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Dissecting Sun’s growth prospects; Sell Sun and Cipla (on CL)
Reiterate Sell on Sun & Cipla; valuation at 40%+ premium to peers
We revisit our outlook on Sun and Cipla (on CL), the two Sell-rated stocks
in our coverage, and reiterate Sell rating on both. We dissect Sun’s 28%-
30% FY12 revenue growth guidance and forecast 7% growth after adjusting
for the base effect from Taro’s acquisition. Both stocks are trading at over
40% premium vs. peers on FY12 P/E, despite offering 3-year EPS CAGR of
15% and 14%, respectively, vs. the sector at 21%. In our view, the premium
valuations are not justified vs. the revenue growth and cash returns they
offer and we expect both these stocks to underperform vs. peers.
Sun: Dissecting FY12 revenue growth, to remain modest ex-Taro
Reiterating our Sell on Sun, we: a) expect domestic revenue share to decline to
42% in FY12E vs. 47% in FY10; it typically commands a higher multiple, in our
view ; b) Exports, while boosted by Taro consolidation, face headwinds from
critical product opportunities like Docetaxel (Sun’s double vial injection faces a
challenging single-vial market in US), Eloxatin (with an injunction against it),
and Pantoprazole (declining materially as expected); c) Weaker pipeline
opportunity in the US market, lagging Ranbaxy, Lupin and Dr Reddy’s. Further,
we maintain our margin decline forecast on Sun, and estimate 190bp decline
in FY12E (vs. +130bp in FY11). We reiterate Sell on Sun Pharma with a new 12-
m Director’s Cut-based TP of Rs327 (from Rs308), implying 32% downside.
Cipla: Forecast 12% 3-year revenue CAGR; reiterate Conviction Sell
We maintain our Conviction Sell on Cipla with a new 12-m Director’s Cutbased TP of Rs244 (from Rs253) implying 26% potential downside. Cipla’s
FY11 performance was in line with our expectations of weaker revenue and
earnings growth vs. peers. We forecast 3-year revenue CAGR of 12% vs.
16% for the sector, on the back of lagging domestic growth. Further, the
Indore SEZ facility, on which the company has incurred significant capex,
continues to be a drag on the operating margins. Hence, we lower our
FY12E-FY13E EBIT margins by 150bp-190bp and EPS by about 8%.
We differ on valuation, below consensus on Cipla/Sun
Our FY12E-FY14E EPS for Cipla are 4%-10% below Bloomberg consensus
on the back of our lower margin expectations. We also differ from
consensus in our views that both Sun and Cipla, with declining cash
returns profile and trading at over 40% premium vs. peers, should revert
towards sector multiples and expect them to underperform vs. peers
Reiterate Sell on Sun and Cipla (on CL) owing to rich valuations
We revisit our outlook on Sun and Cipla (on CL), the two Sell-rated stocks in our
coverage, and reiterate our Sell rating on both. We dissect Sun’s 28%-30% FY12
revenue growth guidance and forecast 7% growth after adjusting for the base effect
from Taro’s acquisition. Both stocks are trading at over 40% premium vs. peers
offering 3-year EPS CAGR of 15% and 14%, respectively. In our view, the premium
valuation for these stocks is not justified vs. the revenue growth and cash returns
they offer, and we expect these stocks to underperform vs. peers.
Sun: Dissecting revenue growth prospects for FY12, reiterate Sell
We forecast Sun’s domestic business to decline significantly as a percent of
total revenues to 41.8% in FY12E from 47.4% in FY10. In our view, the domestic
business commands a higher premium by the investors.
While exports revenues are boosted by the Taro consolidation, we forecast export
revenues (ex Taro) to remain flat in FY12E, with headwinds to Sun’s critical
product opportunities of Eloxatin and Docetaxel (double vial), which were
necessary to replace the steep decline in revenues from Pantoprazole, in our view.
