| Sun Pharmaceutical Industries Ltd. (SUNP IN) Taro 4QFY14 Results: Below expectation on lower revenue | Neutral Price Target: Rs625.00 PT End Date: 31 Mar 2015 | |
SUP’s subsidiary, Taro reported 4QFY14 sales of $187Mn (+13% YoY and -12% QoQ), which was well below JPMe. The company in its press release continued to highlight the slight decline in volume in the quarter and, therefore, we believe that most of the growth was driven by pricing benefit for its key products. In our view, the lower than expected revenue and sequential decline highlights some pricing benefit due to limited competition going away. We have highlighted this as a key risk to SUNP’s growth and margins given the declining volume trend in Taro seen over the last two years.
· EBITDA margin at 56.5% vs. 65% in 3Q and ~60% in 9MFY14. EBITDA margins for the quarter declined q/q due to lower sales revenue and sharp increase in SG&A ex. depreciation (+26% YoY and +22% QoQ). R&D as % of revenue was at 7% with R&D expense increasing 8% YoY (-13% QoQ). Gross profit for the quarter was 75.5% vs. 80.7% in 3Q and 76.7% in 9MFY14 with cost of sales flat YoY (+11% QoQ as 3Q costs was particularly low).
· Other details. Shares outstanding declined QoQ (42.4Mn vs. 44.7Mn in 3Q) post the completion of buyback last quarter, which will increase SUNP’s holding to ~69% (vs. 66% previously). Net cash as of Mar-14 was $615Mn vs. $532Mn last year. The company filed 11 ANDAs in FY14 vs. 9 in FY13 and currently has 27 ANDAs pending for approval.
· Takeaways for SUNP 4QFY14 results: SUNP reports results on 29th May and has scheduled a conference call at 10AM IST on 30th May. We believe that post the lower than expected operating results reported by Taro, there is potential downside risk to SUNP’s 4QFY14 results. We assume 36% growth in PAT (to Rs13.7bn) YoY in the quarter. Our estimates for SUNP are Rs42bn for revenue and EBITDA at Rs18.5bn (margin 44.1%).
Figure 1: Taro’s EBITDA Margin Trend
Source: Company reports
Figure 2: Taro's R&D Cost and as % of sales
Source: Company reports.
Table 1: Taro Quarterly Results Summary
US$ MM, except per share
|
Mar-13
|
Mar-14
|
% YoY
|
Dec-13
|
% QoQ
|
FY13
|
FY14
|
% YoY
|
Sales
|
165.1
|
187.2
|
13.3
|
213.6
|
(12.4)
|
671.0
|
759.3
|
13.2
|
Gross Profit
|
119.5
|
141.4
|
18.3
|
172.5
|
(18.0)
|
494.8
|
580.0
|
17.2
|
Gross Margin (%)
|
72.4
|
75.5
|
80.7
|
73.7
|
76.4
| |||
EBITDA
|
67.4
|
105.7
|
56.8
|
139.0
|
(23.9)
|
346.3
|
446.8
|
29.0
|
EBITDA Margin (%)
|
40.8
|
56.5
|
(8.6)
|
65.1
|
51.6
|
58.8
| ||
D&A
|
(4.3)
|
(4.2)
|
2.6
|
(4.1)
|
2.3
|
(17.8)
|
(16.6)
|
6.7
|
Interest
|
1.1
|
1.2
|
(15.5)
|
1.4
|
(13.6)
|
1.5
|
5.2
|
(241.3)
|
FX Income/(expense)
|
0.7
|
3.9
|
(472.2)
|
2.5
|
55.1
|
2.4
|
7.1
|
(194.5)
|
Other income/(expense)
|
1.4
|
0.4
|
(70.9)
|
0.4
|
(6.7)
|
3.4
|
1.4
|
(59.1)
|
PBT
|
66.3
|
107.1
|
61.5
|
139.3
|
(23.1)
|
335.9
|
443.9
|
32.2
|
Tax
|
(16.1)
|
(17.4)
|
8.4
|
(23.5)
|
(25.9)
|
(67.8)
|
(82.7)
|
22.0
|
Tax rate
|
24.3
|
16.3
|
16.9
|
20.2
|
18.6
| |||
PAT
|
50.2
|
89.7
|
78.5
|
115.8
|
(22.6)
|
268.1
|
361.2
|
34.7
|
Income from discontinued ops
|
(1.2)
|
(0.1)
|
91.6
|
(0.1)
|
94.0
|
(1.2)
|
(0.3)
|
73.3
|
Minority Interest
|
0.1
|
0.1
|
(19.8)
|
(0.1)
|
(181.0)
|
(0.7)
|
(0.5)
|
(28.9)
|
PAT
|
49.2
|
89.6
|
82.3
|
115.6
|
(22.5)
|
266.2
|
360.4
|
35.4
|
FD EPS
|
1.10
|
2.12
|
92.6
|
2.59
|
(18.2)
|
5.98
|
8.14
|
36.3
|
Source: Company reports
Investment Thesis
SUNP trades at a premium to domestic peers that we believe is justified by the company’s strong profitability (40%+ EBITDA margin vs. 15-25% for other Indian companies), robust balance sheet (FY14E net cash Rs48bn) and successful acquisitions. However, slowing growth in Taro, limited opportunities for margin expansion and uncertainty around any possible acquisition provide little upside potential, in our view.
Valuation
Our Mar-15 price target of Rs625 is based on a P/E of 24x Mar-16E base EPS, a 20% premium to the domestic peer group, plus FTF opportunities at Rs17 per share.
SUNP SOTP summary
Rs/share
| ||
Base EPS
|
24.8
| |
Target P/E Multiple
|
24
|
20% premium to current domestic peer group average
|
Base Target Price
|
606
| |
U.S. Opportunities
| ||
FTF
|
7.9
|
gPrandin, gCymbalta, gGleevec, gLunesta and gCrestor
|
Other Opportunities
|
8.8
|
gTaxotere, gEloxatin, gLexapro and gAbilify
|
SUNP Target price
|
625
|
Source: Company reports and J.P. Morgan estimates.
Risks to Rating and Price Target
Key upside risks to our view include a better-than-expected ramp-up of DUSA sales, continued INR weakness and potential value-accretive acquisitions. Downside risks include adverse regulatory rulings, delays in U.S. product launches and a protracted slowdown in India.
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