Sun Pharma Reasonably Valued; Maintain Hold: Emkay

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Sun Pharma

Reasonably Valued; Maintain Hold

HOLD

CMP: Rs 441                                        Target Price: Rs 460

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n     Sun Pharma’s Q3’11 results were in-line except on PAT front with a) Revenues at Rs16bn (est. Rs15.9bn) b) EBITDA at Rs4.4bn (est. Rs4.45bn) and c) PAT at Rs3.5bn (est. Rs3.9bn)

n     Taro contributed 29% to the top-line at US$102mn; Caraco continues to disappoint with revenues at US$40mn (down 22% YoY) and loss at the PBT level

n     APAT at Rs3.5bn was lower than our est. of Rs3.9bn on account of higher depreciation and tax outgo largely led by Taro consolidation

n     Taro remains the key to future performance; Maintain Hold and target price of Rs460

Revenue growth in-line with estimates
Sun Pharma has registered in-line growth in Q3FY11 on account of a) 20% increase in
domestic formulations (estd. 17% growth), and b) 12% increase in export formulations
(excluding Taro). In the exports formulation space, Caraco continues to disappoint
(revenues at US$40mn, down 22% YoY), with revenues from distributed products
declining significantly to US$35mn this quarter from US$49mn in Q3FY10 (Caraco had
stopped shipping certain Paragraph-IV products prior to the quarter). Taro delivered inline
numbers at US$102mn, contributing 29% to the total sales. Higher growth in the
domestic formulation business (above industry rates of 17%) was on account of 9 new
product launches this quarter taking the total to 30 during 9MFY11. In the US, Effexor
XR tablets (market share 30-40%) and Rivastigimine continued to do well. Emerging
markets (ex Caraco & Taro) sales were up by 7% YoY during the first 9MFY11.
Regarding Taro, audit of the financial accounts for CY08 got over this quarter.

EBITDA in-line; PAT at Rs3.5bn below estimates
EBITDA for the quarter was up 20% YoY to Rs4.4bn (in-line). However, Taro consolidation
led the EBITDA margins to contract by 857bps YoY to 27.5% led by a) 51% increase in raw
material cost b) 137% increase in staff cost and c) 81% increase in other expenses
(includes write-back of Pantoprazole inventory in the US). We estimate Taro to have lower
EBIT margins to the tune of 21%. 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 (docetaxel) and Gemzar
(gemcitabine) going forward.
APAT growth of 3% YoY to Rs3.5bn was below our estimates due to a) higher tax
provisioning (13% of PBT vs. our assumption of 7% of PBT) and b) higher depreciation
(includes one-time impairment charge of US$4.5mn on account of Taro). The EPS for
Q3FY11 and YTD’11 is Rs3.4 and Rs13.7, respectively. Our EPS estimate for FY11E
stands at Rs17.3.
Taro remains the key to future performance
Management has raised FY11E revenue guidance from 35% to 42%, mainly on account of
Taro consolidation. We believe Taro consolidation should start beginning to contribute
materially from FY12 onwards.

Caraco’s recovery will be gradual
Caraco in its recent press release has indicated that it won’t be able to begin the
manufacturing and distribution of products from the USFDA banned manufacturing sites till
the end of CY11E. However, a quicker resolution of the issue may lead to manufacturing of
4-5 products as early as CY12E. Caraco management believes that it will take significant
time before it reaches its previous level of manufacturing in its Detroit facility. We have build
US$316mn and US$309mn revenue in FY11E and FY12E respectively from Caraco
operations.
Maintain Hold and target price of Rs460
Sun Pharma continues to remain a good long-term fundamental story in our view, however
stock valuations are likely to limit upside. We value Sun pharma’s base business at 22x
FY12E and the NPV of Para-IV pipeline at Rs6 per share, to arrive at a fair value of Rs460.
We have valued the company in-line with its comparable peers 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$845mn cash in hand. We expect Sun’s revenue and earnings (ex Taro) to grow at a
CAGR of 20% and 21% (on a higher base effect from Pantoprazole sales in FY10)
respectively over FY10-12E. However, owing to limited upside opportunity, we maintain our
Hold rating on the stock. With ~USD845m of cash on books, Sun Pharma is in the process
to explore another inorganic acquisition.
Our EPS (incl. Taro) for FY11/12E works out to Rs17.3 and Rs20.7, respectively. At CMP,
the stock trades at 21xFY12E earnings.