Sun Pharma: Shining Bright; Raise TP to Rs2,400/sh: Citi

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Sun Pharmaceuticals (SUN.BO)
Hold: Shining Bright; Raise TP to Rs2,400/sh

 Raise TP to Rs2,400 — as we raise FY11/12 EPS estimates by 20%/17% & roll over
to 22x FY12E EPS. The higher estimates mainly reflect the unexpected Eloxatin sales
in 2QFY11, consolidation of Taro & potential launch of generic Taxotere in FY12.
High valuations keep us from getting more constructive, but we remain positive on
Sun’s long-term growth prospects & recommend staying invested.


 2Q beat mainly one-off — Residual sales of generic Eloxatin led to materially
higher than expected Caraco sales in 2QFY11 – leading to the big beat (by c54%)
in earnings. Revenues grew 15% YoY, while EBIDTA margins declined 420 bps off
the high base (generic Protonix led) in 2QFY10. Reported net income grew c9%
YoY, aided by lower tax rate & depreciation – impressive, given the high base.

 Good growth across most markets — Formulations sales in India (+27% adjusted
for low 2QFY10 base: channel filling in 4QFY09) & US (+25% on a high base:
generic Protonix sales) continued to impress. However, growth in the emerging
markets biz was surprisingly subdued at c5% YoY – the management indicated
that this was a quarterly aberration & should recover over the full year.

 Clearer picture on base biz margins — We believe Sun’s base biz EBIDTA margins
are in the c30-32% range, with 2Q margins being slightly inflated by the one-off
Eloxatin sales in the US. We expect this to improve, as Sun launches products
such as generic Taxotere & Gemzar over the next year. At the same time, full
consolidation of Taro will be a drag on margins over the next few years.

 Key call takeaways — a) FY11 sales growth guidance upped to 35% (from 18-
20%) appears conservative; b) To launch generic Taxotere once it applies the
favorable District Court verdict to own case – lyophilized version may see lower
traction; c) Intends to invest in Taro – turning it around to achieve full potential
will be a 3-5 yr effort – confident of achieving RoCE of c20-25% on investment.