Sun Pharma HOLD. Higher Domestic Push Boosts Topline Maintain HOLD. Pharmaceuticals June 01, 2012 QUARTERLY REVIEW. Outlook & Valuation

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1 Institutional Equities India Research Pharmaceuticals June 01, 2012 QUARTERLY REVIEW Bloomberg: SUNP IN Reuters: SUN.BO HOLD Higher Domestic Push Boosts Topline Maintain HOLD ceuticals Industries () has posted 59.7% YoY rise in revenues in Q4FY12, on the back of surge in domestic formulations, higher US sales aided by Doxil supplies and Taro. The outperformance in profits can be attributed to higher domestic revenues on account of change in distribution set up. We maintain HOLD recommendation on the stock. Quarter Details: s revenues rose 59.7% YoY to Rs bn in Q4FY12 aided by 49% growth in domestic formulations, better US sales. The Company s domestic business witnessed 18.3% YoY growth on a like to like basis (w/o sales push of Rs. 1.8 bn). Its EBITDA was at 41.2% in Q4FY12, in line with our estimates. Improvement in the Company s gross margins was primarily aided by Taro performance and ramp up in niche launches in the US. The Companyʹs net profit rose 85.3% YoY to Rs. 8.2 bn in Q4FY12. Road Ahead: has guided for revenue growth of 18 20% for FY13. The Company plans to file 25 ANDAs in the US market. R&D expenses are expected to be 6 8% of sales and it plans to expend Rs. 5 bn as capex. Outlook & Valuation We maintain our revenue estimates at Rs bn for FY13E. We downgrade our EBITDAM from 36.3% to 35.9% for FY13E due to higher R&D. We also downgrade our EPS estimates for FY13E by 3% to Rs owing to lower other income. We roll over price target to FY14E and maintain our HOLD recommendation on the stock based 22.5xFY14E. Risks: Increased competition in select products in the Taro basket may be margin decretive. Penalty in lieu of supplies of Pantoprazole would involve a one time cash outgo. Key Financials Y/E, Mar (Rs Mn) FY10 FY11 FY12 FY13E FY14E Net sales 39,040 57,214 80,197 93, ,593 EBITDA 11,645 19,700 32,647 33,472 37,449 Net Profit 10,689 16,581 24,850 23,711 25,393 EPS (Rs) EPS growth (%) EBITDA Margin (%) PER(x) EV/EBITDA (x) RoCE (%) RoE (%) Recommendation CMP: Rs570 Target Price: Rs550 Previous Target Price : Rs546 Downside (%) 4% Stock Information Market Cap. (Rs bn / US$ mn) 583/10, week High/Low (Rs) 611/448 3m ADV (Rs mn /US$ mn) 479/8.6 Beta 0.8 Sensex/ Nifty 16,439/4,990 Share outstanding (mn) 1,030 Stock Performance (%) 1M 3M 12M YTD Absolute (5.4) Rel. to Sensex (1.4) Performance 19,500 17,500 15,500 May 11 Jul 11 Aug 11 Sep 11 Oct 11 Dec 11 Jan 12 Feb 12 Apr 12 May 12 Sensex (LHS) Source: Bloomberg, Karvy Institutional Research Earnings Revision (%) FY13E FY14E Sales EBITDA PAT 3.0 Source: Karvy Institutional Research Analysts Contact Rahul Sharma rahul.sharma@karvy.com Nishith Sanghvi nishith.s@karvy.com (RHS)

2 Results Review ceuticals Industries () has posted 59.7% YoY rise in revenues in Q4FY12. Domestic formulations push has the primary reason for high growth in revenues (Rs. 1.8 bn additional sales push). Increased supplies of Doxil aided performance in the US business. Its margins declined sequentially due to lower gross margins. Gross margins in Taro were also reported lower on QoQ basis. Revenue Analysis s revenues rose 59.7% YoY to Rs bn in Q4FY12 aided by 49% growth in domestic business to Rs. 8.8 bn (one time sales adjustment of Rs. 1.8 bn), strong performance in the US biz. Its US revenue grew 82.8% YoY to Rs bn (US$211 mn) including US$120 mn from Taro higher than our estimates. It has launched 22 products in domestic market in FY12. Ex Taro, its US revenues grew 13.7% QoQ to US$91 mn aided by temporary supplies of Doxil. Total RoW formulation revenues grew 44.6% YoY to Rs bn in Q4. Bulk revenues grew 31.2% YoY to Rs bn in Q4. EBIDTA Margin s EBITDAM stood at 41.2% in Q4FY12 in line with our estimate of 41.4%. Improvement in gross margins was aided by Taro performance and niche launches in the US. Taro says the margin performance may not sustain, going forward. Non Operating Items Depreciation stood at Rs. 823 mn vs. our estimates of Rs. 790 mn in Q4FY12 Effective tax rate was 16.4% vs. our expectation of 9%. Net Profit Growth s net profit stood at Rs. 8.2 bn higher than our estimates of Rs bn in Q4FY12. Key Highlights: The key highlights of FY12 are elucidated hereunder: Changes in Distribution set up in the domestic formulations business have added Rs 1.8 bn of sales in Q4FY12. This would impact sales in H1FY13E. Sales of Doxil are added to the revenues for Q4. Sun s generic Doxil is the only supplier in the US market, but it is supplied on batch to batch basis, which is a temporary opportunity. Sun awaits its ANDA approval for generic Doxil. Business in emerging markets grew 45% in Q4, which is likely to show strong growth going ahead. has given 18 20% revenue growth guidance for FY13E with INR rate at 51 / Dollar. s R&D is expected to scale up to between 6 8% as its API plants and Cranberry plant are due for inspection in the current year. Mr. Makov former President, CEO of Teva Pharmaceutical ( ) has been appointed as Chairman of. He is widely credited with Teva s emergence as a global company and a world leader in generic pharmaceuticals. His experience would be used for making a global business entity. 2

