SUN PHARMA- Sharp rise in Caraco sales boost net profit::Edelweiss

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SUN PHARMACEUTICALS INDUSTRIES
Sharp rise in Caraco sales boost net profit


􀂃 Significant outperformance led by one-off Caraco sales
Sun Pharmaceuticals (SUNP) Q2FY11 results were significantly ahead of our
estimates as one-time (undisclosed) Caraco-distributed product sales sharply
improved overall operating performance. Net sales of INR 13.7 bn were 31%
higher than our estimate of INR 10.5 bn due higher Caraco sales of USD 88 mn
(versus our estimate USD 40 mn). EBITDA of INR 4.67 bn was higher than our
estimate of INR 3 bn. PAT at INR 5 bn (up 28% Y-o-Y) had positive impact from
forex gain and low tax rate (3% versus our estimate of 9%).



􀂃 Caraco sales result in higher revenues
Net sales grew 16% Y-o-Y (22% Y-o-Y adjusted for lower domestic sales and
one-time settlement income of USD 20 mn from Forest in Q2FY10), led by sharp
increase in Caraco sales and USD 10 mn of Taro sales (not build in our
estimates). Ex-Taro, adjusted net sales grew 18% Y-o-Y to INR 13.2 bn. Caraco
sales of USD 88 mn (ex USD 10 mn provision for chargebacks) was primarily led
by one-time impact from spillover of residual oxaliplatin sales. Domestic
formulations depicted strong growth of 36% Y-o-Y (27% adjusted for low base
for Q2FY10). ROW markets grew 5% (constant currency) to INR 1.4 bn in
Q2FY11. Management has raised sales guidance to 35% Y-o-Y (revision largely
led by Taro) while maintaining ex-Taro guidance of 18-20% growth in FY11.

􀂃 Revising estimates to factor in guidance revision and quarter strength
We revise up our FY11-12E earnings by 7-12% to reflect strength in the quarter
and incorporate Taro in SUNP’s consolidated operations. We highlight that our
FY11E revenue estimates are 5% higher than SUNP’s revised guidance of 35%
Y-o-Y revenue growth. We believe Caraco operations could be muted in the next
2-3 quarters (ex potential docetaxel launch) while Taro would exert downward
margin pressure. We expect Taro to contribute ~7% to FY12 profits (post
minority interest), with ex Taro profits growing 2% on a high base in FY11.

􀂃 Outlook and valuations: Increasing TP to INR 2,075; maintain ‘HOLD’
We are increasing our target price to INR 2,075 (INR 1,725 earlier), valuing the
base business at 23x FY12E EPS and assigning INR 20 per share to ‘one off’ nonrecurring
sales. SUNP’s valuations are 10% higher than peers, buoyed by INR 47
bn of cash/investments and upsides from exclusivity driven revenues. However,
full resumption in Caraco may continue to be a multi-year operation, hence, we
maintain ‘HOLD’ on the stock. On relative return basis, we rate it ‘Sector
Outperformer’.