1QFY2013 Result Update Pharmaceutical August 10, 2012 Sun Pharma Performance Highlights (` cr) 1QFY2013 4QFY2012 % chg qoq 1QFY2012 % chg yoy Net sales 2,658 2,330 14.1 1,636 62.5 Other income (2) 218-110 52.1 Gross profit 2,156 1,839 17.2 1,229 75.5 Operating profit 1,217 956 27.2 547 122.3 Net profit 796 820 (3.0) 501 58.8 Sun Pharmaceutical Industries (Sun Pharma) reported a much higher-thanexpected 1QFY2013 performance. Its net sales reported a 62.5% yoy growth. The net profit grew by 58.8% yoy, driven by a higher-than-expected improvement in sales and a higher-than-expected expansion in the OPM. In constant US$ terms, the company posted net sales and profit growth of 34% yoy and 31% yoy respectively. However, on account of the stock s rich valuation, we recommend a Neutral rating on the stock. Better-than-expected results: For 1QFY2013, Sun Pharma reported net sales of `2,658cr, up 62.5% yoy, mainly driven by exports. The company s OPM expanded to 45.8% in 1QFY2013 from 33.5% in 1QFY2012. Also, the gross margin came higher at 81.1% from 75.1% in 1QFY2012. The net profit during the quarter reported a 58.8% yoy growth to `796cr, which is higher than expectations, mainly on the back of a higher sales growth and an expansion in the OPM. Outlook and valuation: Sun Pharma is one of the largest and fastest growing Indian pharmaceutical companies. Its management has guided to 15-20% topline growth for FY2013. We expect Sun Pharma s net sales to post a 23.1% CAGR to `12,134cr. However, on account of higher taxation, we expect a flat EPS of `28.2 over FY2012 14E. The current declaration by Sun Pharma with regards to the possible product damages of $1bn on Pantaprazole, as estimated by Pfizer, could act as an overhang on the stock. However, on account of rich valuations, we recommend a Neutral stance on the stock. Key financials (Consolidated) Y/E March (` cr) FY2011 FY2012E FY2013E FY2014E Net sales 5,721 8,006 9,752 12,134 % chg 34.8 40.2 21.7 24.4 Net profit 1,816 2,584 2,689 2,925 % chg 34.5 42.3 4.1 8.8 EPS (`) 17.5 25.0 26.0 28.2 EBITDA margin (%) 34.4 40.6 41.6 41.6 P/E (x) 38.5 27.1 26.0 23.9 RoE (%) 21.0 23.9 20.3 18.8 RoCE (%) 19.1 25.3 25.4 26.7 P/BV (x) 7.4 5.8 4.9 4.2 EV/Sales (x) 11.9 8.4 6.0 4.5 EV/EBITDA (x) 34.7 20.6 14.5 10.9 NEUTRAL CMP `676 Target Price - Investment Period - Market Cap (` cr) Net Debt (` cr) 69,965 (5,227) Beta 52 Week High / Low Avg. Daily Volume 0.5 690/448 78,600 Face Value (`) BSE Sensex Nifty Reuters Code 1 17,557 5,320 SUN.BO Bloomberg Code SUNP@IN Shareholding Pattern (%) Promoters 63.7 MF / Banks / Indian Fls 10.4 FII / NRIs / OCBs 20.6 Indian Public / Others 5.3 Abs. (%) 3m 1yr 3yr Sensex 6.9 2.5 17.0 Sun Pharma 14.0 40.4 184.2 Sarabjit Kour Nangra +91 22 39357600 Ext: 6806 sarabjit@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 1QFY2013 performance (Consolidated) Y/E March (` cr) 1QFY2013 4QFY2012 % chg qoq 1QFY2012 % chg yoy FY2012 FY2011 % chg Net sales 2,658 2,330 14.1 1,636 62.5 8,006 5,721 39.9 Other income (1.9) 218.1-110.5-424.0 272.7 55.5 Total income 2,656 2,548 4 1,746 52.1 8,430 5,994 40.6 Gross profit 2,156 1,839 17.2 1,229 75.5 6,364 4,261 49.37 Gross margin (%) 81.1 78.9 75.1 79.5 72.6 Operating profit 1,217 956 27.2 547 122.3 3,251 1,967 65.2 Operating margin (%) 45.8 41.1 33.5 40.6 34.4 Interest 21 11-14 28 0 - Depreciation 80 82 (2.6) 65 23.8 291 204 42.7 PBT 1,114 1,081 3.0 580 92.1 3,355 2,036 64.8 Provision for taxation 192 177 8.9 14 1,248.9 383 