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Sun Pharmaceutical Industries Ltd
A strong quarter but valuations limit upside; HOLD
Sun Pharmaceutical’s (SUNP) Q2FY11 results were above our/street estimates.
This was mainly on account of spill-over sales reported for a Para-IV product —
Eloxatin. The management has increased its FY11E revenue growth guidance
from 18-20% to 35% to include revenues from Taro. While the growth outlook
for the domestic market is healthy, growth and margin expansion in the base
business hinge on a strong recovery in the US business. We maintain our HOLD
rating on SUNP as we believe that valuations, at a P/E of 27.6x FY12E base
business earnings, capture most of the positives.
We roll forward our valuations
from March ’12 to Sep ’12 to get a revised Sep ’11 target price of Rs 2,210. We
also move from an investment-based valuation for Taro to a PE-based one.
Spill-over sales of Eloxatin buoy revenues: SUNP’s higher-than-estimated topline
can be attributed to the inclusion of Eloxatin sales in Q2FY11 revenues.
Domestic formulation sales also saw a strong 36% YoY growth (low base effect)
during the quarter; the adjusted growth number was at 27%. Sales from RoW
markets remained under pressure. Taro contributed ~ US$ 10mn (10 days sales)
to the quarter’s overall revenues.
EBITDA margins contract on a high base: SUNP’s EBITDA margin contracted by
365bps to 34.1% on a high base of Q2FY10 (Protonix P-IV sales).
Adj. PAT rises 11%YoY: Supported by the inclusion of Eloxatin revenues, SUNP’s
adj. PAT increased by 11% YoY.
Concall highlights: 1. Caraco: The company is expected to manufacture two
products by FY11E and add 2-3 products in the following year. Though this
development is encouraging, revenue and margins may still take a while to
recover significantly from current levels. 2. Taro: Unaudited numbers still remain
a concern and audited numbers may surprise negatively. Inclusion of Taro will
boost numbers from US operations significantly. 3. Domestic formulations:
Remains on a strong growth trajectory. 4. RoW: No clear growth trajectory. 5.
Product updates: a) Gemzar: actual players on the ground may not allow limited
competition; b) Taxotere: SUNP’s lyophilised version may not be able to target
the full market.
Maintain Hold: Currently, the stock is trading at a PER of 27.6x FY12E base
business earnings. We maintain our HOLD on SUNP with a revised target price
of Rs 2,210. This value comprises Rs 2,005 for the base business (22x Sept’ 12E
earnings), Rs 40 for P-IV opportunities and Rs 165 for Taro.
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