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Sun Pharmaceutical Ind Limited
Holds further promise ...
Investment rationale
Sun Pharmaceutical Industries Limited (Sun Pharma) is a leading player in the
Indian pharma space. Sharp focus on cost control, impressive pipeline for the
US markets, strong foothold in the domestic market and a healthy balance
sheet are major growth drivers.
Core business to drive growth
We expect company’s revenue to grow at a CAGR of ~15% in FY10-13e
driven by new product introductions, higher productivity in the domestic markets
and improving US business through own and third-party product distribution
arrangements.
Taro gets into Sun's fold
This acquisition not only provides access to dermatology and pediatrics
business but also offers access to Israel, Canada and US markets. It offers
another beachhead in US markets whilst it implements remediation action
plan at its other entity i.e., Caraco.
Healthy financials
Sun Pharma has ~USD640m cash on its books which can be used for inorganic
expansion and stabilising Taro. Despite high cash on books dragging return
ratios, it registered an commendable RoCE of 22% and RoNW of 34% in
FY10.
Valuation and outlook
At the CMP of INR466, the stock trades at a PER and EV/EBIDTA of 20.4x and
17.1x of its FY13e EPS of INR22.8. We assign a 10% higher multiple to Sun
Pharma as compared to its peers on account of its strong management quality,
superior margins across segments and added option value from integration of
Taro to Sun Pharma's code of operations and resolution of Caraco manufacturing
issues. We reiterate a BUY recommendation on the stock and a price target of
INR526 providing an upside of 13% from current levels.
Investment rationale
Core business to drive growth
Strong product portfolio in the domestic formulation business as compared to peers
Domestic formulation is the largest revenue contributor for Sun Pharma (~45% of
FY10 revenues). The company began its operations as a five-product anti-psychiatric
portfolio and emerged with one of the largest portfolios in the chronic therapy segment
in the country. Sun currently is the sixth largest branded generic player in the country,
with a product basket comprising ~537 formulations covering chronic therapy segments.
Rapid growth in chronic segments to continue
The company has high profitability potential in chronic segment due to strong marketing
reach and high product recall amongst speciality doctors. This has ensured better
leeway in terms of pricing too. Consistent price rise, ability to enter market early and
use of technological expertise has led the company to increase its market share.
Clarity emerges in the US business; headwinds to continue
After almost 24 months into the drug seizures by the FDA, the management at Caraco
has finally announced a remediation course to the time taken to resolve the
manufacturing issue. Under the terms of the Consent Decree, before resuming the
manufacturing of any product in the Company's manufacturing facility in Detroit, a
number of significant steps and processes are required to be completed, and
certifications and approvals from both outside experts and the FDA are to be obtained.
Caraco has submitted a remediation action plan providing an update on resuming
manufacturing of own products for the local markets. Caraco will introduce two products
by 1HCY11; followed by three products which will commence production by 1HCY12.
We believe company to start production of its own products by end of CY12; full
traction of sales is expected to be registered in FY13e only.
Taro Pharma - Patience Pays
Sun Pharma announced to acquire Taro Pharma in May 2007 for USD 454m (a price
of USD7.75/share). After three years of legal battle, the Israeli Supreme court ruling
paved the way for allowing Sun Pharma to take complete control on Taro Pharma.
Sun Pharma also acquired 12% stake from Templeton Asset Management for USD14/
share resulting in 75% control of the company with majority voting rights.
Scale up benefits from Taro
US generic business accounted for ~USD300m in CY09 (until the seizures by the
FDA) to Sun Pharma. With more than 320 ANDAs approvals (Sun and Caraco
combined), Taro to add another 26 ANDAs, taking the total tally to over 346. This is
expected to provide a significant upside in company’s revenues during FY11e and
FY12e. Sun's acquisition of Taro provides it an entry in the dermatology and topical
segment which forms ~60% of Taro's revenue. The acquisition will also help Sun
Pharma gain a major foothold in the US and Canadian OTC market. Taro has an
established franchise in dermatology and topical products in the US, in addition to
generic products in cardiovascular, neuro-psychiatric and anti-inflammatory therapeutic
categories.
Potential upside from one time opportunities
Sun Pharma has over 108 products awaiting approval from the US FDA and we
expect these approvals to come through in the next couple of years, especially the
ones which have limited competition. However, none of the products provide large
upside to the profits and hence we have not incorporated the same in our estimates.
Subject to clearance from the FDA, there are quite a few opportunities that could
make material impact on Sun Pharma and Caraco combined earnings. Opportunities
like Prandin from Caraco's facility are subject to FDA clearance of its Detroit facility,
providing meaningful cash flow in FY16e. Other drugs like Exelon, Effexor XR,
Metoprolol are not likely to add substantial cash flow to earnings.
Subsidiaries to provide growth impetus to Sun’s core business
We expect company’s revenues, EBITDA, and net profits to post a growth of 15%,
18% and 11.9% in FY10-13e. This is likely to be driven by higher than market growth
in the domestic formulations business, strong sales in the US business post the
remediation process at Caraco. While integration of Taro would be a key challenge
going forward, but considering the management expertise in turning around distressed
assets, we believe the same would be successfully addressed.
Integration to leverage economies of scale and positively impact
operating margins
Sun Pharma has amongst the best operating margins in the industry despite high R&D
expenses. This is on account of presence in chronic therapy areas and technically
complex product profiles for the regulated markets, tight cost controls, and strong field
force productivity. We estimate Sun Pharma to maintain this high operating margin
growth rate in FY10-13e at ~34%. After integration of Taro is completed, a substantial
jump in operating margin is expected by FY12e.
High cash keeps return ratios lower
Sun Pharma currently has USD640m of cash on books. It has been maintaining ~22.6%
RoCE and ~34% RoNW during FY05-10. This period has witnessed considerable
amount of investments in acquiring companies both in the domestic and international
markets. However, high cash on books, has been the key reason for lower return ratios
for the company. We expect Sun Pharma to utilise some cash to incur capex in Taro
and resolve compliance of issues at Caraco, apart from scouting for inorganic growth.
We expect the company to maintain its return ratios at ~20% RoCE and RoNW.
Valuation and outlook
At the CMP of INR466, the stock trades at a PER and EV/EBIDTA of 20.4x and 17.1x
of its FY13e EPS of INR22.8. We assign a 10% higher multiple to Sun Pharma as
compared to its peers driven by strong management quality, better than peers’ margins
across segments, integration of Taro to Sun Pharma's code of operations and resolution
of Caraco manufacturing issues.
We reiterate a BUY recommendation on the stock and a price target of INR526
providing an upside of 13% from current levels.
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