COMPANY UPDATE RETAIL EQUITY RESEARCH Sun Pharmaceutical Industries Ltd. Pharmaceuticals BSE CODE: 524715 NSE CODE: SUNPHARMA Bloomberg CODE: SUNP:IN SENSEX: 35,548 HOLD Rating as per Large Cap 12 months investment period CMP Rs. 571 TARGET Rs. 597 RETURN 5% 19 th June, 2018 Halol facility clearance: A big boost Sun Pharma is India s top drug maker and world's fifth largest specialty generic pharmaceutical company by revenue with 41 manufacturing facilities spread across 6 continents. Revenue fell 2% YoY in Q4FY18 due to lower US and less than expected India sales. US sales declined 7% YoY mainly on account of sharp fall in Taro sales (down 11% YoY) due to continued pricing pressure in the US and lack of significant approvals. EBITDA margin expanded by 340 bps YoY to 25.1% led by improved gross margin. We expect revenue/adj.pat to grow at 14%/42% CAGR over FY18-20E driven by expected pick-up in US sales and key speciality & generic launches. Given improved visibility for key drug launches in the US post Halol plant resolution, increased spend on specialty business and expected recovery in India business, we change our rating to HOLD from SELL. Our revised target price stands at Rs597 based on 23x FY20E PE. Weak US and subdued India sales drags revenue Sun Pharma reported 2% YoY decline in net revenue in Q4FY18 due to weak US sales which declined by 7% YoY impacted by pricing pressure, lack of significant approvals and lower generic sales (Imatinib). Further, lower Absorica sales due to change in co-pay program, which resulted in sharp decline in prescriptions, impacted the sales. However, with changes in the rebate system, we expect improvement from Absorica prescription. Further, Taro sales declined by 11% YoY in Q4FY18. We expect US sales to register 17% CAGR over FY18-20 on the back of ramp-up in specialty portfolio coupled with strong product pipeline in the US market which includes 139 ANDAs and 3 NDAs awaiting approval with the USFDA. Further, clearance of Halol plant, which is Sun pharma s largest facility catering to the US market is a key positive. The company is planning to commercialize key products in specialty dermatology portfolio including Ilumya, Yonsa, OTX-101, tildrakizumab and Seceria in the US market in FY19. The company has already launched Bromsite and Odomzo in the US. It has already received the approval for Yonsa, a product for treating prostate cancer and is targeting to launch the product in this quarter followed by Ilumya in Q2FY19. During the quarter, the company filed 19 ANDAs and received 5 approvals. On the R&D front, the company expects R&D investments to be in the range of 8-9% of FY19 sales, majority of which will be on specialty. India sales grew by just 2% YoY in Q4FY18 impacted by GST and weak performance of key brands like Volini and Revital due to intense competition. Further, formulation sales in Emerging markets rose 5% YoY supported by broad-based growth across key markets such as Romania, Eastern Europe, Middle East and North Africa. Expect 579 bps expansion in EBITDA margin over FY18-20E Despite challenging US generic pricing environment, EBITDA margin expanded by 340 bps YoY during the quarter to 25.1% led by higher gross margin mainly due to better product mix as well as lower COGS for Taro. With improved EBITDA performance, Adj.PAT rose by 14% YoY. Going ahead, we factor in 530bps expansion in EBITDA margin to 26.5% in FY20E on the back of launch of limited competition generic drugs and company s increasing focus on speciality business where it continues to invest to enhance its global specialty and complex generics pipeline. Further, company