1QFY2018 Result Update | Pharmaceutical
August 18, 2017
Sun Pharma
BUY
CMP
`485
Performance Highlights
Target Price
`558
(` cr)
1QFY2018
4QFY2017
% chg (qoq)
1QFY2017
% chg (yoy)
Investment Period
12 months
Net sales
6,167
6,825
(9.6)
8,007
(23.0)
Other income
194
536
(63.8)
393
(50.7)
Stock Info
Gross profit
4,489
4,630
(3.0)
6,160
(27.1)
Sector
Pharmaceutical
Operating profit
1,054
1,235
(14.7)
2,685
(60.8)
Market Cap (` cr)
1,16,414
Adj. Net profit
526
1,385
(62.0)
2,268
(76.8)
Net Debt (` cr)
(8,242)
Source: Company, Angel Research
Beta
0.7
Sun Pharmaceuticals posted poor set of numbers for 1QFY2018. Sales came in at
52 Week High / Low
818/433
`6,167cr (`6,825cr expected) v/s. `8,007cr in 1QFY2017, a yoy de-growth of 23.0%,
Avg. Daily Volume
4,49,346
mainly driven by the Indian formulation sales dip and US (which was impacted on the back
Face Value (`)
1
of pricing pressures and base effect). On operating front, the EBITDA margins came in at
BSE Sensex
31,771
17.1% (17.7% expected) v/s. 33.5% in 1QFY2017, mainly on the back of lower than
Nifty
9,897
expected sales during the quarter and base effect. Excluding the Modafinil settlement, its
Reuters Code
SUN.BO
adjusted net profit was at `526cr, down 77% over 1QFY2017, with resulting adjusted net
Bloomberg Code
[email protected]
profit margin of 8.5%. Net profit for 1QFY2017 last year included the benefit of the 180-
day exclusivity for Imatinib which expired in July-2016. We maintain our Buy.
Shareholding Pattern (%)
Results lower than expectations: Sales came in at `6,167cr (`6,825cr expected) v/s.
Promoters
54.4
`8,007cr in 1QFY2017, a yoy de-growth of
23.0%, mainly driven by the Indian
MF / Banks / Indian Fls
17.1
formulation sales dip and US (which was impacted on the back of pricing pressures and
base effect). On operating front, the EBITDA margins came in at 17.1% (17.7% expected)
FII / NRIs / OCBs
20.1
v/s. 33.5% in 1QFY2017, mainly on the back of lower than expected sales during the
Indian Public / Others
8.4
quarter and base effect. Net profit for the quarter was adversely impacted by settlements
with certain plaintiffs related to the Modafinil antitrust litigation in the US, with the
Abs. (%)
3m 1yr
3yr
settlement amounting to `950cr. Excluding the Modafinil settlement, its adjusted net profit
Sensex
8.0
13.2
20.4
for 1QFY2018 was at `526cr, down 77% over 1QFY2017 last year.
Sun Pharma
(28.4)
(38.0)
(40.5)
Outlook and valuation: Sun Pharma is one of the largest and fastest growing Indian
pharmaceutical companies. We expect its net sales to post a CAGR of 2.5% (including
Ranbaxy Laboratories) to `31,826cr and EPS to come in at `24.8 over FY2017-19E. We
3-year price chart
recommend a Buy on the stock with a target price of `558.
