Sun Pharma (2QFY15) : Margins disappoint but outlook strong. Maintain BUY :: HDFC Sec, link

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Margins disappoint but outlook strong
Sun Pharma’s (SUNP) results (ex Taro) were lower
than expected due to higher other expenses. Higher
other expenses (up 12/47% YoY) reported by Sun
overshadowed Taro’s higher profitability. Sun
posted revenues of Rs 47.5bn, up 13% YoY, EBIDTA
margin of 45.7% (up 190/169bps YoY/QoQ) and
PAT of Rs 15.7bn, up 15.4% YoY.
India formulations revenues reported strong
growth of 21% whereas US (ex Taro) came in at
~US$ 255mn, up 16.5% YoY (led by one time
revenues of one/few products). Sun was expected
to report flat US revenues (at US$230mn) as
competition in a few products (gCymbalta,
gDoxycycline) has increased. Increased other
expenses in 2QFY15 are largely related to
Ranbaxy’s integration and compliance issues and
would be recurring. Going ahead, we expect SUNP
to continue to post impressive growth and
profitability led by robust performance in domestic
formulations and US launches. We expect Taro to
also contribute significantly with a 15%/16% CAGR
in rev/PAT over FY14-16E.
 Rich pipe getting richer : Earlier during the quarter,
SUNP had announced the acquisition of worldwide
rights of Tildrakizumab, which is currently being
evaluated in Phase-3 trials for treatment of Psoriasis,
for an upfront payment of US$80mn. SUNP has
indicated at incurring an additional US$250mn on the
molecule over a period of five years. The Psoriasis
market in US is currently valued ~US$6.0bn.
Management has also highlighted that the acquired
molecule has a competitive advantage over other
similar products currently in trials. We incorporate an
NPV of Rs 70 in our model for Tildrakizumab, with an
expected launch by FY20E and peak revenues of
US$1.9bn.
 Outlook and Valuation : We revise our other
expense estimates, which lowers our EBIDTA margin
by 165/18bps for FY15E/16E. We value Sun at 28x
(earlier 25x) pro-forma FY16 core EPS (inc Ranbaxy) of
Rs 31.2 and add NPV (for cash + FTFs) and
Tildrakizumab of Rs164. Maintain BUY with a TP of Rs
1,038 (earlier Rs 880).

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009820