Reduce Sun Pharmaceuticals - Elara Capital

• Rating : Reduce
• Target Price : INR1,627
• Downside : 0.5%
• CMP : INR1,635 (as on 27 May 2010)

Domestic growth holds fort

Hasty focus on semi-regulated markets aggravates poor show

Sun Pharma's Q4FY10 performance is below our estimates due to the poor performance of Caraco and exports to the US. Yet, the company has achieved a 21% YoY growth in the semi-regulated formulation business. We believe that the sudden shift in focus to accomplish a higher growth in Mexico, Brazil, Russia and other semi-regulated markets have decreased the earnings quality and increased receivable days to 109 in FY10 from 75 in FY09. However, the management suggests that decrease in debtors quality is decreased due to US market.

Aggressive guidance without any earnings visibility

The Sun Pharma management has given guidance of an18-20% YoY sales growth in FY11, and expects to maintain the historical EBITDA margins. We believe that the company may have discounted the positive outcome from the appeal court on Eloxitin and any modest sales gains from Effexor XR in FY11 post the approval. While we expect a not-so-encouraging outcome from the Eloxitin appeal case, sales from Effexor would get harder to realize as Teva is prepared to launch AB-rated Effexor in July 2010.

Steady growth in domestic formulations to be a face saver

With a one-off adjustment in sales Q4FY09, the company has achieved a 14% YoY growth in Q4FY10 on the basis of 40 new launches in India. We expect the company to continue its run rate and be able to maintain a15% growth in FY11.

Much optimism pinned on early decision to Caraco plant issue

The company expects an early resolution to Caraco's manufacturing quality issue with the US FDA in FY11. While we believe that the company would hardly gain any market share from older products, the guidance may factor in gains from sales post the resolution.

Maintain Reduce

Lack of visible growth drivers and a slower offtake in the US market may not be the ideal elements that would help the company achieve targets. Business expansion in semi-regulated markets would also deteriorate the earnings quality. We believe that the company's growth prospects largely depend on the court verdict on Sun Pharma's appeal on Eloxitin in the US. With an unfavourable risk return matrix, we maintain Reduce recommendation. We exclude present value earnings from Eloxitin for FY11 and FY12. We estimate the target price at INR1,627, implying a 1% downside to the current market price.

Source : Equity Bulls

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