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Sun Pharma |
Fairly Valued; Maintain Hold |
HOLD
CMP: Rs2,318 Target Price: Rs2,300
n Sun Pharma’s higher than expected Q2FY11 performance is driven by residual revenue booking of Eloxatin, Taro’s consolidation and robust domestic formulation growth
n APAT at Rs5bn was higher than our est. of Rs3.1bn driven by a) 26% growth in revenue to Rs13.7bn (est. of Rs10.7bn) & b) 33% growth in EBIDTA to Rs4.7bn (est. of Rs3bn)
n Management’s revenue guidance revision from 20% to 35% on Taro’s consolidation looks conservative
n Caraco’s recovery will be gradual
n Raise estimates to incorporate Taro; upgrade TP to Rs2,300; maintain Hold
Revenue growth of 26% ahead of our expectations
Sun Pharma has registered impressive growth in Q2FY11 on account of a) 36%
increase in domestic formulations, b) 25% increase in Caraco revenues to US$98mn,
and c) inclusion of Taro financials (effective 10 days). Higher growth in the domestic
formulation business was on account of low base last year due to one-time adjustment
(adjusting to this, the growth was 29%) and continued momentum in the key segments.
In the US, revenues were up 25% mostly driven by spill-over effect of generic Eloxatin
from the previous quarter and good ramp-up in Effexor XR tablets and generic Exelon
as well as consolidation of Taro’s revenue which contributed ~ US$10mn. However,
growth in the emerging markets (ex India) was surprisingly subdued at 5% YoY- the
management indicated that this was a quarterly aberration and should recover over the
full year.
EBITDA margins expands 185bps to 34%; APAT at Rs5bn up 11% YoY
EBITDA for the quarter was up 33% to Rs4.7bn (adjusting to one time settlement income of
US$20mn received in Q2FY10) on account of higher contribution from high margin
domestic formulation business. In spite of 23% increase in R&D cost, lower contribution of
one-off products and consolidation of low margin Taro financial (Taro’s EBIT margin is 23%
as against Sun’s 31% for Q2FY11E), operating margins for the quarter expanded by
185bps to 34.1%. We believe that Sun pharma’s base business margins are in the range of
31-32% which will improve further as the company is going to monetize some limited
competition opportunities such as Taxotere and Gemzar going forward.
Given the higher base because of US$20mn settlement income and higher
contribution of one –off Pantaprazole, 11% growth in APAT is impressive, aided by
lower tax rate and depreciation. The EPS for Q2FY11 and 1HFY11 is Rs24.3 and
Rs51.6, respectively.
Revised guidance on Taro’s consolidation looks conservative
Management has raised FY11E revenue guidance from 20% to 35%, mainly on account of
Taro consolidation. The increase in revenue guidance is ~US$135mn. Looking at Taro’s 1H
CY10 performance, we believe these numbers are highly conservative. Moreover, Eloxatin
revenue in 1HFY11 has already made up for the loss from Pantaprazole revenue
(~US$130mn).
Caraco’s recovery will be gradual
Caraco in its recent press release has indicated that it has made significant progress
towards certifications and approvals of outside consultants and US FDA for its first set of
two generics and expects to start manufacturing by end FY11E. A second set of 2-3
products is planned for manufacturing in Q3FY12E. By the end of FY12E, Caraco expects
to manufacture and distribute 4-5 products generating insignificant sales volumes. Caraco
management believes that it will take significant time before it reaches its previous level of
manufacturing in its Detroit facility. We have build up gradual recovery in Caraco’s
manufacturing operations (US$316mn and US$309mn revenue in FY11E and FY12E
respectively).
Taxotere opportunity will add US$92mn and US$ 69mn to revenues in
FY12/FY13E respectively
With favorable district court verdict (subject to higher court appeal), we believe that Sun
should be able to monetize this opportunity way ahead of market expectation. Though Sun
has yet to get final approval from the FDA and appeal court decision is still 12-15 months
away, but in view of the strength of the District court ruling, we believe that Sun may launch
the product post the launch of Hospira (Nov’10) and AG. We expect Sun to launch this
product by May 2011. Apotex and Sandoz are other two players who can enter in the
market in the next two years. Therefore we believe that Taxotere could be a multiyear
opportunity (at least till Nov’2013), given the limited competitive landscape (3-4 generic
players). However, we have build up relatively lower market share for Sun, as its lyophilized
form may struggle to gain traction compared to Hospira’s and Sanofi’s single vial products.
We have estimated US$92mn and US$69mn revenue in FY12E/FY13E respectively.
Raise earning estimates by 21% and 23% for FY11E/FY12E
We raise our FY11/12E earning estimates by 21% and 23% and introduced estimates for
FY13E. We have revised our revenue estimates by 19.5% and 23.6% for FY11/FY12E
respectively on the back of a) incorporating Taro’s numbers in our consolidated financials
and b) factoring upside from generic launch of Taxotere and Gemzar. We expect revenue
and earnings CAGR of 19% and 21% (higher base effect because of Pantaprazole sale)
respectively over FY10-13E. Our EPS for FY11/12 and 13E works out to be Rs86.3,
Rs103.2 and Rs108.8 respectively.
Raise Target price to Rs2300; maintain Hold
We value Sun pharma’s base business at 22x FY12E and arrived at a fair value of Rs2270.
We have assigned 10% premium to sector average for Sun Pharma on account of a) Strong
franchises in domestic markets especially in chronic segment, b) niche and strong portfolio
in the US market, c) best in class operating margins and d) strong balance sheet with
US$700mn cash in hand. The NPV of Para IV pipeline is Rs30 per share. Our revised
target price works out to Rs2300 (earlier Rs1866). Though we are positive on long term
growth prospects of the company, however, owing to limited upside opportunity, we
maintain our Hold rating on the stock.
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