3 Exhibit 1: Quarterly Financials Year end March (Rs. mn) Q4FY11 Q3FY12 Q4FY12 QoQ % YoY % Net Sales 14,633 21,451 23, Cost 10,197 11,814 13, EBITDA 4,436 9,638 9,627 (0.1) EBITDA Margin (%) Other Income 659 (863) 2119 N.A N.A Interest (448) (591) 112 (118.9) (125.0) Depreciation Profit before Tax 5,062 8,591 10, Tax ,794.2 Tax rate (%) ,596.1 Share of minority Interest 612 1, (34.0) 37.4 Net Profit After Minority Interest 4,428 6,683 8, Source: Company, Karvy Institutional Research Exhibit 2: Change in estimates Rs. mn FY13E FY14E Comments New Old Change (%) Revenues 93,333 93, ,593 Domestic 32,278 32, ,088 Caraco 17,172 18, ,169 Downgrade in US biz owing to lower number of opportunities in FY12 Taro 29,783 28, ,350 Due to higher revenues in the last 2 qtrs Export formulations 8,054 7, ,067 Net material consumption 22,730 22, ,557 Manufacturing 17,931 18, ,726 R&D 6,134 5, ,489 Guidance of R&D between 6 8% Staff cost 13,065 12, ,372 EBITDA 33,472 33, ,449 EBITDA margin (in %) Net Profit 23,711 24, ,393 Due to lower other income EPS (in Rs.)

4 Exhibit 3: Profit & Loss Rs. mn FY10 FY11 FY12 FY13E FY14E Net Revenues 39,040 57,214 80,197 93, ,593 % growth (8.6) Raw Material 10,977 14,607 16,413 22,730 24,557 Staff 4,008 6,729 11,877 13,065 14,372 Manufacturing 11,456 16,179 19,260 24,066 26,215 Indirect Taxes Total Expenditure 27,394 37,514 47,550 59,861 65,144 EBITDA 11,645 19,700 32,647 33,472 37,449 EBITDA margin (%) Other income 1,681 1,892 4,099 4,617 3,767 Interest Depreciation 1,533 2,041 2,912 3,347 3,619 Profit Before Tax 11,732 19,551 33,553 34,742 37,597 Tax 678 1,284 3,826 6,400 7,212 Effective tax rate % PAT 11,054 18,266 29,727 28,342 30,386 Minority Interest (41) 913 3,855 3,609 3,971 Net Profit 11,095 17,353 25,872 24,733 26,414 Amortization ,022 1,022 1,022 Profit after amortization 10,689 16,581 24,850 23,711 25,393 EOI 2, Reported Net Profit 13,106 17,389 24,850 23,711 25,393 Exhibit 4: Balance Sheet Rs. mn FY10 FY11 FY12E FY13E FY14E Equity 1,036 1,036 1,036 1,036 1,036 Reserves 76,522 92, , , ,559 Net worth 77,558 93, , , ,595 Short term Loans 1,246 2,199 1,185 1,378 1,516 Long term Loans 465 2,057 1,554 1,710 1,881 Total Loans 1,712 4,256 2,739 3,088 3,397 Minority Interest 1,932 8,472 11,615 15,223 19,195 Deferred Tax Liability 890 3,652 5,199 5,199 5,199 Liabilities 80, , , , ,988 Gross Block 23,340 45,520 53,476 58,100 62,527 Depreciation 8,013 20,286 23,198 26,545 30,164 Net Block 15,328 25,234 30,278 31,555 32,363 Capital work in progress 1,448 2,706 2,464 2,840 2,913 Goodwill on consolidation 3,329 6,216 7,693 6,671 5,649 Long term Investments 30,664 22,310 22,129 22,129 22,129 Inventories 10,739 14,794 20,870 26,273 28,592 Debtors 11,748 11,716 19,261 22,428 24,584 Cash 6,073 21,936 35,175 48,656 68,838 Other Current assets 8,562 11,726 16,877 18,693 19,905 Total Current assets 37,121 60,172 92, , ,919 Creditors 3,194 4,808 8,401 9,777 10,747 Other current liabilities 4,385 9,425 16,549 17,577 18,238 Total current liabilities 7,579 14,234 24,950 27,354 28,985 Net current assets 29,542 45,939 67,233 88, ,934 Total Assets 80, , , , ,988 4

