INDUSTRY PHARMA CMP (as on 14 Aug 2018) Rs 602 Target Price Rs 670 Nifty 11,435 Sensex 37,852 KEY STOCK DATA Bloomberg SUNP IN No. of Shares (mn) 2,399 MCap (Rs bn) / ($ mn) 1,444/20,662 6m avg traded value (Rs mn) 3,444 STOCK PERFORMANCE (%) 52 Week high / low Rs 610/433 3M 6M 12M Absolute (%) 27.0 4.7 27.6 Relative (%) 20.6 (6.1) 7.2 SHAREHOLDING PATTERN (%) Promoters 54.38 FIs & Local MFs 15.59 FPIs 16.40 Public & Others 13.63 Source : BSE Amey Chalke amey.chalke@hdfcsec.com +91-22-6171-7321 Off the hook Sun Pharma (SUNP) posted good numbers in 1QFY19. Revenue grew ~16%YoY to Rs 72.2bn, and the EBITDA margin expanded 460bps to 22.2%, ~100bps above our estimates. EBITDA at Rs 16.1bn and PAT at Rs 9.8bn were up 46.6% and 86.9% YoY respectively. Despite challenges in the US generics space and decline in the Taro business, SUNP managed 12% growth in revenues in the US market. Additionally, good performance in India which showed growth of 22% coupled with 11% growth in ROW driven by key markets including Romania, Eastern Europe, and Asia led to positive results for the quarter. With strong performance in 1QFY19, Halol resolution and depreciating rupee, Sun pharma is likely to beat its top line guidance in FY19. Margins could remain subdued for one year due to front end cost incurred for fledging specialty business in the US. Benefits are likely to be visible from FY20 onwards with ramp up expected in products like Yonza, Illumya, Seceira and other specialty molecules. Remain bullish on the stock and maintain BUY rating with the target price of Rs 670 (25x FY20E EPS). RESULTS REVIEW 1QFY19 16 AUG 2018 Sun Pharma BUY Highlights of the quarter The US Business: SUNP is gradually crossing key milestones in the US with 3 products lined up. With the clearance of Halol facility, management is expecting gradual improvement and new product approvals for US. In this quarter, it filed for 3 ANDAs and received 6 approvals. Welchol and new launches were drivers of growth in the US. (3) Management believes cost control and maintaining efficiency is imperative due to challenges in the US. Concall takeaways: (1) R&D costs are likely to go up in the coming quarters for specialty products. (2) Material cost was higher YoY due to unfavourable product mix and higher material cost for Taro. (3) Staff cost is expected to increase due to specialty field force. Marketing and other expenses will also increase on the back of new product launches. (4) Tax will broadly increase for the full year. (5) Guiding a growth of low double digits for FY19. Near-term outlook: Ramp up in specialty portfolio and exclusive generic product launches remain key nearterm triggers. Financial Summary (Rs