Sun Pharmaceutical: Good 2Q, but overhang remains :: RBS

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Sun Pharmaceutical
Good 2Q, but overhang remains
2Q revenue growth surprised us, but margin pressure was on expected lines. We
upgrade our forecasts significantly (by 20-40%), due largely to Taro, and raise our
target price to Rs1,900 (from Rs1,500). Sell due to expensive valuations, the
overhang of the US FDA issues and the credibility of Taro's financial health.

Revenue performance surprises, but margin pressure remains, as expected
Sun Pharma reported 16% yoy 2Q revenue growth to Rs13.7bn due to unexpected revenue
contribution from gEloxatin in the US and robust domestic formulation growth (27% on an
adjusted basis). Sun reported EBITDA of Rs4.7bn (down 3% yoy), with margins contracting
672bp yoy to 34.1%. We believe core EBITDA margins contracted 709bp to 30.4% due to
withdrawal of gProtonix and continuous expenses related to the US FDA’s resolution at
Caraco. While reported PAT was Rs5.0bn (up 11% yoy), core PAT grew 4% yoy (our view).
We raise our estimates to factor in Taro and robust domestic formulation momentum...
We highlight that management has revised its FY11 revenue growth guidance from 18-20%
to 35%. We raise our FY11-12 forecasts by 20-40%, implying optimistic FY11F revenue
growth of 57% (followed by 21% growth for FY12F). Our revised forecasts imply FY10-12F
revenue CAGR of 26% for domestic formulations (despite a high base), 13% for Caraco
(despite the suspension of gProtonix and gEloxatin, and Caraco’s US FDA issues), and
modest growth on Taro’s provisional estimates (despite credibility issues on financials).
… but despite optimistic assumptions, stock appears expensive; maintain Sell
We roll forward our PE-based valuation to FY12, valuing Sun’s core business at Rs1,745/sh
(21.9x FY12F, at par with the sector), while incorporating the value of Taxotere to raise the
value of one-offs from Rs30 to Rs66/share. Incorporating Taro’s value at Rs89/share (based
on an FY12F PE of 10x, at par with US generics) raises our SOTP-based target price to
Rs1,900. Despite our optimistic forecasts, our revised target price yields potential downside
of 13%. We are enthused by the strong growth in the domestic formulation business and
robust ANDA pipeline, but overhang remains on Caraco and Taro. Potential litigation
damages on generic Protonix is another concern. We believe that until reasonable clarity
emerges on the credibility of Taro’s financial health, the stock does not warrant the current
premium valuations. Sell.