5 Exhibit 5: Cash Flow Rs. mn FY10 FY11 FY12 FY13E FY14E EBIT 9,706 16,887 28,714 29,103 32,808 Change in working capital Cash flow from operations 5,032 16,354 20,658 21,121 28,752 Other income 1,681 1,892 4,099 4,617 3,767 Depreciation & Amortization 1,533 2,041 3,933 4,369 4,641 Interest paid( ) (62) 0 (282) 0 0 Dividends paid( ) Tax paid( ) (678) (1,284) (3,826) (6,400) (7,212) Changes in minority interest 41 (913) (3,855) (3,609) (3,971) Deferred tax (211) (2,762) (1,547) 0 0 Extraordinaries 2, Net cash from operations 6,432 11,922 14,034 14,523 20,402 Capital Expenditure (2,113) (13,205) (7,713) (5,000) (4,500) Free Cash Flow Change in short term borrowing Change in long term borrowing 239 1, Change in borrowings (77) 2, Increase in long term investments (12,069) 8, Equity issue/buyback (2,351) (481) Changes in minority interest (39) 6,540 3,143 3,609 3,971 Cash from Financial Activities (14,535) 16,957 1,807 3,958 4,280 Others Opening cash 16,690 6,073 21,936 35,175 48,656 Closing cash 6,073 21,936 35,175 48,656 68,838 Change in Cash (10,618) 15,864 13,239 13,481 20,182 Exhibit 6: Key Ratios Ratios FY10 FY11 FY12 FY13E FY14E EV/EBDITA(x) ROE (%) ROCE (%) PE(x) P/BV(x) P/S(x)

6 Institutional Equities Team Rangachari Muralikrishnan Head Institutional Equities Shridhar Iyer Head Institutional Sales K. Anant Rao Head Sales Trading & Derivatives Uday Raval Karvy Inc. USA (212) INSTITUTIONAL RESEARCH Analysts Industry / Sector Desk Phone ID Dwaipayan Poddar Derivatives/Technical Research dwaipayan.poddar@karvy.com Hatim Broachwala Banking Jagadishwar Pasunoori MidCap jagadishwar.p@karvy.com Madhavi Arora Economy madhavi.arora@karvy.com Manoj Kumar Manish Derivatives Research manojkumar.m@karvy.com Mitul Shah Auto & Auto Ancillaries mitul.shah@karvy.com Naushil Shah Technology naushil.shah@karvy.com Nishith Sanghvi Pharmaceuticals nishith.s@karvy.com Naveen Trivedi FMCG naveen.trivedi@karvy.com Pallav Agarwal Metals & Mining agarwal.pallav@karvy.com Paresh Jain BFSI paresh.jain@karvy.com Parikshit Kandpal Infra / Real Estate parikshit.kandpal@karvy.com Raghuram Kuchi MidCap raghuram.kuchi@karvy.com Rahul Sharma Pharmaceuticals rahul.sharma@karvy.com Rahul Singh MidCap rahulsingh@karvy.com Rajesh Kumar Ravi Cement & Logistics rajesh.ravi@karvy.com Rupesh Sankhe Power/Capital Goods rupesh.sankhe@karvy.com Sameer Pardikar Telecom, Media and Oil & Gas sameer.pardikar@karvy.com Vinay Nair Oil & Gas vinaynair@karvy.com INSTITUTIONAL SALES Dinesh Bajaj Sales dinesh.bajaj@karvy.com Dipesh Jain Sales dipesh.jain@karvy.com R. Sriram Sales sriram.rangarajan@karvy.com Sushant Kumar Sales sushant.kumar@karvy.com Shabbir Dahodwala Sales (USA) shabbir@karvy.com Tejash Gandhi Sales tejash.gandhi@karvy.com INSTITUTIONAL SALES TRADING & DEALING Bhavesh Gandhi Institutional Dealer /69 bhavesh.gandhi@karvy.com Prashant Oza Institutional Dealer /71 prashant.oza@karvy.com Parag Shah Sales Trader /65 parag.shah@karvy.com Sriram Jagdish Sales Trader /67 sriram.jagdish@karvy.com PRODUCTION Asim Kumar Mohapatra Editor asim.mohapatra@karvy.com Vishal Randive Database vishal.randive@karvy.com Vijayalaxmi Moolya Production vijayalaxmi.m@karvy.com

7 Stock Ratings Absolute Returns Buy : > 15% Hold : 5 15% Sell : < 5% For further enquiries please contact: research@karvy.com Tel: Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures nor other derivatives related to such securities. Karvy Stock Broking Limited Institutional Equities Office No. 702, 7 th Floor, Hallmark Business Plaza, Opp. Gurunanak Hospital, Mumbai Regd Off : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad Karvy Stock Broking Research is also available on: Bloomberg KRVY <GO>, Thomson Publisher & Reuters.