mn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%) FY17 FY18 FY19E FY20E Net Sales 72,242 62,088 16.4 69,771 3.5 3,15,784 2,64,895 3,05,435 3,51,047 EBIDTA 16,067 10,957 46.6 16,835 (4.6) 1,00,893 56,081 64,573 88,734 APAT 9,825 5,256 86.9 13,090 (24.9) 62,327 31,121 38,320 60,085 Diluted adj. EPS (Rs) 4.1 2.2 86.9 5.5 (24.9) 26.0 13.0 16.0 25.0 P/E (x) 23.2 46.4 37.7 24.0 RoE (%) 17.9 8.3 9.7 13.8 # Consolidated HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Quarterly Financials Snapshot (Consolidated) Particulars 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%) Net Sales 72,242 62,088 16.4 69,771 3.5 Material Expenses 21,068 16,774 25.6 17,701 19.0 Employee Expenses 14,330 13,299 7.8 13,413 6.8 R&D Expenses 4,849 5,015 (3.3) 6,155 (21.2) Other Operating Expenses 15,927 16,045 (0.7) 15,668 1.7 EBITDA 16,067 10,957 46.6 16,835 (4.6) Depreciation 4,016 3,466 4,552 EBIT 12,051 7,490 60.9 12,283 (1.9) Other Income 1,998 1,520 31.4 3,028 Interest Cost 1,309 1,094 1,554 PBT 12,739 (1,589) (901.6) 13,756 (7.4) Tax 1,639 1,618 (1,767) Minority Interest + Share of profit/loss of Asso. (1,275) (1,042) (2,434) RPAT 9,825 (4,249) (331.2) 13,090 (24.9) EO Items (Adj For Tax) - 9,505 - APAT 9,825 5,256 86.9 13,090 (24.9) Margin Analysis 1QFY19 1QFY18 YoY (bps) 4QFY18 QoQ (bps) Material Expenses % Net Sales 29.2 27.0 215 25.4 379 Employee Expenses % Net Sales 19.8 21.4 (158) 19.2 61 R&D Expenses % Net Sales 6.7 8.1 (136) 8.8 (211) Other Expenses % Net Sales 22.0 25.8 (379) 22.5 (41) EBITDA Margin (%) 22.2 17.6 459 24.1 (189) Tax Rate (%) 12.9 (101.8) 11466 6.5 634 APAT Margin (%) 13.6 8.5 514 18.8 (516) Page 2
US Business: Decline In Taro Impacted Growth US Formulations Revenue (Rs bn) YoY Growth (%) India Business: Good Quarter Domestic Formulations Rev (Rs bn) YoY Growth (%) 28.3 31.7 12.0 6.8 (34.7) (44.4) (46.5) (7.2) 12.3 15.1 4.0 11.1 4.2 6.1 (5.0) 10.6 5.9 2.4 22.2 39 41 37 34 26 23 20 (37.9) 21 24 25 18 19 20 20 19 18 22 21 20 22 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 EBITDA Margin: Sequential Decline EBITDA (Rs bn) EBITDA Margin (%) R&D Expense: Focus On Specialty R&D Expenses (Rs bn) R&D to Sales (%) 29.7 35.4 38.3 31.0 21.7 17.6 20.7 21.8 24.1 22.2 9.1 6.5 7.1 8.0 7.9 8.1 7.4 7.2 9.2 6.8 23 29 32 25 15 11 14 15 17 16 6.7 5.2 5.5 6.1 5.4 5.0 4.9 4.7 6.2 4.8 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Page 3
