

• Domestic market adjusting for one-off of last year grew by 20% yoy to Rs5.9bn

• US Formulation clocked in strong revenue growth of 147% yoy and 52.5% qoq to Rs15.4bn (105% yoy growth in constant currency basis)

• EBIDTA margin at 45.8% is far above our expectation which is largely driven by Taro performance, business mix and better realization of Rupee

• In line with sales, PAT accelerated by 63% largely on account of improved margin

• We revise our rating to MP from Buy on the back of limited upside and revise our 9-month target price to Rs715.

Result table

Sun Pharma reported revenue growth of 62% yoy and 14% qoq at Rs26.5bn; higher than our expectations (constant currency growth of 34% is largely in line with estimates)

Sun Pharma reported 62% growth in sales to Rs26.5bn in Q1 FY13, is far ahead of our expectation. Higher than expected growth in revenues is primarily led by higher than expected growth in its US subsidiary (Taro), one-off like cancer drug Doxil in US and forex impact. At constant dollars the growth is at 34% yoy, which is largely in line with our estimates.

Domestic market adjusting for one-off in last year grew by 20% yoy to Rs5.9bn

The company reported de-growth of 8% to Rs5.9bn in domestic sales in Q1 FY13. Excluding the impact of the nonrecurring sales, growth in the core business was 20% yoy. Sun has maintained its legacy in domestic market by growing well above ~16% growth in overall domestic pharmaceutical market.

US Formulation clocked in strong revenue growth of 147% yoy and 52.5% qoq to Rs15.4bn (105% yoy growth in constant currency basis

The US Sales of finished dosage products recorded strong revenue growth of 147% yoy to Rs15.4bn. Sales in the US is US$285mn, up by 105% where sales of Caraco increased by 185% yoy and Taro posted revenue growth of 43% yoy to US$159mn.

The growth was led by better than expected growth in its US subsidiary, Taro and one-offs like cancer drug Doxil. In response to the critical shortage of the cancer drug Doxil, doxorubicin hydrochloride liposome injection, USFDA took proactive steps needed to increase available supply for patients in the US. US FDA allowed Sun Pharma to sell the product (sourcing type of arrangement). It’s a onetime but the effect was there in last and even this quarter as well. The company is not sure till what time it would be selling the product under this agreement. We expect core growth momentum in US will continue with new niche product launches and gaining market share in existing products. Positive trigger would be US FDA clearance of its Caraco facility in Detroit where remediation efforts are still ongoing.

EBIDTA margin at 45.8% is far above our expectation which is largely driven by Taro performance, business mix, one-offs and better realization of Rupee

Sun Pharma recorded an OPM of 45.8% is far above our expectation which is largely driven by Taro performance, business mix, one-offs and better realization of Rupee. The yoy improvement in margin by 1231bps is on account of benefits of operating leverage and cost rationalization along with better business mix at Taro forex gain and few one-offs. Taro continue to indicate that the growth may not be sustainable as the higher growth is driven by identifying niche opportunity and some part of growth is attributable to price hike in the products; so with the competition creeping in the growth might not be sustainable. But, even with this comments, Taro continues to surprise. And the one-offs like cancer drug Doxil in US, forex impact, higher other operating income is not sustainable and hence we expect margin to decline in next quarter. But, with the aid of niche launches and higher operating leverage creeping in, we believe improvement in margins is inevitable.

Key take-away from the conference call

• Guidance for ~18-20% revenue growth on constant currency basis (Rs exchange rate of 51/$) is maintained
• Capital expenditure to be around Rs5bn on both at existing sites and at new sites.
• Tax rates to be higher than current rate but less than 20%.
• Sun Pharma expect to make 25 ANDA filings in FY13
• Organic growth is on track and company is open for inorganic growth in US or other big emerging market

We maintain Buy rating with a revised 9-month target price of Rs646

• We expect 22.7%/17.2% CAGR in revenue and PAT respectively over FY12-14E. We continue to remain positive on Sun Pharma over the long term on account of it’s strong footing in domestic market along with its potential to grow in international businesses. We believe with Taro integration Sun Pharma is geared up to show strong performance in the US. The other non-US international business, ROW is also expected to witness strong higher double digit growth. We revise our rating to MP from Buy with a 9-month revised target price of Rs715 on the back of limited upside.