1,200
1,000
Key financials (Consolidated)
Y/E March (` cr)
FY2016
FY2017
FY2018E
FY2019E
800
Net sales
27,888
30,264
28,466
31,826
600
% chg
2.2
8.5
(5.9)
11.8
400
Adj. Net profit
6,248
7,846
5,101
5,949
200
% chg
31.7
25.6
(35.0)
16.6
EPS (`)
26.0
32.7
21.3
24.8
EBITDA margin (%)
24.6
29.0
20.8
22.4
Source: Company, Angel Research
P/E (x)
18.7
14.8
22.8
19.6
RoE (%)
21.0
22.2
13.0
15.2
Sarabjit Kour Nangra
RoCE (%)
15.6
18.8
11.5
12.3
+91 22 39357600 Ext: 6806
P/BV (x)
3.5
3.2
2.9
2.6
[email protected]
EV/Sales (x)
4.0
3.6
3.7
3.2
EV/EBITDA (x)
16.3
12.5
17.9
14.4
Source: Company, Angel Research; Note: CMP as of August 16, 2017
Please refer to important disclosures at the end of this report
1
Sun Pharma | 1QFY2018 Result Update
Exhibit 1: 1QFY2018 performance (Consolidated)
Y/E March (` cr)
1QFY2018
4QFY2017
% chg QoQ
1QFY2017
% chg yoy
FY2017
FY2016
% chg
Net sales
6,167
6,825
(9.6)
8,007
(23.0)
30,264
27,888
8.5
Other income
194.1
536.4
(63.8)
393.4
(50.7)
1,902
1,847
3.0
Total income
6,361
7,362
(13.6)
8,400
(24.3)
32,166
29,735
8.2
Gross profit
4,489
4,630
(3.0)
6,160
(27.1)
22,133
21,558
2.7
Gross margin (%)
72.8
67.8
76.9
73.1
77.3
Operating profit
1,054
1,235
(14.7)
2,685
(60.8)
8,810
6,874
28.2
Operating margin (%)
17.1
18.1
33.5
29.1
24.6
Interest
109
45
143.2
135
(18.7)
400
523
(23.6)
Depreciation
347
338
2.5
316
9.7
1,265
1,038
21.9
Extraordinary item loss/ ( gain)
951
0
0
0
590
PBT
792
1,389
(43.0)
2,628
(69.9)
9,048
7,161
26.4
Provision for taxation
162
44.3
265.2
352.7
(54.1)
1,212
914
32.6
PAT before extra-ordinary item
630
1,344
(53.2)
2,275
(72.3)
7,836
6,247
25.4
Minority interest(MI)
(2)
(41)
-
7
(10)
1
Reported PAT
526
1,385
(62.0)
2,268
(76.8)
7,846
6,248
25.6
Adj. PAT
(323)
1,385
-
2,268
7,846
5,658
38.7
Adj. EPS (`)
2.2
5.8
9.4
32.6
26.0
Source: Company, Angel Research
Exhibit 2: 1QFY2018 - Actual V/s Angel estimates
(` cr)
Actual
Estimates
Variance (%)
Net sales
6,167
6,825
(9.6)
Other income
194
500
(61.2)
Operating profit
1,054
1,211
(13.0)
Tax
162
44
265.2
Adj. Net profit
526
1,324
(60.3)
Source: Company, Angel Research
Sales lower than expectations: Sales came in at `6,167cr (`6,825cr expected) v/s.
`8,007cr in 1QFY2017, a yoy de-growth of 23.0%, mainly driven by the Indian
formulation sales dip and US (which was impacted on back of pricing pressures and
base effect). India sales at `1,761cr (which accounted for 29% of sales), was down by
5% yoy, mainly on back of GST implementation.
Sales in the US were US$351mn for the quarter; de-growth of 42% yoy over same
period last year and accounted for 37% of total sales. Sales for 1QFY2017 included the
benefit of generic Imatinib exclusivity, which expired in July 2016. Besides Imatinib, the
overall pricing pressure in the US generics market also impacted the yoy growth. Sales
in emerging markets were at US$168mn for 1QFY2018; a growth of 9% compared to
the same quarter last year and accounted for 18% of total sales. The growth was partly
boosted by the consolidation of the Biosintez acquisition in Russia.
Formulation sales in Rest of World (ROW) markets excluding US and Emerging Markets
were US$115mn in 1QFY2018, a growth of 37% from 1QFY2017 and accounting for
approximately 12% of revenues. The growth was partly boosted by the consolidation of
revenues from the acquisition of 14 brands from Novartis.
August 18, 2017
2
Sun Pharma | 1QFY2018 Result Update
The company had a total of 433 ANDAs filed with the USFDA. Currently, ANDAs for
151 products await USFDA approval, including 16 tentative approvals. For the quarter,
5 ANDAs were filed and 8 approvals were received. Additionally, the pipeline includes
37 approved NDAs while 5 NDAs await USFDA approval.