Segmental Quarterly Performance (Rs mn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%) India 21,520 17,610 22.2 19,626 9.6 US 25,437 22,646 12.3 23,716 7.3 RoW 20,265 18,228 11.2 20,230 0.2 API 3,942 3,089 27.6 3,324 18.6 Other 225 95 135.8 213 5.4 Total 71,388 61,669 15.8 67,109 6.4 Source: HDFC sec Inst Research Assumptions FY16 FY17 FY18 FY19E FY20E India 72,815 77,491 80,293 88,707 99,648 Growth (%) 8.4 6.4 3.6 10.5 12.3 USA 1,37,580 1,37,588 87,466 1,07,534 1,30,318 Growth (%) 0.3 0.0 (36.4) 22.9 21.2 RoW 57,829 71,131 78,132 86,297 94,926 Growth (%) (4.6) 23.0 9.8 10.4 10.0 API 14,025 13,609 13,993 16,347 17,655 Growth (%) 41.5 (3.0) 2.8 16.8 8.0 Other 796 750 775 750 1,000 Total 2,83,044 3,00,568 2,60,659 2,99,635 3,43,547 Growth (%) 2.7 6.2 (13.3) 15.0 14.7 Source: HDFC sec Inst Research Page 4
Peer Set Comparison Mcap (Rs bn) CMP (Rs/sh) Reco TP/FV Adj EPS (Rs/sh) P/E (x) RoE (%) FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E Sun Pharma 1,444 602 BUY 670 26.0 13.0 16.0 25.0 23.2 46.4 37.7 24.0 17.9 8.3 9.7 13.8 Cipla 516 643 NEU 595 12.5 17.5 22.5 28.6 51.4 36.7 28.6 22.5 8.4 10.5 12.0 13.7 Dr Reddy's Labs 387 2,279 NEU 2,340 72.7 59.2 75.7 102.5 31.4 38.5 30.1 22.2 9.5 7.8 9.5 11.5 Lupin 376 837 BUY 1,000 33.4 38.0 27.4 45.3 25.1 22.0 30.5 18.5 12.2 12.7 8.9 13.5 Aurobindo Pharma 369 631 BUY 691 39.3 34.4 36.6 45.4 16.1 18.4 17.2 13.9 27.6 19.1 16.9 17.8 Cadila Healthcare 349 340 BUY 495 14.5 12.9 14.7 20.6 23.4 26.5 23.1 16.5 23.5 16.8 16.1 19.7 Divi's Labs 306 1,155 NEU 1,150 39.9 33.0 44.6 51.4 28.9 34.9 25.9 22.5 22.0 15.5 18.7 18.9 Torrent Pharma 290 1,711 NEU 1,540 51.2 40.1 46.1 69.9 33.4 42.7 37.1 24.5 22.1 15.1 15.9 20.9 Alkem Laboratories 240 2,010 BUY 2,410 74.6 57.6 76.8 101.9 26.9 34.9 26.2 19.7 21.9 14.8 17.6 20.1 Glenmark 165 585 BUY 629 29.6 17.5 22.6 33.6 17.5 33.4 25.8 17.4 18.1 9.4 10.9 14.4 Jubilant Life Sciences 111 714 BUY 990 37.0 46.6 57.9 70.1 19.3 15.3 12.3 10.2 18.0 19.3 20.1 20.3 Alembic Pharma 109 581 NEU 560 21.4 21.9 23.8 31.1 27.1 26.5 24.4 18.7 23.0 20.0 18.8 20.9 Laurus Labs 47 447 NR 505 18.0 15.8 18.3 28.2 24.8 28.2 24.5 15.8 17.4 11.9 12.3 16.6 Dishman Carbogen Amcis 41 253 BUY 440 9.0 9.6 13.4 19.9 28.1 26.4 18.8 12.7 3.0 3.1 4.2 5.9 Strides Shasun 38 420 BUY 480 34.0 12.7 15.5 28.7 12.4 33.1 27.0 14.6 13.1 4.4 5.5 9.6 Suven Life Sciences 30 237 NR 450 6.8 9.7 10.3 11.4 34.6 24.4 22.9 20.8 13.8 17.2 16.0 15.5 Granules India 27 105 BUY 120 7.5 5.2 7.8 10.0 13.9 20.0 13.5 10.5 21.0 12.0 14.3 16.5 Neuland Labs 6 688 BUY 914 42.6 11.0 17.4 57.1 16.1 62.7 39.5 12.0 12.8 2.2 3.5 10.0 Source: HDFC sec Inst Research Change In Estimates (Consolidated) Rs mn Previous New % Chg FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E Net Sales 2,64,895 3,00,021 3,52,740 2,64,895 3,05,435 3,51,047 0.0 1.8 (0.5) EBITDA 56,081 64,929 87,388 56,081 64,573 88,734 0.0 (0.5) 1.5 APAT 31,121 39,432 59,047 31,121 38,320 60,085 0.0 (2.8) 1.8 Source: HDFC sec Inst Research Page 5