As highlighted in our February 18, 2011 report, “Deep dive into patent cliff -
US$3bn opportunity for Top 6 cos,” we estimate Sun to have a much weaker
pipeline in the US (US$232mn potential) vs. peers such as Dr Reddy’s, Lupin, or
Ranbaxy.
With headwinds to key high margin yielding products and the Caraco
remediation still ongoing, we expect margins to decline and forecast a 190 bp
decline in EBIT margin in FY12E vs. +130bp in FY11.
We reiterate our Sell rating on Sun Pharma with a revised 12-month Director’s
Cut-based TP of Rs327 (from Rs308), implying downside of 32%. Valuations are at
a 48% and 70% premium to peers on FY12E P/E and EV/EBITDA, respectively,
which we believe are unjustified considering the lower growth and returns profile.
Cipla: Forecast 12%/14% 3-yr revenue/EPS CAGR; reiterate CL-Sell
We reiterate our Conviction Sell with a revised 12-month Director’s Cut-based TP
of Rs244 (from Rs253), implying downside of 26%. Despite underperforming peers
over the last three years, Cipla’s valuations are at a 45% and 38% premium to
peers on FY12E P/E and EV/EBITDA, respectively.
We continue to expect Cipla’s domestic revenue growth to underperform peers.
Cipla’s domestic revenue CAGR was 11% vs. industry CAGR of 17% over the last
two years. We expect this underperformance to continue owing to greater
competitive intensity and lower number of launches, and forecast domestic
revenue CAGR of 13% over FY12E-FY13E vs. our industry growth expectation of
16%-18%.
While there have been incrementally positive comments on the Indore SEZ facility
on which Cipla has incurred significant capex over the last three years, we await
visibility on regulatory agency approvals and product launches. That said, we
expect the Indore SEZ facility to still operate below group margins.
CROCI could continue to decline: Cipla’s cash returns have declined 900bp over
FY06-FY11. We forecast cash returns to remain below the sector average and
expect it to offer no valuation support to the stock
Sun’s revenue growth in FY12 to be affected by weak exports; Sell
Sun Pharmaceutical’s stock has outperformed the broader market since its 4QFY11
earnings, up 7% vs. BSE Sensex’s +1%. Sun guided to a revenue growth of 28%-30%
for FY2012 on its 4Q conference call. However, after adjusting FY11 revenues to offset
the base effect from Taro’s acquisition (in 2HFY11), the FY2012 revenue guidance
implies 10%-12% growth. We deconstruct Sun’s growth prospects and forecast sales
to grow 7% on an adjusted basis for FY12E (24% on consolidated un-adjusted basis).
We reiterate our Sell rating on Sun on: (1) Top-line risk to guidance given risks to
sales of key drugs/launches like Pantoprazole, Oxaliplatin and Docetaxel. (2)
Declining contribution of domestic business to both top line and bottom line. (3)
Operating margins continue to remain under pressure due to lack of one-off products,
as seen in 4Q. Our revised 12-m Director’s Cut-based TP of Rs327 (32% potential
downside) implies FY12E P/E of 16.5X, at 13% premium vs. the sector.
Deconstruction of revenue growth prospects in FY2012E – We forecast Sun’s FY12E
revenues to grow at 24% on a consolidated basis (compared with the 28%-30% guidance),
including fully consolidated results of Taro (which Sun acquired in Sep-2010). However, we
believe Sun’s normalized revenue growth in FY12E would be only 7% after adjusting for
Taro’s consolidation for 1HFY11 (Exhibit 1) coming from:
(1) Domestic revenue growth of 16% (in line with domestic market growth),
(2) Export revenue decline of 17% (excluding Taro) due to weak product pipeline in US
and one-off revenues from Pantoprazole and Eloxatin in FY11 leading to a high base.
We see headwinds for critical product opportunities such as Docetaxel (Sun’s double
vial injection faces a challenging single-vial market), Eloxatin (with an injunction
against it), and Pantoprazole (declining materially as expected) in the US.
