Saturday, August 18, 2012

>Sun Pharmaceutical Industries

Recommendation: Buy
Price target: Rs743
Current market price: Rs682
Price target revised to Rs743
Result highlights
  • Better than expected performance: For Q1FY2013 Sun Pharmaceuticals (Sun Pharma) reported a 62.5% year-on-year (Y-o-Y) rise in its net sales to Rs2,658.1 crore, which is 12% higher than our estimate. The operating profit margin (OPM) jumped by 1,231 basis points to 45.8%, which is substantially higher than our estimate of 38.6%. The quarter's OPM is better than the margin achieved in the previous 14 quarters. Despite a foreign exchange (forex) loss (netted off in the other income) and a higher effective tax rate (17.3% in Q1FY2013 vs 2.5% in Q1FY2012), the net profit jumped by 58.8% year on year (YoY) to Rs796 crore during the quarter. The net profit exceeds our estimate by 19%. 
  • Strong results of Taro and exclusive supplies of Lipodox help: The better than expected performance was driven by three main factors: (1) stronger revenues (up 42% YoY to $159 million) and higher profit (up 110% YoY to $62.9 million) from Taro Pharmaceuticals (Taro); (2) better revenue and profitability from the supplies of Lipodox (through Caraco Pharmaceuticals [Caraco]; opportunity arose out of a drug shortage in the USA); and (3) a strong growth in the emerging markets (ex Taro the growth stood at 45% YoY). Besides, Sun Pharma's base business also seems to have grown impressively during the quarter. 
  • Business restructuring and full control of Taro to help sustain the strong growth: Sun Pharma is in the process of restructuring its business. It has announced a plan to spin off its domestic formulation business (which contributes about 22% of its revenues) to its wholly owned subsidiary called Sun Resins and Polymers Pvt Ltd with effect from March 31, 2012. This is being done with a view to enhance the focus on the business and to allow for quicker responses to the competitive market conditions. Besides, the company has announced a plan to acquire the entire stake in Taro which will give it a stronger foothold in the USA and Europe.
  • We revise our earnings estimates and price target; maintain Buy: Despite an impressive performance in Q1FY2013, the management has maintained its guidance of an 18-20% revenue growth for the base business in FY2013. We have revised our earnings estimates upward by 14% each for FY2013 and FY2014, in view of Sun Pharma's plan to gain full control of Taro (which will result in a lower minority interest) and the operational synergies that would result from such a move. Accordingly, our price target stands revised by 14% to Rs743. We maintain our Buy rating on the stock.