Income Statement (Consolidated) Year ending March (Rs mn) FY16 FY17 FY18 FY19E FY20E Net Revenues 2,84,870 3,15,784 2,64,895 3,05,435 3,51,047 Growth (%) 3.8 10.9 (16.1) 15.3 14.9 Material Expenses 63,304 81,307 74,247 85,396 92,758 Employee Expenses 47,723 49,023 53,671 60,171 65,295 SG&A Expenses 29,627 29,210 25,430 30,544 35,105 Other Operating Expenses 62,634 55,351 55,466 64,752 69,156 EBITDA 81,583 1,00,893 56,081 64,573 88,734 EBITDA Margin (%) 28.6 31.9 21.2 21.1 25.3 EBITDA Growth (%) 3.7 23.7 (44.4) 15.1 37.4 Depreciation 10,375 12,648 14,998 16,902 18,411 EBIT 71,208 88,245 41,083 47,671 70,323 Other Income (Including EO Items) (269) 6,232 4,013 8,500 9,500 Interest 5,232 3,998 5,176 4,500 3,500 PBT 65,706 90,479 39,920 51,671 76,323 Tax (Incl Deferred) 9,138 12,116 13,582 9,301 13,738 Minority Interest (11,112) (8,719) (4,722) (4,050) (2,500) RPAT 45,457 69,644 21,616 38,320 60,085 EO (Loss) / Profit (Net Of Tax) 90 7,316 (9,505) - - APAT 45,367 62,327 31,121 38,320 60,085 APAT Growth (%) -0.1 37.4-50.1 23.1 56.8 Adjusted EPS (Rs) 18.9 26.0 13.0 16.0 25.0 Balance Sheet (Consolidated) Year ending March (Rs mn) FY16 FY17 FY18 FY19E FY20E SOURCES OF FUNDS Share Capital - Equity 2,407 2,399 2,399 2,399 2,399 Reserves 3,27,418 3,63,997 3,78,606 4,07,101 4,57,361 Total Shareholders Funds 3,29,825 3,66,397 3,81,006 4,09,501 4,59,760 Minority Interest 40,853 37,909 38,842 42,892 45,392 Long Term Debt 31,103 14,361 17,721 14,177 11,341 Short Term Debt 52,061 66,549 79,797 63,838 51,070 Total Debt 83,164 80,910 97,518 78,014 62,411 Net Deferred Taxes (30,462) (21,780) (19,748) (19,748) (19,748) Long Term Provisions & Others 21,055 13,418 12,111 5,286 12,357 TOTAL SOURCES OF FUNDS 4,44,434 4,76,853 5,09,728 5,15,945 5,60,172 APPLICATION OF FUNDS Net Block 75,831 84,953 91,590 94,060 97,025 CWIP 25,936 31,986 18,318 32,582 30,266 Goodwill 82,891 91,799 1,07,243 1,08,372 1,08,996 Investments 3,664 5,035 3,001 3,001 3,001 Other Non-current Assets 28,581 41,291 57,057 43,187 43,872 Total Non-current Assets 2,16,903 2,55,063 2,77,210 2,81,202 2,83,160 Cash & Equivalents 1,46,452 1,58,292 1,67,721 1,88,756 2,19,130 Inventories 64,225 68,328 68,807 69,610 75,610 Debtors 67,757 72,026 78,153 58,577 67,324 Other Current Assets 28,476 35,465 29,199 39,243 43,318 Total Current Assets 1,60,458 1,75,819 1,76,159 1,67,429 1,86,253 Creditors 35,829 43,954 47,662 46,164 50,144 Other Current Liabilities & Provns 43,549 68,367 63,700 75,278 78,227 Total Current Liabilities 79,378 1,12,321 1,11,362 1,21,442 1,28,371 Net Current Assets 81,080 63,498 64,797 45,986 57,882 TOTAL APPLICATION OF FUNDS 4,44,434 4,76,853 5,09,728 5,15,944 5,60,172 Page 6