(3) Taro’s revenue growth at 18% (adjusted for consolidation with effect from 2HFY11).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dissecting Sun’s growth prospects; Sell Sun and Cipla (on CL)
Reiterate Sell on Sun & Cipla; valuation at 40%+ premium to peers
We revisit our outlook on Sun and Cipla (on CL), the two Sell-rated stocks
in our coverage, and reiterate Sell rating on both. We dissect Sun’s 28%-
30% FY12 revenue growth guidance and forecast 7% growth after adjusting
for the base effect from Taro’s acquisition. Both stocks are trading at over
40% premium vs. peers on FY12 P/E, despite offering 3-year EPS CAGR of
15% and 14%, respectively, vs. the sector at 21%. In our view, the premium
valuations are not justified vs. the revenue growth and cash returns they
offer and we expect both these stocks to underperform vs. peers.
Sun: Dissecting FY12 revenue growth, to remain modest ex-Taro
Reiterating our Sell on Sun, we: a) expect domestic revenue share to decline to
42% in FY12E vs. 47% in FY10; it typically commands a higher multiple, in our
view ; b) Exports, while boosted by Taro consolidation, face headwinds from
critical product opportunities like Docetaxel (Sun’s double vial injection faces a
challenging single-vial market in US), Eloxatin (with an injunction against it),
and Pantoprazole (declining materially as expected); c) Weaker pipeline
opportunity in the US market, lagging Ranbaxy, Lupin and Dr Reddy’s. Further,
we maintain our margin decline forecast on Sun, and estimate 190bp decline
in FY12E (vs. +130bp in FY11). We reiterate Sell on Sun Pharma with a new 12-
m Director’s Cut-based TP of Rs327 (from Rs308), implying 32% downside.
Cipla: Forecast 12% 3-year revenue CAGR; reiterate Conviction Sell
We maintain our Conviction Sell on Cipla with a new 12-m Director’s Cutbased TP of Rs244 (from Rs253) implying 26% potential downside. Cipla’s
FY11 performance was in line with our expectations of weaker revenue and
earnings growth vs. peers. We forecast 3-year revenue CAGR of 12% vs.
16% for the sector, on the back of lagging domestic growth. Further, the
Indore SEZ facility, on which the company has incurred significant capex,
continues to be a drag on the operating margins. Hence, we lower our
FY12E-FY13E EBIT margins by 150bp-190bp and EPS by about 8%.
We differ on valuation, below consensus on Cipla/Sun
Our FY12E-FY14E EPS for Cipla are 4%-10% below Bloomberg consensus
on the back of our lower margin expectations. We also differ from
consensus in our views that both Sun and Cipla, with declining cash
returns profile and trading at over 40% premium vs. peers, should revert
towards sector multiples and expect them to underperform vs. peers
Reiterate Sell on Sun and Cipla (on CL) owing to rich valuations
We revisit our outlook on Sun and Cipla (on CL), the two Sell-rated stocks in our
coverage, and reiterate our Sell rating on both. We dissect Sun’s 28%-30% FY12
revenue growth guidance and forecast 7% growth after adjusting for the base effect
from Taro’s acquisition. Both stocks are trading at over 40% premium vs. peers
offering 3-year EPS CAGR of 15% and 14%, respectively. In our view, the premium
valuation for these stocks is not justified vs. the revenue growth and cash returns
they offer, and we expect these stocks to underperform vs. peers.
Sun: Dissecting revenue growth prospects for FY12, reiterate Sell
We forecast Sun’s domestic business to decline significantly as a percent of
total revenues to 41.8% in FY12E from 47.4% in FY10. In our view, the domestic
business commands a higher premium by the investors.
While exports revenues are boosted by the Taro consolidation, we forecast export
revenues (ex Taro) to remain flat in FY12E, with headwinds to Sun’s critical
product opportunities of Eloxatin and Docetaxel (double vial), which were
necessary to replace the steep decline in revenues from Pantoprazole, in our view.