128 197.9 PAT before extra-ordinary item 921 904 1.9 565 62.9 2,973 1,907 55.9 Minority interest(mi) 126 84 49.3 64 95 385 91 322 Extraordinary item 0 0 0 0 0 PAT after extra-ordinary item & MI 796 820 (3.0) 501 58.8 2,587 1,816 42.5 EPS (`) 7.7 7.9 4.8 25.0 13.7 Exhibit 2: 1QFY2013 Actual vs Angel estimates (` cr) Actual Estimates Variance (%) Net sales 2,658 2,000 32.9 Other income (2) 97 - Operating profit 1,217 763 59.6 Tax 192 152 26.4 Net profit 796 545 46.0 Higher-than-expected top-line performance: Sun Pharma reported 62.5% yoy growth in its net sales to `2,658cr during 1QFY2013, above our expectation of `2,000cr. The growth in the top-line was mainly driven by the inclusion of Taro s financials as well as strong growth in overall exports. The company s domestic segment reported a dip of 8.0% yoy during the quarter. Overall, exports sales of finished dosage products stood at `1,453cr in 4QFY2012, accounting for 63% of total sales. Taro s net sales for the quarter came in at US$159mn, registering a 43% yoy growth. The net profit for the quarter was at US$63mn. The US business grew by 105% led by supplies from Doxil while it ramped up market share to ~80% from the earlier 40%. Ex-Doxil and Taro, US growth of 51% was led by a ramp-up. Operating margins were at 49.6%, up 19% yoy and 4% qoq (had been estimated at 44%), led by an increase in gross margins and a proportionately lower increase in selling, general and administrative (SG&A) expenses. The PAT at US $63mn was up 72% against an estimated US $55mn. August 10, 2012 2
Taro has shared that it remains cautious of the increasing competition and consequential erosion of volume on some of its major products. This could result in significant challenges in maintaining its current performance. Overall, the US sales during the quarter were at US$285mn, up by 105% yoy, accounting for 57% of total sales. Sales of Caraco increased by 185% yoy during the quarter. On the regulatory front, during the quarter, an abbreviated new drug application (ANDA) for one product was filed. With this, ANDAs for 391 products cumulatively have been filed by Sun Pharma and Taro with the USFDA. ANDAs for six products received approvals in 1QFY2013, taking the total number of approvals to 256. Currently, ANDAs for 135 products await USFDA approval, including 17 tentative approvals. Exhibit 3: Sales trend (`cr) 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 877 1908 638 705 696 1475 1487 588 1022 1217 1QFY2012 2QFY2012 3QFY2012 4QFY2012 1QFY2013 Domestic Sales Export Sales OPM much higher than expectations: The company s OPM expanded to 45.8% in 1QFY2013 from 33.5% in 1QFY2012. Also, the gross margin came in higher at 81.1% from 75.1% in 1QFY2012. Amongst the key expenditure, the R&D and other expenditure increased by 57% yoy and 42.9% yoy respectively. August 10, 2012 3
Exhibit 4: OPM trend (%) 50.0 45.0 41.4 44.9 41.1 45.8 40.0 35.0 33.5 (%) 30.0 25.0 20.0 15.0 10.0 1QFY2012 2QFY2012 3QFY2012 4QFY2012 1QFY2013 Net profit came in above expectations: For 1QFY2013, the company s net profit came in at `796cr, up 58.8% yoy. This was higher than the estimated net profit of `568.5cr on account of higher-than-expected sales growth and higher than expected OPM. Exhibit 5: Net profit trend (`cr) 900 800 700 600 500 400 300 200 100 0 796 668 668 598 501 1QFY2012 2QFY2012 3QFY2012 4QFY2012 1QFY2013 Concall takeaways For FY2013, the management has given a revenue guidance of 15 20% on constant