Sun Pharmaceutical- Mixed quarter, maintain Hold: Anand Rathi

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Sun Pharmaceutical Industries
Mixed quarter, maintain Hold
Sun Pharma’s (Sun) 3QFY11 results were a mixed bag, with
revenue being higher and PAT lower than our estimates. While
revenue grew 56.8% yoy to `16bn, adjusted PAT grew only 8.4%
yoy to `3.7bn due to 860bps decline in EBITDA margin.

 Formulations – Key driver; API disappoints. The formulations
segment grew 16.6% yoy led by domestic growth of 20.2% and
11.4% growth in exports. The lower growth in exports was due to
the high base, with sales of Pantaprazole. APIs revenue declined
18.1% yoy.
 Full-quarter impact of Taro consolidation. Taro contributed
~29% of consolidated sales. It, however, impacted consolidated
EBITDA margin by 860bps, given that Taro’s EBITDA margin is
~25% vs. Sun’s 35%. Taro’s margin is lower as staff costs
constitute 30% of its sales. We believe Sun would be able to
improve Taro’s operating performance going forward.
 Change in estimates. We reduce adjusted PAT for Sun by 4.8%
for FY11e, mainly to capture the high staff costs and the higher
depreciation charge. We maintain our FY11 revenue estimates as
well as our FY12-13 overall estimates.
 Valuation and risks. At current market price, the stock trades at
21.2x FY12e and 19.5x FY13e earnings. We maintain Hold with
target price of `449. Downside risk: unfavorable judgment on
Pantaprazole case; upside risk: FY12-13 revenue growth in Taro.