India’s most valuable pharma company, Sun Pharmaceutical Industries’ stock is up two per cent over the past two days, following better than expected results. While gains from Taro led to the 37 per jump in consolidated revenues, apart from strong operational performance, lower tax rates and higher interest income also helped net profits surge 91 per cent in the quarter ended December 2011.
The management has since revised its revenue growth outlook upwards, to 32-34 per cent from the earlier 28-30 per cent for 2011-12, largely due to a weaker rupee. Chairman and managing director Dilip Shanghvi, in an investor conference call, said Sun Pharma (sitting on a cash pile of about $1 billion — about Rs 5,000 crore) was looking at acquisitions in the American and emerging markets.
Given the strong growth prospects in both the domestic and US business, and a robust product pipeline, analysts have revised upwards their earnings estimates by five to eight per cent, while cautioning that Taro’s performance was not sustainable.
| Q3: robust performance | ||||
| In Rs crore | Q3' FY12 | % chg y-o-y | FY12E | FY13E |
| Net sales | 2,145 | 37.4 | 7,578 | 9,086 |
| Ebitda | 964 | 118.8 | 2,641 | 3,311 |
| Ebitda (%) | 44.9 |
1,672 bps | 34.9 | 36.4 |
| Net profit | 668 | 90.9 | 2,341 | 2,888 |
| P/E (x) | – | – | 24.5 | 19.8 |
| All figures at consolidated level E: Estimates Source: Company, Emkay Global | ||||
Overall, while Sun is still expected to deliver good performance (2012-13 profit growth of 20-plus per cent), the outlook for its stock is not as bright. At Rs 554, it is trading at 24 times and 20 times its FY12 and FY13 earnings estimates, respectively. Based on analysts’ revised price targets of Rs 570-635, the upside from current levels works out to three to 15 per cent. Analysts say unless the company surprises with a value-accretive acquisition or if there is an early resolution of the US drug regulator issue at Caraco (another Sun subsidiary), the stock is likely to track broader markets.
Taro gains unsustainable
Taro Pharma, the 66 per cent owned Israeli subsidiary, recorded 44 per cent jump in revenue to $148 million. The increase came on the back of a price increase (overall volumes were flat) on a few dermatological products in its America business. A jump in revenue and lower raw material and sales/general administration costs helped it achieve operating profit margins of 55 per cent. This helped boost Sun’s overall margins at the consolidated level to 45 per cent, the highest in the past 15 quarters, say Manoj Garg and Perin Ali of Edelweiss Securities, in a recent report. Taro Pharma accounts for roughly a third of consolidated Sun Pharma revenues.
The Sun Pharma management, however, says the performance may not be sustainable, as “it was principally driven by increased selling prices on select products in the US market, even as the overall volumes were flat”, says the company statement. Edelweiss analysts add the higher base of calendar year 2011 and the entry of new companies such as Teva following the resolution of regulator issues in the dermatological space will mean higher competition and, thus, a pressure on margins for Taro.
Domestic business
Adjusted for one-offs (like discontinued third-party manufacturing), the domestic business grew at 17 per cent, driven by launch of six new products and a strong chronic portfolio. On a moving annual total basis (CY2011), the company recorded growth of 23.6 per cent, as compared to 14.9 per cent of the industry.
Sun Pharma’s out-performance, according to Emkay Global analysts, was due to strong volume uptake in existing brands, coupled with price increase, and a 6.4 per cent growth from launches. The chronic portfolio, accounting for nearly 60 per cent of sales, grew 23 per cent. Edelweiss Securities’ analysts say the company is likely to hold on to its 4.5 per cent market share in the domestic market, on the back of continued and sustained new differentiated launches. These include Citagliptin/variants launched for the diabetes market under the Merck deal and dry powder inhalers, among others.
Outlook
Given the strong showing in the third quarter, analysts believe the company will achieve revenue growth upwards of 30 per cent year-on-year for 2011-12, with margins around 35 per cent.
Going ahead, triggers for the company in the US would be volume-led growth on the back of four key products under Para IV, say Emkay Global analysts. The company has a strong pipeline of 148 pending Abbreviated New Drug Applications with the FDA. Domestic growth for 2012-13 is also expected to come from 30 product launches in 2011-12, of which the company has so far done 23.