currency terms. Management has also decided to spin off the domestic formulation business on a going concern basis, comprising certain assets pertaining to the said business to its wholly owned subsidiary, Sun Resins & Polymers Pvt. Ltd. The total medical representative (MR) strength in the domestic market is of ~3000 executives. The company enjoys a market share of 4.6% in the domestic formulations markets. Sun Pharma s overall tax rate is expected to increase from the current levels to 20% of PBT in FY2013. August 10, 2012 4
The management has guided for a capex of `500cr for FY2013. R&D expenses have been guided for 6-8% of sales in FY2013 against 5.7% in FY2012. Investment arguments Strongest ANDA pipeline: Sun Pharma s US business posted a 33% CAGR over FY2005 10, which contributed 30% to its total turnover in FY2010. Sun Pharma, along with Caraco and Taro, now has 151 ANDAs pending USFDA approval, which is one of the highest in the Indian pharma space. Sun Pharma has filed around 30 ANDAs in each of the past few years. The company indicated that it would file ~25 ANDAs in FY2013 as well. On the Caraco front, the resolution of the USFDA issue is not clear. The company s remediation work plan to the USFDA on Caraco is ongoing. Domestic business: Sun Pharma s domestic formulation business has grown at a 23% CAGR, ie above the industry s average over FY2005 12. It contributed 36% to the company s total turnover in FY2012. The company has 3,000 MRs and its field force productivity is among the highest at around `97lakh/MR per year, which has resulted in high margins from the segment. The company has a market share of around 4.6%, with exposure to psychiatry, neurology, CVS, diabetic and gastroenterology segments. In FY2012, Sun Pharma launched 22 products in the domestic market. Healthy balance sheet: Sun Pharma has one of the strongest balance sheets in the sector, with cash of around `5,000cr. The management has indicated that it is looking at inorganic growth and scouting for acquisitions, especially in the US and the emerging markets. Outlook and valuation: Sun Pharma is one of the largest and fastest growing Indian pharmaceutical companies. The management has given a guidance of a 15-20% top-line growth for FY2013. Further, the management expects R&D expenses to be ~6-7% of net sales and capex at `500cr for FY2013. We expect Sun Pharma s net sales to post a 23.1% CAGR to `12,134cr. However, on account of higher taxation, we expect a flat EPS of `28.2 over FY2012 14E. The current declaration by the company with regards possible product damages of $1bn on Pantaprazole, as estimated by Pfizer, could act as an overhang on the stock. However, on account of rich valuations, we recommend a Neutral stance on the stock. Exhibit 6: Key assumptions FY2013E FY2014E Net sales growth (%) 21.7 24.4 Growth in employee expenses (%) 15.8 19.5 Operating margins (%) 41.6 41.6 Capex (`cr) 500 500 August 10, 2012 5
