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Sun Pharmaceutical Industries (SUN.BO) Rs440.60
Negative News – Estimates Under Review Equity Research
First Take: 3Q below expectations; margins compress; maintain Sell
News
Sun Pharma reported 3QFY11 net income of Rs3.5bn which was 17%/23%
below GS/Bloomberg estimates. Revenue of Rs16bn was 19% above GSe
mainly on account of consolidation of revenue from Taro. EBIT margins
compressed by 1,010 bp yoy to 22.5% due to lack of one-off product
opportunities and increased costs from Taro. Sun revised its FY11E sales
growth guidance to 42% (from 35%). Sun also reported that Caraco is
unlikely to manufacture products by the end of FY11 due to prolonged
remediation efforts at its manufacturing facilities.
Analysis
(1) Revised guidance suggests risks to top-line growth: We believe that
Sun’s revised growth guidance of 42% is disappointing given that Sun has
achieved 46% yoy growth in first nine months of FY11, implying 31% yoy
growth in 4QFY11 (vs. 57% in 3Q). In our view, there could be risks to Sun’s
top-line growth in US due to increasing competition to Pantoprazole, which
went off patent in Jan 2011. Pantoprazole contributed around 60% of Sun’s
LTM US sales (as per IMS). Also, the delay in remediation efforts at Caraco
could negatively impact revenue growth for Sun in FY12. (2) Margin
compression as expected; scope for consensus margins to reduce: We
continue to believe that Sun’s EBIT margins will normalize from the
elevated levels seen in 1HFY11 and view this as quarter as evidence to that.
We currently forecast a 230 bp reduction over FY11E- FY13E. (3)
Manufacturing issues hampering pipeline: Sun has lowered its ANDA filing
target for the year to 20-22 (from 30), citing ongoing manufacturing issues.
The slowdown in ANDA filing may result in delays in product launches
over the medium to long term. The manufacturing issues could also impact
the FDA approval process and necessitate shifting of product sites.
Implications
We maintain our Sell rating on Sun as we believe that current valuations
outweigh growth prospects. Our estimates and target price are under
review pending further clarification from management on Taro and Caraco.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sun Pharmaceutical Industries (SUN.BO) Rs440.60
Negative News – Estimates Under Review Equity Research
First Take: 3Q below expectations; margins compress; maintain Sell
News
Sun Pharma reported 3QFY11 net income of Rs3.5bn which was 17%/23%
below GS/Bloomberg estimates. Revenue of Rs16bn was 19% above GSe
mainly on account of consolidation of revenue from Taro. EBIT margins
compressed by 1,010 bp yoy to 22.5% due to lack of one-off product
opportunities and increased costs from Taro. Sun revised its FY11E sales
growth guidance to 42% (from 35%). Sun also reported that Caraco is
unlikely to manufacture products by the end of FY11 due to prolonged
remediation efforts at its manufacturing facilities.
Analysis
(1) Revised guidance suggests risks to top-line growth: We believe that
Sun’s revised growth guidance of 42% is disappointing given that Sun has
achieved 46% yoy growth in first nine months of FY11, implying 31% yoy
growth in 4QFY11 (vs. 57% in 3Q). In our view, there could be risks to Sun’s
top-line growth in US due to increasing competition to Pantoprazole, which
went off patent in Jan 2011. Pantoprazole contributed around 60% of Sun’s
LTM US sales (as per IMS). Also, the delay in remediation efforts at Caraco
could negatively impact revenue growth for Sun in FY12. (2) Margin
compression as expected; scope for consensus margins to reduce: We
continue to believe that Sun’s EBIT margins will normalize from the
elevated levels seen in 1HFY11 and view this as quarter as evidence to that.
We currently forecast a 230 bp reduction over FY11E- FY13E. (3)
Manufacturing issues hampering pipeline: Sun has lowered its ANDA filing
target for the year to 20-22 (from 30), citing ongoing manufacturing issues.
The slowdown in ANDA filing may result in delays in product launches
over the medium to long term. The manufacturing issues could also impact
the FDA approval process and necessitate shifting of product sites.
Implications
We maintain our Sell rating on Sun as we believe that current valuations
outweigh growth prospects. Our estimates and target price are under
review pending further clarification from management on Taro and Caraco.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
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