Cash Flow Year ending March (Rs mn) FY16 FY17 FY18 FY19E FY20E Reported PBT 65,706 90,479 34,790 51,671 76,323 Non-operating & EO items (4,129) (11,849) (13,110) (8,500) (9,500) Interest expenses 5,232 3,998 5,176 4,500 3,500 Depreciation 10,375 12,648 14,998 16,902 18,411 Working Capital Change 2,468 (4,092) (18,374) 25,247 (6,194) Tax Paid (19,885) (20,571) (8,452) (9,301) (13,738) OPERATING CASH FLOW ( a ) 59,768 70,612 15,028 80,519 68,802 Capex (33,329) (35,904) (22,706) (34,155) (19,000) Free cash flow (FCF) 26,439 34,708 (7,678) 46,364 49,802 Investments (14,278) (10,108) (59,510) - - Non-operating Income 3,892 3,796 8,388 8,500 9,500 INVESTING CASH FLOW ( b ) (43,716) (42,216) (73,828) (25,655) (9,500) Debt Issuance/(Repaid) (7,820) 8,371 16,608 (19,504) (15,603) Interest Expenses (3,014) (3,338) (5,176) (4,500) (3,500) FCFE 5,219 33,429 (47,368) 30,860 40,199 Share Capital Issuance (378) (27,283) (3,789) 0 0 Dividend (8,687) (2,889) (9,825) (9,825) (9,825) Others (3,588) 1,701 (14,961) (0) 0 FINANCING CASH FLOW ( c ) (23,486) (23,438) (17,144) (33,829) (28,928) NET CASH FLOW (a+b+c) (7,433) 4,957 (75,944) 21,035 30,374 EO Items, Others - - - - - Closing Cash & Equivalents 1,02,337 1,36,774 75,464 1,20,329 1,50,703 Key Ratios FY16 FY17 FY18 FY19E FY20E PROFITABILITY (%) GPM 77.8 74.3 72.0 72.0 73.6 EBITDA Margin 28.6 31.9 21.2 21.1 25.3 APAT Margin 15.9 19.7 11.7 12.5 17.1 RoE 14.9 17.9 8.3 9.7 13.8 RoIC (or Core RoCE) 23.1 28.1 9.6 13.9 19.6 RoCE 12.1 14.3 7.0 8.2 11.7 EFFICIENCY Tax Rate (%) 13.9 13.4 34.0 18.0 18.0 Fixed Asset Turnover (x) 2.3 2.4 1.8 1.9 2.0 Inventory (days) 82.3 79.0 94.8 83.2 78.6 Debtors (days) 86.8 83.3 107.7 70.0 70.0 Other Current Assets (days) 36.5 41.0 40.2 46.9 45.0 Payables (days) 45.9 50.8 65.7 55.2 52.1 Other Current Liab & Provns (days) 55.8 79.0 87.8 90.0 81.3 Cash Conversion Cycle (days) 103.9 73.4 89.3 55.0 60.2 Debt/EBITDA (x) 1.0 0.8 1.7 1.2 0.7 Net D/E (x) (0.2) (0.2) (0.2) (0.3) (0.3) Interest Coverage (x) 13.6 22.1 7.9 10.6 20.1 PER SHARE DATA (Rs) EPS 18.9 26.0 13.0 16.0 25.0 Dividend 1.0 3.5 3.5 3.5 3.5 Book Value 137.1 152.7 158.8 170.7 191.6 VALUATION P/E (x) 31.9 23.2 46.4 37.7 24.0 P/BV (x) 4.4 3.9 3.8 3.5 3.1 EV/EBITDA (x) 17.0 13.5 24.5 20.6 14.5 EV/Revenues (x) 4.9 4.3 5.2 4.4 3.7 OCF/EV (%) 4.3 5.2 1.1 6.0 5.3 FCF/EV (%) 1.9 2.5 (0.6) 3.5 3.9 FCFE/Mkt Cap (%) 0.4 2.3 (3.3) 2.1 2.8 Dividend Yield (%) 0.2 0.6 0.6 0.6 0.6 Page 7
RECOMMENDATION HISTORY 700 650 600 550 500 450 400 Sun Pharma TP Date CMP Reco Target 12-Aug-17 450 NEU 455 10-Oct-17 531 NEU 525 15-Nov-17 526 NEU 485 11-Jan-18 588 NEU 560 15-Feb-18 575 NEU 550 13-Apr-18 516 NEU 544 27-May-18 466 NEU 530 13-Jun-18 540 BUY 640 10-Jul-18 569 BUY 640 16-Aug-18 602 BUY 670 350 300 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8
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