Exhibit 7: One-year forward PE band 700 600 500 400 300 200 25x 20x 15x 10x 100 - Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 10 15x 20x 25x Exhibit 8: Recommendation Summary Company Reco CMP Tgt. price Upside FY2014E FY12-14E FY2014E (`) (`) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%) Alembic Pharma. Buy 59 91 55.4 6.5 0.7 4.3 14.6 29.4 29.9 Aurobindo Pharma Buy 103 156 51.2 8.2 0.9 6.4 61.1 10.4 16.4 Aventis* Neutral 2,207 - - 21.1 2.7 17.7 12.0 16.1 17.0 Cadila Healthcare Accumulate 874 953 9.0 19.0 2.6 13.5 20.5 20.2 26.8 Cipla Accumulate 350 399 14.0 17.5 2.8 12.6 18.4 16.8 16.6 Dr Reddy's Accumulate 1,646 1,859 12.9 17.7 2.6 12.3 2.3 15.1 20.8 Dishman Pharma Accumulate 86 92 6.5 7.6 1.0 5.6 26.6 8.9 10.0 GSK Pharma* Neutral 2,105 - - 25.5 5.1 16.4 8.7 38.9 29.0 Indoco Remedies Buy 56 92 63.3 6.4 0.9 5.0 32.8 15.5 17.0 Ipca labs Buy 406 475 17.1 11.1 1.6 7.8 29.5 26.1 26.0 Lupin Accumulate 581 647 11.3 18.6 2.6 13.2 26.7 22.9 24.7 Orchid Chemicals Buy 107 178 65.8 4.8 0.8 4.7 27.8 11.5 7.9 Ranbaxy* Neutral 483 - - 16.2 1.8 11.2 44.8 15.8 28.9 Sun Pharma Neutral 676 - - 23.9 4.5 10.9 0.1 26.7 18.8 ; Note: *December year ending Company background Sun Pharma is an international specialty pharma company, with a large presence in the US and India, and a footprint across 40 other markets. In India and rest of the world markets, the key chronic therapy areas for the company are cardiology, psychiatry, neurology, gastroenterology, diabetology etc. We are market leaders in specialty therapy areas in India. In India, the company has emerged as a leading pharma company in India where we are the 6th largest by prescription sales. Also in the US, a key geography, the company has expanded significantly through both in-organic and organic routes. August 10, 2012 6
Profit & Loss (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E Gross sales 4,375 3,981 5,807 8,120 9,886 12,843 Less: Excise duty 103 27 85 114 134 229 Net sales 4,273 4,007 5,721 8,006 9,752 12,134 Other operating income 4 237-14 5 5 Total operating income 4,276 4,244 5,721 8,020 9,757 12,138 % chg 27.3 (0.8) 34.8 40.2 21.7 24.4 Total expenditure 2,408 2,644 3,754 4,755 5,694 7,084 Net raw materials 856 1,098 1,461 1,641 1,902 2,366 Other mfg costs 202 221 314 350 426 530 Personnel 340 401 800 1,188 1,447 1,800 Other 1,011 925 1,494 1,576 1,919 2,388 EBITDA 1,864 1,363 1,967 3,251 4,058 5,049 % chg 20.2 (26.9) 44.3 65.2 24.8 24.4 (% of Net Sales) 43.6 34.0 34.4 40.6 41.6 41.6 Depreciation & amort. 123 153 204 291 393 433 EBIT 1,741 1,210 1,763 2,974 3,665 4,616 % chg 19.7 (30.5) 45.7 68.7 23.2 26.0 (% of Net Sales) 40.7 30.2 30.8 37.1 37.6 38.0 Interest & other charges 28 Other income 205 205 273 410 272 272 (% of PBT) 10.5 14.5 13.4 12.2 6.9 6.3 Share in profit of Asso. - - - - - Recurring PBT 1,950 1,415 2,036 3,355 3,942 4,344 % chg 21.9 (27.4) 43.9 64.8 17.5 10.2 Extraordinary expense/(inc.) - - - - - PBT (reported) 1,950 1,415 2,036 3,355 3,942 4,344 Tax 71.2 67.9 128.4 385.5 788.3 868.8 (% of PBT) 3.7 4.8 6.3 11.5 20.0 20.0 PAT (reported) 1,878 1,347 1,907 2,970 3,153 3,475 Add: Share of earnings of asso. - - - - - Less: Minority interest (MI) 60 (4) 91 385 464 550 Prior period items - - - - - PAT after MI (reported) 1,818 1,351 1,816 2,584 2,689 2,925 ADJ. PAT 1,818 1,350 1,816 2,584 2,689 2,925 % chg 22.3 (25.8) 34.5 42.3 4.1 8.8 (% of Net Sales) 42.6 33.7 31.7 32.3 27.6 24.1 Basic EPS (`) 17.6 13.0 17.5 25.0 26.0 28.2 Fully Diluted EPS (`) 17.6 13.0 17.5 25.0 26.0 28.2 % chg 22.3 (25.7) 34.4 42.3 4.1 8.8 August 10, 2012 7
