CMP Rs800, Target Rs815, Upside 1.9%
 
-  Sun Pharma revenues posted 12.4% yoy growth, marginally below estimate; domestic branded sales rise 16.8% yoy
-  US sales rise 7% yoy in constant currency even as Taro revenues decline 15% yoy mainly due to price protection charge
-  EBIDTA margin remain broadly stable yoy while PAT grew at 12% yoy adjusted for Protonix settlement provision in Q1 of last year
-  Healthy traction in domestic business, synergies with Ranbaxy upon merger and back ended launches in US to drive growth even as valuation at 23.5x FY16 PE leave little room for upside; accumulate with target of Rs815

Result table

(Rs m)	Q1 FY15	Q4 FY14	% qoq	Q1 FY14	% yoy
Net sales	39,356	40,586	(3.0)	35,027	12.4
RM+inventory changes	(5,713)	(5,127)	11.4	(4,042)	41.3
Purch of stock in trade	(1,936)	(1,585)	22.1	(1,212)	59.8
Staff expense	(5,674)	(5,244)	8.2	(5,034)	12.7
Other expenses	(8,707)	(10,625)	(18.1)	(9,228)	(5.6)
Operating profit	17,326	18,006	(3.8)	15,512	11.7
OPM (%)	44.0	44.4	(34) bps	44.3	(26) bps
Depreciation	(1,280)	(1,061)	20.7	(978)	30.9
Interest	(66)	(39)	68.3	(219)	(69.9)
Other income	924	1,938	(52.3)	748	23.5
PBT	16,904	18,844	(10.3)	15,063	12.2
Tax	(2,119)	(1,199)	76.7	(1,511)	40.3
Effective tax rate (%)	12.5	6.4	617 bps	10.0	251 bps
Minority Interest	(880)	(1,774)	(50.4)	(1,139)	(22.8)
Adjusted PAT	13,905	15,871	(12.4)	12,413	12.0
Adj. PAT margin (%)	35.3	39.1	(377) bps	35.4	(11) bps
Extra ordinary items	-	-	-	(25,174)	-
Reported PAT	13,905	15,871	(12.4)	(12,761)	-

Source: Company, India Infoline Research
 
Sun Q1: marginal revenue miss but PAT beats forecast
Sun Pharma Q1 revenues at Rs39.4bn rose 12.4% yoy (-3% qoq) and marginally below our estimate of Rs40.5bn; overall growth also benefited from YoY INR depreciation as international revenues account for ~75% of total sales.
US formulations: US revenues increased 7% yoy to US$389mn, accounting for 58% of revenue pie. Taro recently reported a decline in sales (-15% yoy to US$130mn) and PAT (-22% yoy to US$46mn) mainly due to a price protection charge taken during the quarter.
India branded generics: India branded formulations increased 17% yoy, beating industry run rate which stood at 8% yoy. Sun launched 7 products in the domestic market during the quarter and is no 2 player with 5.4% market share in the Rs770bn pharma market.     
Ex-US formulations: International formulation sales ex-US grew at ~2% yoy in US$ terms to US$82mn. Excluding Taro’s non-US sales, underlying US$ growth was 4% in Q1.

Revenue mix

Revenues (Rs mn)	Q1 FY15	Q1 FY14	% yoy
India Branded generics	9,920	8,490	16.8
APIs	1,740	1,930	(9.8)
US formulations (US$ mn)	389	364	6.9
ROW (US$ mn)	82	81	1.2

Source: Company, India Infoline Research
 
APIs and R&D: Significant increase in usage of APIs for captive consumption led to 10% yoy decline in external sales of APIs. The company has made 259 DMF/CEP applications with 176 approved so far. Consolidated R&D expense stood at 6.6% of sales, up 60bps yoy. Company awaits approval for 140 product filings from US FDA including 12 tentative approvals. Total patent applications stood at 575 with 349 patents granted till date.
 
EBIDTA margin at 44% broadly in line and marginally down by 26bps yoy due to higher adjusted RM costs and purchases though offset by lower other expenses which had an element of onetime costs in Q1 of last year. PAT adjusted for the onetime settlement provision of Protonix of Rs25.2bn in Q1 FY14, increased 12% yoy and beat our estimate of +10.3% yoy. Capex during the quarter stood at Rs0.8-1bn and company retained its overall FY15 guidance given in Q4 earnings call for 13-15% topline growth, R&D spend at 6-8% of revenues, 25 ANDA filings targeted in US and capex of Rs9bn.         
 
Conference call highlights
Key takeaways from Q1 conference call: 1) Continue to enjoy low competition in certain generics in US. US revenues included certain onetime sales which may not recur every quarter. US$ at higher rate yoy while constant currency US sales increased 7% yoy despite 15% yoy sales decline at Taro. 2) Temporary supply issues such as availability of RM, packaging issues etc in non US markets which resulted in lower growth and company expects ROW growth to pick up as issues are resolved. 3) India business: company continues to build product portfolio and expects financial impact of NLEM pricing order to be not very high. 4) Other expenses has some items not recurring while Q1 and Q4 of last year had some time onetime expenses hence Q1 FY15 number being more indicative of trend ahead. 5) Reiterate US$250mn synergy on revenue and cost post merger of Ranbaxy and so far company has received approval from domestic stock exchanges and anti-competition authorities from all markets except in India and US.
 
Financial summary

Y/e 31 Mar (Rs m)	FY13	FY14	FY15E	FY16E
Revenues	112,999	160,804	182,609	209,196
yoy growth (%)	36.1	42.3	13.6	14.6
Operating profit	49,673	71,901	81,809	93,929
OPM (%)	44.0	44.7	44.8	44.9
Reported PAT	29,831	31,415	61,179	70,568
yoy growth (%)	42.2	5.3	94.7	15.3
EPS (Rs)	14.4	15.2	29.5	34.1
P/E (x)	55.5	52.7	27.1	23.5
P/BV (x)	2.8	4.5	3.4	2.7
EV/EBITDA (x)	7.6	10.8	9.2	7.5
Debt/Equity (x)	0.0	0.1	0.1	0.1
ROE (%)	19.9	17.0	25.2	22.8
ROCE (%)	32.5	34.0	30.3	27.8

Source: Company, India Infoline Research