Exhibit 3: Sales trend
7000
6153
5755
5714
6000
4909
5000
4406
4000
3000
1854
2010
1969
1916
1761
2000
1000
0
1QFY2017
2QFY2017
3QFY2017
4QFY2017
1QFY2018
Domestic Formulation
Export Formulation, Bulk and others
Source: Company, Angel Research
OPM at 17.1%, lower than expected: On operating front, the EBITDA margins came in
at 17.1% (17.7% expected) v/s. 33.5% in 1QFY2017, mainly on the back of lower than
expected sales during the quarter and base effect. Gross margins came in at 72.8%
v/s. 76.9% in 1QFY2017, while R&D expenses were at 8.5% of sales, mainly on the
back of lower sales while it dipped 28% yoy. Also, the last year operating profitability
included the benefit of the 180-day exclusivity for Imatinib.
Exhibit 4: OPM trend (%)
40.0
33.5
34.3
28.9
30.0
20.0
18.1
17.1
10.0
1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018
Source: Company, Angel Research,
Net profit below expectations: Net profit for the quarter was adversely impacted by
settlements with certain plaintiffs related to the Modafinil antitrust litigation in the US,
with the settlement amounting to `950cr. Excluding the Modafinil settlement, its
adjusted net profit for 1QFY2018 was at `526cr, down 74% over 1QFY2017 last year,
August 18, 2017
3
Sun Pharma | 1QFY2018 Result Update
with resulting adjusted net profit margin of 8.5%. Net profit for 1QFY2017 last year
included the benefit of the 180-day exclusivity for Imatinib which expired in July 2016.
Exhibit 5: Adjusted Net profit trend (` cr)
3,000
2,500
2,268
2,235
2,000
1,472
1,385
1,500
1,000
526
500
0
1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018
Source: Company, Angel Research
Concall takeaways
Ranbaxy Lab integration benefits of US$300mn by end of FY2018E.
Revenue may decline due to challenges in the US (assuming no new approval
from Halol and no disruption at Dadra).
Remediation measures at Halol over; awaiting USFDA inspection.
2HFY2018E EBITDA margin to be ~20-22%.
Tildrakizumab NDA launch expected by early 2019.
Investment arguments
Strongest ANDA pipeline: Sun Pharma, with the recent acquisitions of DUSA, URL
Pharma and Ranbaxy Laboratories, has now become strong in the US region, with
the geography accounting for 37% of its sales in FY2017. In terms of ANDAs, the
company cumulatively has 433 products, out of which 151 products now await
USFDA approval, including 16 tentative approvals. With the merger of Ranbaxy
Laboratories, the company is now the fifth-largest specialty generics company in
the world (behind Teva, Sandoz, Activas and Mylan). However, the near term
performance of the company has been impacted on the back of supply constraints
at the Halol facility although the company has taken redemption measures
including site transfers. Also, during FY2018, the company like other generic
players in the US is expecting the pricing dip on back of the consolidation in the
buyers chain (4 players hold now 90% market share). Overall, we expect the
region to post a CAGR of (10.4)% in sales over FY2017-19E, accounting for
almost 34% of the overall sales in FY2019E.
Domestic business: Sun Pharma’s domestic formulation business is among the
fastest growing in the Indian pharmaceutical industry. It contributed 23% to the
August 18, 2017
4
Sun Pharma | 1QFY2018 Result Update
company’s total turnover in FY2014. Sun Pharma, with Ranbaxy Laboratories’
merger, is now the segment leader with a market share of 8.7% in the domestic
formulation market, followed by Abbott India, which has a market share of 6.5%.
This is a significant gap considering that the segment is highly fragmented. We
expect the domestic formulation business to post a CAGR of
15.0% over
FY2017-19E, contributing 32% to the overall formulation sales of the company in
FY2019.
