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Sun Pharma (Q2 FY13)

India Infoline Research Team / 14:57 , Nov 15, 2012

CMP Rs697, Target Rs715, Upside 2.6%

  • Revenue growth of 40% yoy and flat qoq to Rs26.5bn was 6% better than our estimates

  • The growth was primarily led by better than expected growth in its US subsidiary, continued benefit from Doxil in US and higher realisation

  • Domestic market adjusting for higher sales last year grew by 19% yoy to Rs8.1bn

  • US Formulation clocked in strong revenue growth of 67% yoy to Rs15.3bn (largely led by Doxil sales); US$ revenue growth at 38% yoy

  • EBIDTA margin at 44%, 260 bps improvement yoy is again led largely by Taro performance, one-off and better realization of Rupee

  • In line with sales, Adjusted PAT accelerated by 51% to Rs9bn

  • Reported PAT was down 46% yoy on account of one-time provision of Rs5.9bn (~10% of Wyeth’s claim of US$960mn for Protonix)

  • The company announced the acquisition of DUSA Pharmaceuticals (listed at NASDAQ) for a cash consideration of US$230mn

  • We keep scope of revising our estimates after DUSA consolidation. However, at present we maintain our rating to MP on the back of limited upside led by stretched valuations

Result table
(Rs mn) Q2 FY13 Q2 FY12 % yoy Q1 FY13 % qoq
Operating Income 26,572 18,946 40.3 26,581 (0.0)
Inc/(dec) in stock (1,043) (1,163) (10.3) (852) 22.4
Consumption of Materials (4,872) (4,367) 11.6 (4,978) (2.1)
Purchase of Traded Goods (1,057) (435) 142.9 (897) 17.8
Employees' Cost (3,568) (2,727) 30.8 (3,512) 1.6
Other Expenditure (6,434) (4,740) 35.7 (5,878) 9.5
Operating profit 11,685 7,840 49.0 12,169 (4.0)
OPM (%) 44.0 41.38 259 bps 45.78 (180 )bps
Depreciation (829) (668) 24.2 (801) 3.4
Interest income (283) (56) 408.3 (212) 33.2
Other income 1,758 1,238 42.0 (19) (9,402.6)
PBT 12,332 8,355 47.6 11,136 10.7
Tax (2,139) (1,281) 67.0 (1,924) 11.2
Effective tax rate (%) 17.3 15.3 201 bps 17 7 bps
PAT 4,357 7,074 (38.4) 9,212 (52.7)
Min Interest & other Adj 1,161 1,097 5.8 1,256 (7.5)
Exceptional Item (5,836) - - - -
Reported PAT 3,196 5,977 (46.5) 7,956 (59.8)
Adj PAT 9,032 5,977 51.1 7,956 13.5
PAT margin (%) 34.0 31.55 244 bps 29.9 406 bps
Ann. EPS (Rs) 34.7 23.1 51.1 30.7 13.5
Source: Company, India Infoline Research

Revenue growth of 40% yoy and flat qoq at Rs26.5bn was 6% better than our estimates

Revenue growth of 40% yoy to Rs26.5bn was largely in line with our estimates. The 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. Adjusted Domestic growth moderated to 19% yoy (adjusted for pre-booked sales of last year). US revenue declined by ~US$40mn qoq, largely on account of moderation in Lipodox (generic doxil) sales in Q2FY13.  International formulation sale at US$68mn grew by 21% yoy (in $ terms).  Formulation sales in rest of the world markets outside of India and US grew by 21% yoy to US$ 68mn in Q2FY13.  In RoW, excluding US Taro sales, underlying sales growth in $ terms was 34% for the Q2 FY13 and 40% for H1FY13. API business which is largely for captive purpose, also, continues to grow.  External sales of API reached Rs1.8bn in Q2FY13 registering a growth of 10% yoy. 