As highlighted in our February 18, 2011 report, “Deep dive into patent cliff -
US$3bn opportunity for Top 6 cos,” we estimate Sun to have a much weaker
pipeline in the US (US$232mn potential) vs. peers such as Dr Reddy’s, Lupin, or
Ranbaxy.
With headwinds to key high margin yielding products and the Caraco
remediation still ongoing, we expect margins to decline and forecast a 190 bp
decline in EBIT margin in FY12E vs. +130bp in FY11.
We reiterate our Sell rating on Sun Pharma with a revised 12-month Director’s
Cut-based TP of Rs327 (from Rs308), implying downside of 32%. Valuations are at
a 48% and 70% premium to peers on FY12E P/E and EV/EBITDA, respectively,
which we believe are unjustified considering the lower growth and returns profile.
Cipla: Forecast 12%/14% 3-yr revenue/EPS CAGR; reiterate CL-Sell
We reiterate our Conviction Sell with a revised 12-month Director’s Cut-based TP
of Rs244 (from Rs253), implying downside of 26%. Despite underperforming peers
over the last three years, Cipla’s valuations are at a 45% and 38% premium to
peers on FY12E P/E and EV/EBITDA, respectively.
We continue to expect Cipla’s domestic revenue growth to underperform peers.
Cipla’s domestic revenue CAGR was 11% vs. industry CAGR of 17% over the last
two years. We expect this underperformance to continue owing to greater
competitive intensity and lower number of launches, and forecast domestic
revenue CAGR of 13% over FY12E-FY13E vs. our industry growth expectation of
16%-18%.
While there have been incrementally positive comments on the Indore SEZ facility
on which Cipla has incurred significant capex over the last three years, we await
visibility on regulatory agency approvals and product launches. That said, we
expect the Indore SEZ facility to still operate below group margins.
CROCI could continue to decline: Cipla’s cash returns have declined 900bp over
FY06-FY11. We forecast cash returns to remain below the sector average and
expect it to offer no valuation support to the stock
Sun’s revenue growth in FY12 to be affected by weak exports; Sell
Sun Pharmaceutical’s stock has outperformed the broader market since its 4QFY11
earnings, up 7% vs. BSE Sensex’s +1%. Sun guided to a revenue growth of 28%-30%
for FY2012 on its 4Q conference call. However, after adjusting FY11 revenues to offset
the base effect from Taro’s acquisition (in 2HFY11), the FY2012 revenue guidance
implies 10%-12% growth. We deconstruct Sun’s growth prospects and forecast sales
to grow 7% on an adjusted basis for FY12E (24% on consolidated un-adjusted basis).
We reiterate our Sell rating on Sun on: (1) Top-line risk to guidance given risks to
sales of key drugs/launches like Pantoprazole, Oxaliplatin and Docetaxel. (2)
Declining contribution of domestic business to both top line and bottom line. (3)
Operating margins continue to remain under pressure due to lack of one-off products,
as seen in 4Q. Our revised 12-m Director’s Cut-based TP of Rs327 (32% potential
downside) implies FY12E P/E of 16.5X, at 13% premium vs. the sector.
Deconstruction of revenue growth prospects in FY2012E – We forecast Sun’s FY12E
revenues to grow at 24% on a consolidated basis (compared with the 28%-30% guidance),
including fully consolidated results of Taro (which Sun acquired in Sep-2010). However, we
believe Sun’s normalized revenue growth in FY12E would be only 7% after adjusting for
Taro’s consolidation for 1HFY11 (Exhibit 1) coming from:
(1) Domestic revenue growth of 16% (in line with domestic market growth),
(2) Export revenue decline of 17% (excluding Taro) due to weak product pipeline in US
and one-off revenues from Pantoprazole and Eloxatin in FY11 leading to a high base.
We see headwinds for critical product opportunities such as Docetaxel (Sun’s double
vial injection faces a challenging single-vial market), Eloxatin (with an injunction
against it), and Pantoprazole (declining materially as expected) in the US.
(3) Taro’s revenue growth at 18% (adjusted for consolidation with effect from 2HFY11).
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