s focus on cost control, R&D rationalization and exclusive launches will support margin expansion. Halol Plant resolution; a key trigger Sun Pharma has received the clearance for its Halol plant from the USFDA for the inspection conducted at its facility in Gujarat during the period February 12-23, 2018. This facility had been under FDA scanner since September 2014 which restricted any product approval from this facility. This clearance is a big boost for the company as this facility caters to the US market and it will pave the way for getting new product approvals. The US business accounts for 35-40% of the revenue for Sun Pharmaceutical. Outlook & Valuation Clearance of Halol facility, ramp up of generics and speciality business driven by increased investments augurs well for the company as it improves the launch visibility. Sun Pharma has been investing heavily to build a pipeline of specialty products for the US market. Moreover, expectation of further market share gains in Odomzo and BromSite (launched in FY17) and recovery in India business will support growth. Hence, we change our rating to HOLD from SELL with a revised target price of Rs 597 based on 23x FY20E EPS. We increase our target multiple to factor in improved launch visibility and key speciality & generic launches. Company Data Market Cap (Rs. cr) 136,964 Enterprise Value (Rs. cr) 129944 Outstanding Shares (cr) 239.9 Free Float 46% Dividend Yield 0.4% 52 week high Rs. 608 52 week low Rs.433 6m average volume (cr) 0.1 Beta 0.8 Face value Rs. 1 Shareholding (%) Q2FY18 Q3FY18 Q4FY18 Promoters 54.4 54.4 54.4 FII s 18.2 17.2 16.3 MFs/Insti 13.9 14.9 16.3 Public 7.6 7.5 7.3 Others 5.9 6.0 5.7 Total 100.0 100.0 100.0 Price Performance 3 Month 6 Month 1 Year Absolute Return 10% 10% 5% Absolute Sensex 5% 7% 14% Relative Return* 5% 3% (9%) *over or under performance to benchmark index Standalone (Rs. cr) FY18 FY19E FY20E Sales 26,489 29,836 34,541 Growth (%) -16.1% 12.6% 15.8% EBITDA 5,608 6,821 9,163 Margin(%) 21.2 22.9 26.5 PAT Adj 3,112 4,255 6,233 Growth (%) -55.3% 36.7% 46.5% Adj.EPS 13.0 17.7 26.0 Growth (%) -55.3% 36.7% 46.5% P/E 44.0 32.2 22.0 P/B 3.6 3.3 2.9 EV/EBITDA 25.1 20.3 14.6 RoE (%) 7.6 9.7 12.7 D/E 0.2 0.2 0.2
Quarterly Financials (Consolidated) Profit & Loss Account Particulars (Rs cr) Q4FY18 Q4FY17 YoY Growth % Q3FY18 QoQ Growth % Sales 6,977 7,137 (2.2) 6,653 4.9 EBITDA 1,683 1,548 8.8 1,453 15.8 Margin (%) 24.1 21.7 245 21.8 228 Depreciation 455 338 34.6 339 34.2 EBIT 1,228 1,209 1.6 1,114 10.2 Interest 155 45 245.4 95 63.0 Other Income 303 225 34.9 129 134.3 Exceptional Items - - - - - PBT 1,376 1,389 (1.0) 1,148 19.8 Tax (177) 44 (498.8) 749 (123.6) PAT 1,552 1,345 15.4 399 288.8 Minority Interest (243) (121) 101.4 (34) 619.3 Reported PAT 1,309 1,224 7.0 365 258.2 Adjustment - - - - - Adj PAT 1,309 1,224 7.0 365 258.2 No. of shares (cr) 239.9 239.9-239.9 - EPS (Rs) 5.5 5.1 7.0 1.5 258.2 Source: Company, Geojit Research Business performance (Rs cr) Q4FY18 Q4FY17 YoY QoQ Q3FY17 Growth % Growth % US 2,372 2,554 (7.2) 2,124 11.6 India 1,963 1,916 2.4 2.085 (5.9) Emerging Market (EM) 1,279 1,213 5.5 1,221 4.8 RoW 744 732 1.5 777 (4.2) Total Formulations 6,357 6,416 (0.9) 6,207 2.4 APIs 332 395 15.9 370 (10.1) Others 21 14 54.3 21 (0.7) Total sales 6,711 6,825 (1.7) 6,598 1.7 Source: Company, Geojit Research Change in estimates Old estimates New estimates Change % Year / Rs cr FY19E FY19E FY20E FY19E Revenue 32,193 29,836 34,541 (7.3) EBITDA 7,855 6,821 9,163 (13.2) Margins (%) 24.4 22.9 26.5 (150bps) PAT 4,957 4,255 6,233 (14.2) EPS 20.7 17.7 26.0 (14.3)
