Sun Pharmaceuticals --1Q earnings conf call takeaway :: Macquarie Research,

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Sun Pharmaceuticals
1Q earnings conf call takeaway
Event
 Sun hosted its 1QFY12 earnings call today after reporting sales of Rs16.4bn,
EBITDA margin of 33.8% and adjusted PAT of Rs 4.7bn. Sun maintained its
guidance of strong 28-30% growth for FY12. We maintain our OP rating and
raise our TP to Rs560 (from Rs500 earlier).
Impact
 Taro margins strong in 1HCY11: Taro’s EBITDA margin at ~ 35% (up
significantly from 24% in 4QCY10) is one of the key reasons for the strong
performance. Sun expects ramp-up in R&D expenditure going forward. Also,
given the limited competition in the space where Taro operates, new
entrants are expected going forward, negatively impacting sales and/or
pricing in future quarters. Our FY12 EBITDA margin estimate for Taro is now
~32.5% (earlier ~31%).
 US key to growth: 1) Docetaxel and Sumatriptan auto-injector were launched
in 1QFY12 and ramp-up is in line with expectations. 2) Prandin: Caraco is still
awaiting FDA approval (likely after the manufacturing issues are resolved at
Caraco). Sun is satisfied with progress on Caraco FDA issues and believes it
would be in a position to provide more colour in 2Q12.
 Domestic Formulations (DF): DF contributed 38% to the top line and grew at
12% YoY to Rs6.4bn in 1QFY12. Excluding third party business (which has
been discontinued ~Rs 290m in 1QFY11), underlying growth is 18% YoY.
Secondary sales growth for Sun for 1QFY12 was ~20% vs. 14% for the
industry (ORG-IMS). Sun Pharma holds 4.4% share in the India pharma
market. Sun’s DF reported sales are now VAT adjusted.
 Call highlights: A) Sun maintains its guidance for 28-30% sales growth for
FY12; B) Sun indicated that the mention of competitive pressure on Taro was
just a cautionary statement and might not have a significant impact on
margins in the near term; C) Sun expects India business to grow at 16-18% in
FY12; D) better clarity to emerge on the progress of remediation in Caraco by
end-2Q FY12; E) Current cash position: US$1bn; Capex guidance for FY12:
US$100m.
Earnings and target price revision
 We raise our FY12E and FY13E EPS to Rs21/25.4 (from Rs20.7/24) on account
of higher Taro earnings. We now value Sun at Rs560, as we roll forward our
target price on 22x FY13E earnings (from 24x FY12 earnings earlier).
Price catalyst
 12-month price target: Rs560.00 based on a Sum of Parts methodology.
 Catalyst: Sustaining the turnaround in Taro. 2) Niche launches in US
Action and recommendation
 Sun is trading at ~24.6x FY12E EPS. Given its robust business model,
execution record, strong B/S, and earnings momentum, the valuation
premium will be sustained in our view. In particular, we recommend
adding Sun on any weakness.


Conference call highlights
 Guidance: Management maintains its guidance for 28-30% growth for FY12. Discontinued India
(third party business) business and the VAT adjustment (not included in sales) are factored into
the guidance.
 Taro: Management indicated that the competitive pressure on Taro (mentioned in the Taro press
release) was just a cautionary statement and might not have a significant impact on margins
going forward. Future quarters will not have tax benefits (since these are exhausted) and R&D
expenses will go up from current levels. US business represents ~78% of the topline.
 India Domestic Formulation: Sun launched two inlicensed products from Merck (sitagliptin and
sitagliptin plus metformin) and Sun expects the India business (mostly chronic therapies) to grow
at 16-18% in FY12.
 Caraco: Management believes that by the end of 2QFY12, Sun would have better clarity to
comment on the progress of remediation. Management is satisfied with the remediation progress
until now. Sandoz launched Taxotere in July-11. Prandin approval depends on facility
resumption and the litigation.
 Other Highlights:  Current cash position: US$1b; Capex guidance for FY12: US$100m