Healthy balance sheet: Sun Pharma has one of the strongest balance sheets in the
sector with cash of
~`15,000cr. The same can continue to support the
Management in inorganic growth and in scouting for acquisitions, especially in the
US and in emerging markets.
Outlook and valuation: Sun Pharma is one of the largest and fastest growing
Indian pharmaceutical companies. We expect its net sales to post a CAGR of 2.5%
(including Ranbaxy Laboratories) to `31,826cr and EPS to post a CAGR of 8.0% to
`24.8 over FY2017-19E. We recommend a Buy rating on the stock with a target
price of `558.
Exhibit 6: Key assumptions
FY2018E
FY2019E
Domestic Formulation sales growth (%)
12.0
18.0
Export Formulation sales growth (%)
(11.8)
9.9
Growth in employee expenses (%)
15.0
15.0
Operating margins (%)
20.8
22.4
Tax as % of PBT
15.0
15.0
Source: Company, Angel Research
Exhibit 7: One-year forward PE band
1,200
1,000
800
600
400
200
-
10x
15x
20x
25x
Source: Company, Angel Research
August 18, 2017
5
Sun Pharma | 1QFY2018 Result Update
Exhibit 8: Valuation summary
Company
Reco
CMP
Tgt. Price
Upside
FY2019E
FY17-19E
FY2019E
(`)
(`)
% PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)
Alembic Pharma
Buy
515
600
16.5
18.9
2.1
11.0
12.8
24.3
20.6
Aurobindo Pharma
Buy
714
823
15.3
13.9
2.1
9.7
14.2
25.3
22.7
Cadila Healthcare
Reduce
484
426
(11.9)
22.7
3.7
18.0
21.0
17.3
22.9
Cipla
Sell
590
458
(22.4)
24.5
2.5
15.7
38.7
10.9
13.1
Dr Reddy's
Accumulate
1,999
2,219
11.0
18.0
2.0
11.2
23.6
11.2
13.0
Dishman Pharma
Under Review
293
-
-
18.9
1.3
10.1
(7.2)
2.9
2.5
GSK Pharma
Neutral
2,365
-
-
40.4
5.4
30.3
30.6
28.9
26.5
Indoco Remedies
Sell
193
153
(20.9)
15.2
1.5
10.1
23.0
11.3
15.6
Ipca labs
Buy
420
620
47.6
16.7
1.3
8.5
27.9
12.8
11.2
Lupin
Buy
962
1,467
52.5
14.4
2.0
8.4
8.2
20.5
17.5
Sanofi India*
Reduce
4,127
3,845
(6.8)
26.8
2.8
16.5
9.2
23.9
25.8
Sun Pharma
Buy
485
558
15.0
19.6
3.2
14.4
8.0
12.3
15.2
Source: Company, Angel Research; Note: * December year ending
Company background
Sun Pharma is an international specialty pharma company, with a large presence in the
US and India, and a footprint across 40 other markets. In India and rest of the world
markets, the key chronic therapy areas for the company are cardiology, psychiatry,
neurology, gastroenterology, diabetology, etc. The company is a market leader in
specialty therapy areas in India. In India, the company has emerged as a leading
pharma company, where it is the third largest player. Also, in the US, a key geography,
the company has expanded significantly through both in-organic and organic routes.
August 18, 2017
6
Sun Pharma | 1QFY2018 Result Update
Profit & Loss statement (Consolidated)
Y/E March (` cr)
FY2015
FY2016
FY2017
FY2018E
FY2019E
Gross sales
27,652
28,254
30,536
28,724
32,115
Less: Excise duty
366
366
272
259
289
Net sales
27,287
27,888
30,264
28,466
31,826
Other operating income
147
599
1,314
1,314
1,314
Total operating income
27,433
28,487
31,578
29,780
33,140
% chg
70.6
3.8
10.9
(5.7)
11.3
Total expenditure
19,470
21,014
21,489
22,537
24,699
Net raw materials
6,739
6,330
8,131
7,686
8,550
Other mfg costs
1,192
1,218
1,322
1,244
1,390
Personnel
4,430
4,772
4,902
5,638
6,483
Other
7,109
8,693
7,134
7,970
8,275
EBITDA
7,817
6,874
8,775
5,928
7,127
% chg
12.9
-12.1
(27.5)
-56.0
3.7
(% of Net Sales)
28.6
24.6
29.0
20.8
22.4
Depreciation & amort.