Consolidated Financials Profit & Loss Account Sales 28,270 31,578 26,489 29,836 34,541 % change 2.5% 11.7% -16.1% 12.6% 15.8% EBITDA 8,324 10,089 5,608 6,821 9,163 % change 3.9% 21.2% -44.4% 21.6% 34.3% Depreciation 1,014 1,265 1,500 1,604 1,703 EBIT 7,310 8,825 4,108 5,217 7,461 Interest 477 400 518 508 479 Other Income 617 623 839 972 1,062 PBT 7,450 9,048 4,429 5,681 8,044 % change 10.3% 21.4% -51.0% 28.3% 41.6% Tax 935 1,212 845 1,023 1,448 Tax Rate (%) 12.5% 13.4% 19.1% 18.0% 18.0% Reported PAT 4,716 6,964 2,162 4,255 6,233 Adj* 685-951 - - Adj PAT 5,401 6,964 3,112 4,255 6,233 % change 10.4% 28.9% -55.3% 36.7% 46.5% No. of shares (cr) 241 240 240 240 240 Adj EPS (Rs) 22.4 29.0 13.0 17.7 26.0 % change 10.3% 29.3% -55.3% 36.7% 46.5% DPS (Rs) 1.0 3.5 2.0 2.0 2.0 Cash flow Pre-tax profit 6,571 9,048 4,429 5,681 8,044 Depreciation 1,730 1,285 1,500 1,604 1,703 Changes in W.C 247 (409) (1,634) (914) (808) Others 127 (784) (321) (464) (583) Tax paid (1,988) (2,057) (845) (1,023) (1,448) C.F.O 6,686 7,082 3,129 4,885 6,907 Capital exp. (3,404) (3,693) (2,271) (2,400) (2,000) Change in inv. 1,520 363 (5,951) - - Other invest.cf (2,488) (892) 839 972 1,062 C.F - investing (4,372) (4,222) (7,383) (1,428) (938) Issue of equity 9 2 (125) - - Issue/repay debt (829) (1,897) 1,661 (1,000) (500) Dividends paid (871) (292) (576) (576) (576) Other finance.cf (198) (99) (518) (508) (479) C.F - Financing (1,889) (2,285) 443 (2,084) (1,555) Chg. in cash 426 575 (3,812) 1,373 4,414 Closing cash 13,989 15,141 9,929 11,302 15,717 Balance Sheet Cash 13,989 15,141 9,929 11,302 15,717 Accounts Receivable 6,796 7,203 7,815 8,809 10,208 Inventories 6,424 6,833 6,881 7,615 7,951 Other Cur. Assets 2,941 3,547 2,920 3,179 3,519 Investments 1,309 1,192 7,143 7,143 7,143 Gross Fixed Assets 19,571 22,142 24,748 25,414 27,814 Net Fixed Assets 10,833 12,139 13,246 12,307 13,004 CWIP 2,527 2,801 2,465 4,200 3,800 Intangible Assets 4,181 5,536 5,607 5,607 5,607 Def. Tax (Net) 2,126 2,178 1,975 1,975 1,975 Other Assets 3,032 4,526 6,103 6,103 6,103 Total Assets 54,158 61,095 64,084 68,239 75,026 Current Liabilities 8,026 11,232 11,885 12,957 14,224 Provisions - - - - - Debt Funds 8,338 8,091 9,752 8,752 8,252 Other Liabilities 2,303 1,342 463 463 463 Equity Capital 241 240 240 240 240 Reserves & Surplus 31,164 36,400 37,861 41,540 47,197 Shareholder s Fund 31,405 36,640 38,101 41,780 47,437 Minority Interest 4,085 3,791 3,884 4,288 4,651 Total Liabilities 54,158 61,095 64,084 68,239 75,026 BVPS (Rs) 130.5 152.7 158.8 174.1 197.7 Ratios Y.E March FY16 FY17 FY18 FY19E FY20E Profitab. & Return EBITDA margin (%) 29.4 31.9 21.2 22.9 26.5 EBIT margin (%) 28.0 29.9 18.7 20.7 24.7 Net profit mgn.(%) 19.1 22.1 11.7 14.3 18.0 ROE (%) 16.9 18.3 7.6 9.7 12.7 ROCE (%) 19.5 20.5 9.9 11.6 14.8 W.C & Liquidity Receivables (days) 89 87 109 109 109 Inventory (days) 362 307 338 338 338 Payables (days) 64 75 83 83 83 Current ratio (x) 3.8 2.9 2.3 2.4 2.6 Quick ratio (x) 3.0 2.3 1.7 1.8 2.1 Turnover &Levg. Gross asset T.O (x) 1.5 1.5 1.1 1.2 1.3 Total asset T.O (x) 0.5 0.5 0.4 0.4 0.5 Int. covge. ratio (x) 15.3 22.1 7.9 10.3 15.6 Adj. debt/equity (x) 0.2 0.2 0.2 0.2 0.2 Valuation ratios EV/Sales (x) 4.9 4.4 5.4 4.7 3.9 EV/EBITDA (x) 16.3 13.3 25.1 20.3 14.6 P/E (x) 25.4 19.7 44.0 32.2 22.0 P/BV (x) 4.4 3.7 3.6 3.3 2.9
Recommendation Summary (last 3 years) Dates Rating Target 25-April-16 BUY 970 06-June-17 BUY 823 23-February-17 BUY 741 12-September-17 SELL 413 19-June-18 HOLD 597 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk have reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Abhishek Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc.
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