Sun Pharmaceuticals: Slow start to the year, although margin surprises positively:: Kotak Sec

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Sun Pharmaceuticals (SUNP)
Pharmaceuticals
Slow start to the year, although margin surprises positively. Sales were up 20%
yoy; however, margin at 33.5% surprised, up 300 bps qoq primarily on account of a
400 bps qoq improvement in SUN margin with Taro margin flat qoq. We expect sales
growth to pick up in 9MFY12E, inline with management guidance of 28% for FY2012E
with overall margin declining qoq due to higher R&D expenses at Taro. We increase our
FY2012-13E EPS estimate by 5-8% due to higher margin assumption and lower tax
rate. Maintain ADD with PT at Rs560 (from Rs515), 23X core EPS.


1QFY12 sales at Rs16 bn, 11% lower than our estimate, up 26% yoy ex exclusivity/Taro
Sales were up 20% yoy on reported basis and excluding Taro and exclusivity sales of last year were
up 26% yoy in 1QFY12 driven by (1) India grew 12% on reported basis; however, 18% excluding
discontinued business, we expected 20% growth, (2) ROW ex Taro more than doubled according
to our estimates due to low base effect, (3) US excluding Taro/exclusivity sales grew to US$52 mn
as per our estimates, up 70% yoy driven by 7 new launches in the quarter (see Exhibit 5) including
generic Taxotere and Immitrex injection, (4) Taro was up 14% yoy to US$112 mn.
PAT at Rs5 bn, 5% lower than our estimate due to lower sales; margin surprised
EBITDA margin at 33.5% surprised, 150 bps higher than our estimate and up 300 bps qoq driven
by (1) sharp sequential decline in other expenses and (2) higher margin at Taro of 30.6% on
account of flat R&D expenses qoq. Excluding Taro, EBITDA margin at 34.7% was 50 bps higher
than our estimate, up 400 bps qoq. While we expect Taro margin to decline qoq due to higher
R&D, we expect EBITDA margin ex Taro to sustain at around 34.5% despite qoq decline in sales of
high-margin generic Taxotere due to (1) muted increase in other expenses, (2) pick-up in sales
growth.
We increase our FY2012-13E estimates by 5-8% due to higher margin, lower tax
In order for management guidance of 28% sales growth to be met, 9MFY12E net sales growth
needs to pick up to 29% from 20% reported in 1QFY12. We believe this is achievable and factor
in the same as (1) sales growth excluding Taro ,exclusivity sales reported this quarter was at 26%
yoy, up from 15% reported in FY2011 (see Exhibit 3). According to our analysis, this needs to
grow at 34% in FY2012E, (2) pick-up in sales in US on account of 7 new launches in 1QFY12,
some of which are low competition and (3) further launches in 9MFY12E. We increase our
FY2012E estimates by 5% due to higher margin assumption at 33% versus 31% earlier and lower
tax rate at 7% versus 9% earlier versus 6% in FY2011 (see Exhibit 4).
Maintain ADD with PT at Rs560 (was Rs515), 23X FY2013E EPS ex-interest income of Rs22
We value Sun at (1) 23 X FY2013E EPS ex-interest income of Rs21.7, (2) cash/share of Rs55.