Sun Pharma – 2QFY2011 Result Update Angel Broking

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  Sun Pharma – 2QFY2011 Result Update

Angel Broking maintains a Neutral on Sun Pharma.

Sun Pharma reported stellar 2QFY2011 results driven by one-off sales of the

generic version of Eloxatin, as the last 4-5 days of 1QFY2011 product sales were

booked during the quarter. Excluding the one-off, recurring sales numbers were

in line with estimates. For FY2011 post completion of Taro acquisition, the

company has revised upwards its revenue growth guidance to 35% from earlier

20%. We maintain our Neutral view on the stock owing to fair valuations.

Results driven by one-off: Sun reported net sales of `1,370cr (`1,185cr), up

15.6% yoy mainly driven by one-time sales of generic version of Eloxatin. Caraco

reported net sales of US $98mn (US $78mn), up 24.7% primarily driven by

generic version of Eloxatin. Further, the company also witnessed traction in

Effexor XR and Exelon generic product launches during the quarter. Taro is

expected to have contributed US $10mn during the quarter post completion of its

acquisition. Adjusting for the low base, domestic formulation sales grew a strong

27% yoy, which was marginally higher than our estimate. For the quarter, the

company clocked OPM of 34.1% (37.7%) driven by sales of the high-margin

generic version of Eloxatin. We expect margins of the base business to be in the

range of 30-31% excluding Eloxatin.

Outlook and Valuation: Post completion of the Taro acquisition, we expect Sun

Pharma’s net sales to post a 33.7% CAGR to `7,336cr and EPS to register 27.4%

CAGR to `105.9 over FY2010–12. We remain Neutral on the stock.

Concall takeaways

􀂄 Post completion of the Taro acquisition, Sun has revised upwards its top-line

growth guidance for FY2011 to 35% from 20% earlier.

􀂄 Sun expects to register RoCE in the range of 20-25% for Taro investments and

expects a pay back period of 4-5years.

􀂄 The company intends to apply the favourable District court verdict in the

generic Taxotere case to its own filing, but is not sure of the time-line.

􀂄 On the FDA issues with Caraco, the company expects slow ramp up by end of

FY2011 with commencement of manufacturing of two products.

􀂄 The company expects its tax rate to go up post the DTC implementation.

Recommendation rationale

Strongest ANDA pipeline: Sun Pharma’s US business posted 33% CAGR over

FY2005–10, which contributed 30% to its total turnover in FY2010. Sun Pharma,

along with Caraco and Taro, now has 146 ANDAs pending US FDA approval,

which is one of the highest in the Indian pharma space. The company has

indicated that it would file 30 ANDAs in FY2011 as well. Some of its key products

with limited competition include the generic versions of Stalevo, Gabitril, Exelon,

Strattera and Gleevec. On the Caraco front, management is confident of

resolution of the US FDA issue in FY2011.

Domestic business: Over FY2005–10, the company’s domestic formulation

business registered 24% CAGR, above the industry average, and contributed 45%

to the total turnover in FY2010. The company has strength of 2,600MRs and one

of the highest field force productivity of around of ` 70lakh/MR per year, which

has resulted into high margins from the segment. The company has a market

share of around 3.7%, with exposure to the psychiatry, neurology, CVS, diabetic

and gastroenterology segments. In FY2010, the company launched 49 products in

the domestic market. Going forward, the segment would continue to outpace the

industry growth driven by strong product portfolio.

Healthy balance sheet: Sun has one of the strongest balance sheets in the sector,

with cash of around `4,000cr (~10% of Mcap). Management has indicated that it

is looking at inorganic growth and scouting for acquisitions, especially in the US.

Outlook and Valuation

Sun is one of the largest and fastest growing Indian pharmaceutical companies.

Management has guided for a stellar 35% top-line growth for FY2011, with OPM

in the historic range. Further, management expects R&D expenses to be in the

range of 7–8% of net sales and capex at `200cr for FY2011. Post completion of

the Taro acquisition, we expect Sun Pharma’s net sales to post a 33.7% CAGR to

`7,336cr and EPS to register 27.4% CAGR to `105.9 over FY2010–12.