Sun Pharmaceuticals - 3QFY2012 Result Update - Reliance Securities

Taro continues to be the key growth driver

Key highlights of the result

- Taro boosts sales: Sun Pharma's top-line for 3QFY2012 grew at 37.4% yoy, largely driven by Taro (31% of the total sales) and favorable currency. The domestic formulations (up 14% yoy), adjusting for the discontinued third party manufacturing, the underlying business grew 17% yoy. The US formulations grew by a staggering 63.1% yoy on a high base of 3QFY2011 (due to inclusion of high margin Eloxatin), boosted by Taro (aided by price increase in select products, largely non-recurring sales in nature). API grew by 39% in 3QFY2012.

- EBITDA highest in last 3 years: The gross margins expanded by 1,000bp at 82.4%, aided by inventory valuation impact due to depreciating rupee. However, the same may not be sustainable going forward. The operating margins improved substantially at 44.9% (highest in last 3 years) on account of strong operating performance from Taro. Taro's OPM for the quarter stood at a strong 50.3%. Owing to lower tax rate the RPAT stood at ~Rs668.3cr (up 91% yoy).

- Concall takeaways: (1) The management, has upgraded its top-line guidance to 32-34% for FY2012 (earlier 28-30%), (2) Taro's PAT was restricted by forex loss of US$6.3mn, (3) Taro's higher growth and margin momentum were led by price hikes (flat volume growth) in certain dermatology products in US, (4) R&D expenses to stay higher at~6% of sales and tax rate at ~9% largely on account of Taro, (5) Management has maintained status quo on Caraco update, while the Taro buyout decision is awaited from its shareholders, (6) Sun filed 1 ANDA in 3QFY2012 and has 148 ANDAs pending for approval, and (7) Capex for FY2012 stands at Rs400cr, while cash on books is ~Rs1bn.

Outlook and Valuation

Sun Pharma delivered results which were above our expectations in 3QFY2012, owing to robust performance from Taro's dermatology portfolio and rupee depreciation. However, with most of Taro's growth coming from price increases, we believe that volume growth is likely to be a challenge going ahead. Nevertheless, with strong para IV pipeline in US and gradual improvement in the domestic business, the growth prospects of the company appear promising.

Factoring in the strong performance and revised guidance, we upgrade our estimates for FY2012E and FY2013E. Our revised EPS stands at Rs21.8 (Rs21 earlier) and Rs26.4 (Rs24.4 earlier) for FY2012E and FY2013E respectively. Apt utilization of cash could boost the return ratios. Sun is currently trading at 25.4x and 21x its FY2012E and FY2013E EPS respectively. We maintain Accumulate on the stock with the revised price target of Rs580 (earlier Rs562, achieved on 6th Feb 2012).

Risks to the view

- Delay in product approvals and higher than expected liability on Protonix litigation

- Lower than expected performance from Taro.

Source : Equity Bulls

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