1,195
1,038
1,265
1,465
1,665
EBIT
6,622
6,436
8,825
5,778
6,777
% chg
1.7
(2.8)
(18.7)
(34.5)
17.3
(% of Net Sales)
24.3
23.1
29.2
20.3
21.3
Interest & other charges
579
523
400
400
400
Other income
451
1,248
623
623
623
(% of PBT)
6.8
17.4
6.9
10.4
8.9
Share in profit of Asso.
-
-
-
-
Recurring PBT
6,641
7,161
9,048
6,001
7,000
% chg
-6.4
7.8
(16.8)
0.0
0.1
Extraordinary expense/(inc.)
237.8
589.9
-
-
1.0
PBT (reported)
6,641
7,161
9,048
6,001
6,999
Tax
914.7
913.8
1,211.6
900.1
1,049.8
(% of PBT)
13.8
12.8
13.4
15.0
15.0
PAT (reported)
5,726
6,247
7,836
5,101
5,949
Add: Share of earnings of asso.
(13)
1
10
-
-
Less: Minority interest (MI)
936
-
-
-
-
Prior period items
-
-
-
-
PAT after MI (reported)
4,539
5,658
7,846
5,101
5,949
ADJ. PAT
4,743
6,248
7,846
5,101
5,949
% chg
(10.0)
31.7
65.4
(35.0)
16.6
(% of Net Sales)
16.6
0.0
1.0
2.0
3.0
Basic EPS (`)
22.9
26.0
32.7
21.3
24.8
Fully Diluted EPS (`)
22.9
26.0
32.7
21.3
24.8
% chg
(10.0)
13.4
42.8
(35.0)
16.6
August 18, 2017
7
Sun Pharma | 1QFY2018 Result Update
Balance Sheet (Consolidated)
Y/E March (` cr)
FY2015
FY2016
FY2017
FY2018E
FY2019E
SOURCES OF FUNDS
Equity share capital
207
241
240
240
240
Preference capital
Reserves & surplus
26,300
32,742
36,400
40,378
45,204
Shareholders’ funds
26,507
32,982
36,640
40,618
45,444
Minority interest
2,851
4,085
3,791
3,791
3,791
Total loans
7,596
8,316
8,091
8,091
8,091
Deferred tax liability
(1,752)
(3,046)
(2,178)
(2,178)
(2,178)
Other Long Term Liabilities
9
-
-
-
-
Long Term Provisions
2,710
2,106
1,342
2,364
2,591
Total liabilities
37,922
44,443
47,685
52,686
57,739
APPLICATION OF FUNDS
Gross block
15,041
15,084
18,162
19,162
20,162
Less: Acc. depreciation
4,863
7,139
8,404
9,869
11,534
Net block
10,179
7,945
9,758
9,293
8,628
Capital work-in-progress
842
842
303
303
303
Goodwill
3,701
9,261
10,417
10,417
10,417
Investments
2,716
1,830
1,192
1,388
1,389
Long term long & adv.
