Taro saves the day for Sun Pharma

Supply constraints, competitive pressures hit US base business

Sun Pharma’s operating performance for the June 2015 quarter was driven by its US subsidiary, Taro. Even as its volumes remained subdued, Taro had taken price hikes that pushed up its gross margins to 80 per cent from to 66 per cent in the year-ago quarter. This drove Sun’s consolidated operating margin to Rs 1,850 crore, better than Bloomberg consensus estimate of Rs 1,827 crore.



Taro had recently posted sales of $215 million, up 65 per cent year-on-year. Without this, Sun’s overall US sales at $488 million would have fallen by a bigger margin. The impact of competitive pressures on some products and temporary supply constraints due to the remediation efforts being carried out at Halol facility were clearly visible in the decline in Sun’s sales in the US, which accounts for 47 per cent of total sales.

 

Supply disruptions from the Halol facility, lack of new product approvals, and Ranbaxy integration challenges took the toll on Sun’s consolidated sales and net profit. While sales at Rs 6,522 crore came slightly lower than estimates of Rs 6,672 crore, one-time as well as exceptional charges of Rs 685 crore saw profits come in at Rs 479 crore -way lower than estimates of Rs 1,077 crore.



Among other markets, domestic sales at Rs 1,784 crore were up 11 per cent year-on-year and contributed 27 per cent to overall sales. Emerging market sales at $133 million though declined 15 per cent, impacted by cross currency headwinds and due to the company’s conscious decision of not participating in low-margin businesses. Consequently, rest of the world sales fell seven per cent to $91 million.



Overall, Sun is trying to streamline the business as it integrates Ranbaxy’s operations and in the backdrop some temporary blips are expected. But, the fact that markets had already built in higher costs (and thus lower profits) after Sun recently warned on higher costs, and with Q1 profits still coming in below expectations could see some impact on the stock in early trades on Wednesday.

In the long-run, most analysts say Sun’s prospects remain strong.



Data by All Indian Origin Chemists & Distributors show Sun’s July month sales were up 22.5 per cent. Analysts at Nomura say growth rate in Ranbaxy’s portfolio has picked up and the re-launch of brand Revital H has also helped.

Morgan Stanley analysts expect meaningful firepower in Sun's US pipeline to get unlocked once the Food and Drug Administration issues are resolved. They add Sun’s core earnings face near-term challenges, but should improve sequentially. The analysts expect return of normal profitability and sales growth from FY17. Thus, any price corrections can be used for accumulating the stock currently priced at Rs 842 a share.