Taro delivered a strong outperformance on the revenue and operating margins front. Revenue was up 43% at USD159mn (estimated USD148mn) while gross margins at 71.7% was higher than the estimated 69%. Operating margins were at 49.6%, up 19%YoY and 4%QoQ (estimated 44%). PAT of USD63mn was up 72% against the estimated USD55mn, which would have a positive impact on Sun Pharma (SUNP) Q1FY13 numbers.
Strong performance by Taro – ahead of our expectations
Taro sales grew 43%YoY to USD159mn, 7% ahead of our estimates, as the company continues to benefit from price hikes taken for certain products in FY12. Operating margins at 49.6% improved by 400bps QoQ, led by an increase in gross margins (up 336bps) and proportionate lower increase in S,G&A. PAT at USD63mn grew 72% YoY.
R&D costs inch-up as Taro starts to file more ANDAs
R&D costs increased 48%YoY to USD12mn and stand at 7.2% of sales, higher than 6.8% in Q4FY12. This is in-line with the management strategy to focus on building the future pipeline. Taro filed one ANDA and one NDA while pending approvals include 15 ANDAs and two NDAs. It received approval for two ANDAs including Clobetasol Propionate lotion (two players) and generic Lexapro (to be launched post Teva exclusivity).
Positive read through for Sun Pharma
We believe that Taro’s performance will have a positive rub –off on Sun Pharma in Q1FY13 (to be announced on August 10, 2012). Post Taro outperformance, we expect Sun revenue growth at 44%YoY to INR23.5bn. EBITDA margins to improve to 41.5% (40.5% earlier estimate) versus 33.5% in Q1FY12. PAT growth is estimated at 41% to INR7.06bn. Other important data to watch out for is the contribution from Doxil supplies.
Taro higher base to impact Sun growth in Q2FY13
Taro performance continues to surprise though it is largely led by price increase taken in Q2FY12. We believe that with more competition, pricing pressure is likely to erode margins while higher base will reduce earnings momentum for Taro, and in turn for Sun.
Outlook and Valuations: Maintain ‘HOLD’
We are confident of Sun’s execution track record. However, with recent rally in the stock and visible slowdown in earnings (8-9% CAGR over FY12-14E), we see limited upside. We maintain ‘HOLD/SO’ rating.
Regards,
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