2,736
3,276
4,526
3,978
4,425
Current assets
27,005
29,227
32,723
35,822
41,907
Cash
10,998
13,182
15,141
19,147
23,277
Loans & advances
2,193
2,006
2,480
2,344
2,608
Other
13,813
14,040
15,102
14,331
16,022
Current liabilities
9,256
7,938
11,232
8,513
9,330
Net current assets
17,748
21,290
21,491
27,308
32,577
Others
-
-
-
-
-
Total assets
37,922
44,443
47,685
52,686
57,739
August 18, 2017
8
Sun Pharma | 1QFY2018 Result Update
Cash Flow Statement (Consolidated)
Y/E March (` cr)
FY2015
FY2016
FY2017
FY2018E
FY2019E
Profit before tax
6,641
7,161
9,048
6,001
7,000
Depreciation
1,195
1,038
1,265
1,465
1,665
(Inc)/Dec in working capital
(4,322)
(1,898)
(2,505)
(12,139)
(2,341)
Direct taxes paid
915
914
1,212
900
1,050
Cash Flow from Operations
2,598
5,386
6,596
(5,573)
5,273
(Inc.)/Dec.in Fixed Assets
(8,653)
(43)
(1,682)
(1,000)
(1,000)
(Inc.)/Dec. in Investments
70
886
1,524
(196)
(1)
Other income
-
-
-
-
-
Cash Flow from Investing
(8,583)
843
(157)
(1,196)
(1,001)
Issue of Equity
-
-
-
-
-
Inc./(Dec.) in loans
(4,928)
(1,333)
(1,873)
1,022
227
Dividend Paid (Incl. Tax)
-
(282)
(1,123)
(1,123)
(1,123)
Others
14,320
(2,431)
(1,485)
10,876
754
Cash Flow from Financing
9,392
(4,046)
(4,480)
10,775
(142)
Inc./(Dec.) in Cash
3,408
2,184
1,959
4,006
4,130
Opening Cash balances
7,590
10,998
13,182
15,141
19,147
Closing Cash balances
10,998
13,182
15,141
19,147
23,277
August 18, 2017
9
Sun Pharma | 1QFY2018 Result Update
Key Ratios
Y/E March
FY2015
FY2016
FY2017
FY2018E
FY2019E
Valuation Ratio (x)
P/E (on FDEPS)
21.2
18.7
14.8
22.8
19.6
P/CEPS
17.5
17.4
12.8
17.7
15.3
P/BV
4.4
3.5
3.2
2.9
2.6
Dividend yield (%)
0.6
0.2
0.2
0.2
0.2
EV/Sales
3.6
4.0
3.6
3.7
3.2
EV/EBITDA
12.4
16.3
12.5
17.9
14.4
EV / Total Assets
2.6
2.5
2.3
2.0
1.8
Per Share Data (`)
EPS (Basic)
22.9
26.0
32.7
21.3
24.8
EPS (fully diluted)
22.9
26.0
32.7
21.3
24.8
Cash EPS
27.7
27.8
38.0
27.4
31.7
DPS
3.0
1.0
1.0
1.0
1.0
Book Value
110.2
137.1
152.3
168.8
188.9
Dupont Analysis
EBIT margin
24.3
23.1
29.2
20.3
21.3
Tax retention ratio
86.2
87.2
86.6
85.0
85.0
Asset turnover (x)
1.2
1.0
1.1
0.9
1.0
ROIC (Post-tax)
26.1
19.7
27.5
15.5
17.6
Cost of Debt (Post Tax)
9.8
5.7
4.4
8.4
4.1
Leverage (x)
0.0
0.0
0.0
0.0
0.0
Operating ROE
26.1
19.7
27.5
15.5
17.6
Returns (%)
ROCE (Pre-tax)
21.1
15.6
18.8
11.5
12.3
Angel ROIC (Pre-tax)
38.3
29.6
41.3
25.9
29.1
ROE
21.1
21.0
22.2
13.0
15.2
Turnover ratios (x)
Asset Turnover (Gross Block)
2.6
1.9
1.9
1.6
1.7
Inventory / Sales (days)
58
77
76
88
92
Receivables (days)
50
76
76
88
92
Payables (days)
61
91
95
69
69
WC cycle (ex-cash) (days)
82
95
71
50
96
Solvency ratios (x)
Net debt to equity
(0.1)
(0.1)
(0.2)
(0.3)
(0.3)
Net debt to EBITDA
(0.4)
(0.7)
(0.8)
(1.9)
(2.1)
Interest Coverage (EBIT/Int.)
-
-
-
-
-
August 18, 2017
10
Sun Pharma | 1QFY2018 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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offering of securities of the company covered by Analyst during the past twelve months.
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Disclosure of Interest Statement
Sun Pharma
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
Yes
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
August 18, 2017
11