Sun Pharmaceuticals- Buy at Rs 917.5 and add on dips to Rs 840 - Rs 857 for Target of Rs 958 in 1 quarter :HDFC Sec

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SPIL recently reported Q3FY15 results which were below street’s expectations. Given below are some of the key highlights, which we came across while reviewing the results. Key highlights of Q3FY15 results:  The sale of branded formulations in India during the quarter stood at Rs.1,150 cr, up 21% y-o-y while finished dosage sales in the US market stood at US$413 mn in Q3FY15, down 5% y-o-y. The total sales fell by 0.2% in Q3FY15 to Rs.4,280 cr. EBIDTA Margins were down 160 bps y-o-y at 45.1% on account of higher other expenditure and muted sales. SPIL posted de-growth of ~7% in net profit to Rs.1,425 cr for Q3FY15 from a year earlier, led by poor operational performance, higher interest and depreciation expenses (partly offset by lower tax).

Other Highlights:  SPIL is ranked 2nd and holds 5.5% market share in the highly competitive Indian Branded Generics market, as per December 2014 AIOCD report. Overall, the company is ranked no. 1 based on share of prescriptions with 7 classes of specialists: psychiatrists, neurologists, cardiologists, ophthalmologists, orthopedicians, nephrologists and gastroenterologists. Branded generic sales in India at Rs.1150 cr, was up by 21.4% over Q3FY14.  Taro sales in Q3FY15 were reported at US$238 mn, up 11% y-o-y. For 9MFY15, sales were US$ 619 mn, up by 8% over 9 months last year. The growth is driven by a hike in prices of key products, though sales volume has declined in the quarter. Net Profit stood at US$143 mn, up 23% y-o-y. Net profit for 9MFY15 was at US$332 million, up by 23% y-o-y. Taro’s EBITDA margin improved to 68.7% mainly due to lower R&D and SG&A expenses.  Sales in the US were US$413 mn for Q3FY15, down by 5%, accounting for 59% of total sales. For 9MFY15, sales were US$1,283 mn recording a growth of 5%. Sales for Q3 were impacted primarily due to temporary supply constraints arising from remediation efforts.  Formulation sales in rest of the world (ROW) markets outside of India and US accounted for US$72 mn in Q3FY15, registering de-growth of 15% (in US$ terms). ROW sales for 9MFY15 were US$242 mn, was flat y-o-y. Excluding ex-US Taro sales, underlying sales in US$ terms for Sun Pharma business in these markets de-grew by 29% for Q3FY15 and 4% for 9MFY15.

 The API business has strategic importance for vertical integration on key products. A cumulative of 266 DMF / CEP applications have been made, with 178 approved so far. External sales of API reached Rs. 181 cr in Q3FY15, up 4% on a y-o-y basis. For 9MFY15, API sales reduced by 2% to Rs. 566 cr. The lower growth is mainly on account of increased captive consumption.  The company has filed four ANDAs in Q3FY15 taking total filings to 488. It has received approvals for four products taking the total number of approvals to 358. In domestic market, it has launched 15 products in 9MFY15. The total number of patent applications submitted now stands at 586 with 345 patents granted so far.  SPIL faced supply disruptions from the Halol manufacturing facility, which was issued a form-483 (an adverse inspection report) by the US Food and Drug Administration (USFDA) in September 2014. However, the management indicated that the supply from the facility could resume in Q4FY15 while it will continue to coordinate with the USFDA in order to obtain an early clearance.  Consolidated R&D expense for Q3FY15 was Rs.389 cr, or 9% of sales. This includes significant investments on account of funding the clinical development of Tildrakizumab, the psoriasis monoclonal anti-body recently in-licensed from MSD (US). For 9MFY15, R&D spend was Rs.958 cr at 7% of sales.  In April-2014, SPIL had proposed the acquisition of Ranbaxy Laboratories Ltd in an all-stock deal valued at an Enterprise Value of about US$ 4 bn. This acquisition requires approvals from multiple regulatory agencies and the respective shareholders of both the companies. Most of these approvals have been received. The approval of the Hon’ble High Court of Punjab and Haryana is pending. Both SPIL and Ranbaxy will also have to meet the pre-conditions required as per the order of the Competition Commission of India and the US FTC. Guidance:  The company maintains its revenue guidance of 13% growth for FY15E on back of gradual improvement in US business. Guidance is at constant exchange rate and excludes the impact of the proposed acquisition of Ranbaxy pending the deal closure.  The NPPA imposing pricing beyond the NLEM list will not impact SPIL significantly. Concerns  Any product approval delays, unfavorable litigation outcomes, delay in Ranbaxy merger and potential future adverse inspections from USFDA could be key risks to SPIL’s growth.  SPIL is impacted by forex fluctuations, as it exports more than 60% of its sales and has presence abroad through subsidiaries/other infrastructure.  Growing portfolio of price increase-led/ shortages led earnings stream in US.  Fast integration of merger with Ranbaxy could be a key challenge

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011516