Balance Sheet (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E SOURCES OF FUNDS Equity share capital 104 104 104 104 104 104 Preference capital - - - - - Reserves & surplus 6,941 7,725 9,380 12,063 14,266 16,704 Shareholders funds 7,045 7,829 9,483 12,166 14,369 16,808 Minority interest 197 193 847 1,161 1,625 2,176 Total loans 179 171 426 303 303 303 Deferred tax liability (68) (89) (365) (520) (520) (417) Total liabilities 7,353 8,104 10,391 13,111 15,778 18,766 APPLICATION OF FUNDS Gross block 2,148 2,334 3,345 4,667 5,167 5,667 Less: Acc. depreciation 685 801 822 1,113 1,506 1,940 Net block 1,463 1,533 2,523 3,554 3,661 3,728 Capital work-in-progress 157 145 271 271 271 271 Goodwill 325 406 772 1,022 1,022 1,022 Investments 1,859 3,066 2,231 2,213 2,213 2,213 Current assets 4,268 3,712 6,017 8,517 11,615 15,271 Cash 1,669 607 2,194 3,367 5,342 7,466 Loans & advances 742 856 1,173 1,043 1,270 1,580 Other 1,857 2,249 2,651 4,107 5,003 6,225 Current liabilities 720 758 1,423 2,466 3,004 3,737 Net current assets 3,548 2,954 4,594 6,051 8,611 11,533 Mis. Exp. not written off - - - - - - Total assets 7,353 8,104 10,391 13,111 15,778 18,766 August 10, 2012 8
Cash Flow Statement (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E Profit before tax 1,949 1,415 2,036 3,355 3,942 4,344 Depreciation 123 153 204 291 393 433 (Inc)/Dec in working capital 3 (467) (53) (284) (585) (798) Direct taxes paid 169 162-385 788 869 Cash Flow from Operations 1,907 938 2,187 2,977 2,961 3,110 (Inc.)/Dec.in Fixed Assets (640) (174) (1,137) (1,322) (500) (500) (Inc.)/Dec. in Investments (1,103) (1,207) 835 18 - - Other income - - - - - - Cash Flow from Investing (1,744) (1,381) (301) (1,304) (500) (500) Issue of Equity - - - - - - Inc./(Dec.) in loans (35) 8 (254) 123 - - Dividend Paid (Incl. Tax) (242) (333) (486) (486) (486) (486) Others 545 (294) 442 (136) - - Cash Flow from Financing 267 (619) (299) (500) (486) (486) Inc./(Dec.) in Cash 430 (1,062) 1,586 1,174 1,975 2,124 Opening Cash balances 1,239 1,669 607 2,194 3,367 5,342 Closing Cash balances 1,669 607 2,194 3,367 5,342 7,466 August 10, 2012 9
Key Ratios Y/E March FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E Valuation Ratio (x) P/E (on FDEPS) 36.7 51.8 38.5 27.1 26.0 23.9 P/CEPS 6.9 9.3 6.9 4.9 4.5 4.2 P/BV 9.5 8.9 7.4 5.8 4.9 4.2 Dividend yield (%) 2.1 2.0 2.5 3.4 3.7 3.7 EV/Sales 15.3 17.3 11.9 8.4 6.0 4.5 EV/EBITDA 35.0 51.0 34.7 20.6 14.5 10.9 EV / Total Assets 8.9 8.6 6.6 5.1 3.7 2.9 Per Share Data (`) EPS (Basic) 17.6 13.0 17.5 25.0 26.0 28.2 EPS (fully diluted) 17.6 13.0 17.5 25.0 26.0 28.2 Cash EPS 93.7 72.6 97.5 138.8 148.8 162.1 DPS 13.8 13.8 16.6 22.8 24.8 24.8 Book Value 68.0 75.6 91.6 117.5 138.8 162.3 Dupont Analysis EBIT margin 40.7 30.2 30.8 37.1 37.6 38.0 Tax retention ratio 96.3 95.2 93.7 88.5 80.0 80.0 Asset turnover (x) 0.9 0.6 0.7 0.9 1.0 1.1 ROIC (Post-tax) 34.3 18.5 21.1 29.4 29.1 34.0 Cost of Debt (Post Tax) 0.0 0.0 0.0 6.9 0.0 0.0 Leverage (x) - - - - - - Operating ROE 34.3 18.5 21.1 29.4 29.1 34.0 Returns (%) ROCE (Pre-tax) 27.4 15.7 19.1 25.3 25.4 26.7 Angel ROIC (Pre-tax) 38.5 19.9 25.0 38.1 41.7 48.2 ROE 30.2 18.2 21.0 23.9 20.3 18.8 Turnover ratios (x) Asset Turnover (Gross Block) 2.3 1.9 2.0 2.0 2.0 2.2 Inventory / Sales (days) 75 88 81 81 87 92 Receivables (days) 98 88 75 69 78 83 Payables (days) 37 34 29 106 108 108 WC cycle (ex-cash) (days) 168 182 151 116 111 110 Solvency ratios (x) Net debt to equity (0.2) (0.1) (0.2) (0.3) (0.4) (0.4) Net debt to EBITDA (0.8) (0.3) (0.9) (0.9) (1.2) (1.4) Interest Coverage (EBIT / Int.) - - - - - - August 10, 2012 10
Research Team Tel: 022-3935 7800 E-mail: research@angelbroking.com Website: www.angelbroking.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Sun Pharma 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors. Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) August 10, 2012 11