>SUN PHARMACEUTICALS LIMITED (KR CHOKSEY)

Depressing performance

Topline in line with expectation: The topline of the company is inline with our expectation and posted a turnover de-growth of 10% Y-o-Y, mainly due to 67% Y-o-Y decline in the sales from its Caraco subsidiary. The decline was largely on account of a very high base in the corresponding quarter last year, contributed by launch of Pantoprazole generic. Indian formulation business grew by 81% to Rs 652.6 crore whereas International formulations businesses, excluding Caraco, have grown by 89%. API sales grew by 64% Y-o-Y; most of the growth was witnessed from international markets.

Operating level deteriorated: Sun Pharma reported dismal performance at its operating level.
The Q4FY09 Operating profit at Rs 375 crore stands below with our expectation of Rs 499
crore. The EBITDA posted a de-growth of 49% Y-o-Y, whereas on a Q-o-Q basis it recorded degrowth of 9% mainly due spike in the other expenses which includes one-off expenses related
to product recalls at Caraco and inventory write offs. Also due to high raw material cost & staff
cost led the margin to shrink. The OPM contracted by 2,590 bps to 33% in Q4FY09.

Bottom Line – Below our expectation: The bottom line of the company was below our
expectation at Rs 395 crore. Despite a higher other income and a lower tax numbers due to creation of deferred tax asset, the net profit declined by 47% to Rs395 crore during Q4FY09
consequent to a sharp decline in the operating profit.

Our View: Sun Pharma Q4FY09 performance was hit by lower sales from Caraco and the
economic downturn, which resulted in a slowdown in the domestic business. Currently, the status of the Detroit facility is unchanged; however the management has indicated that if the need arises, the company could evaluate product transfer options to India from Caraco on a case-to-case basis. For FY2010, Caraco has not provided any guidance, given the uncertainty surrounding its Detroit facility and the lower exclusivity revenues.

Going forward, we expect the slower growth in the business to continue for the next two to three quarters, due to the economic downturn and lack of new product launches from the Caraco facility that is under USFDA scrutiny. However, the company’s track record of delivering consistent and robust growth makes it the best Indian player in the generic space. With a strong balance sheet with over Rs 3,500 crore in cash, Sun Pharma is well positioned to exploit newer growth avenues. Thus we remain positive on the stock.

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