Revenue Break-up
Rsmn. Q2FY13 Q2FY12 % yoy Q1FY13 % qoq
India Formulations 8,099 7,046 14.9 5,877 37.8
US Formulations 13,301 7,991 66.5 15,411 (13.7)
ROW Formulations 3,726 2,567 45.1 3,666 1.6
Export Formulation 17,027 10,558 61.3 19,077 (10.7)
Total Formulations 25,125 17,604 42.7 24,954 0.7
Bulk 1,758 1,603 9.6 2,020 (13.0)
Others 125 4 2,933.1 18 591.7
Total Sales 27,008 19,211 40.6 26,992 0.1

US Formulation clocked in strong revenue growth of 67% yoy to Rs15.3bn; US$ revenue growth at 38% yoy

The US Sales of finished dosage products recorded strong revenue growth of 67% yoy to Rs15.3bn. however at constant currency the growth was restricted at 38% yoy to US$24mn 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 was a onetime opportunity, however, now we believe the opportunity is almost over as J&J (the innovator) indicated resuming the supply. We expect core growth momentum in US will continue with new niche product launches and gaining market share in existing products.  


EBIDTA margin at 44% is again largely driven by Taro performance, business mix, one-offs and better realization of Rupee

Sun Pharma recorded an OPM of 44% was largely in with our expectation driven by Taro performance, business mix, one-offs and better realization of Rupee. The yoy improvement in margin by 256bps is on account of benefits of operating leverage and cost rationalization along with better business mix at Taro forex gain and 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 and forex impact is also 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.

In line with sales, Adjusted PAT accelerated by 51% to Rs9bn; Reported PAT was down 46% yoy on account of one-time provision of Rs5.9bn (~10% of Wyeth’s claim of US$960mn) for Protonix generic.


Cost analysis
As a % of net sales Q2FY13 Q2FY12 bps yoy Q1FY13 bps qoq
Raw material 14.4 16.9 (250) 15.5 (111)
Purchases 4.0 2.3 168 3.4 60
Personnel Costs 13.4 14.4 (97) 13.2 21
Other Expenditure 24.2 25.0 (80) 22.1 210
Total costs 56.0 58.6 (259) 54.2 180

The company announced the acquisition of DUSA Pharmaceuticals (listed at NASDAQ) for a cash  consideration of US$230mn

Sun Pharma has announced the acquisition of DUSA Pharmaceuticals (listed at NASDAQ) for a cash consideration of US$230mn. DUSA is focused on the US dermatology segment with one marketed product viz. Levulan. Sun Pharma will commence a tender offer for all the outstanding shares of DUSA at US$8/share. The offer price is at a 38% premium to the last closing price. On completion of the tender offer, Sun will acquire the remaining shares through a merger. We believe the valuations that the company is paying for the DUSA is at higher side, but we believe, its right step to materialize the strategy of becoming leader in derma space.


Key take-away from the conference call

  • Guidance for ~18-20% revenue growth on constant currency basis (Rs exchange rate of 51/$) is revised to +30% growth for FY13

  • Capital expenditure to be around Rs5bn on both at existing sites and at new sites.

  • During the quarter, Caraco resumed manufacturing at its facilities in Michigan after the USFDA determined Caraco to be in compliance with relevant paragraphs of the Consent Decree.

  • Tax rates will be higher than current rate but less than 20%.

  • Sun Pharma expect to make 25 ANDA filings in FY13

  • Sun Pharma’s tender offer is at US$8/share, or US$230mn, to acquire 28.8mn outstanding shares of Dusa Pharmaceuticals

  • Dusa has no direct synergy with Taro’s business.

  • As on date the company has ~136 ANDA pending for approval

Outlook & Valuation


We maintain MP rating with a 9-month target price of Rs715

We expect 24%/14.3% 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 and DUSA 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 keep scope of revising our estimates after DUSA consolidation. However, at present we maintain our rating to MP with a 9-month target price of Rs715 on the back of limited upside led by stretched valuations.

 
Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 57,214 80,054 101,236 123,150
yoy growth (%) 50.2 39.9 26.5 21.6
Operating profit 19,700 32,645 43,592 49,316
OPM (%) 34.4 40.8 43.1 40.0
Pre-exceptional PAT 18,161 25,870 29,650 33,826
Reported PAT 18,161 25,870 29,650 33,826
yoy growth (%) 34.4 42.4 14.6 14.1
         
EPS (Rs) 17.5 25.0 28.6 32.7
P/E (x) 39.7 27.9 24.3 21.3
Price/Book (x) 7.6 5.9 5.0 4.3
EV/EBITDA (x) 35.7 21.0 15.5 13.2
Debt/Equity (x) 0.0 0.0 0.0 0.0
RoE (%) 21.0 23.9 22.3 21.6
RoCE (%) 25.5 31.9 34.4 32.5
Source: Company, India Infoline Research