1QFY2017 Result Update | Pharmaceutical

August 17, 2016

Sun Pharma

BUY

CMP

`783

Performance Highlights

Target Price

`944

(` cr)

1QFY2017 4QFY2016

% chg QoQ 1QFY2016

% chg yoy

Investment Period

12 months

Net sales

8,007

7,414

8.0

6,527

22.7

Other income

393

185

112.3

399

(1.3)

Stock Info

Gross profit

6,160

5,962

3.3

4,836

27.4

Sector

Pharmaceutical

Operating profit

2,685

2,300

16.7

1,533

75.1

Market Cap (` cr)

1,88,437

Adj. Net profit

2,034

1,714

18.7

1,070

90.1

Net Debt (` cr)

(6,960)

Source: Company, Angel Research

Beta

0.7

52 Week High / Low

965/706

The company’s sales for 1QFY2017 came in higher than expected at

Avg. Daily Volume

4,13,072

`8,007cr V/s `7,414cr expected and V/s `6,526cr in 1QFY2016, a yoy

Face Value (`)

growth of 22.7%, mainly driven by exports. On the operating front, the

BSE Sensex

28,065

EBITDA margin came in at 33.5% V/s 29.5% expected and V/s 23.5% in

Nifty

8,643

1QFY2016, mainly driven by gross margin expansion (76.9% in 1QFY2017

Reuters Code

SUN.BO

V/s 74.1% in 1QFY2016). Thus, the Adj. net profit came in at `2,034cr V/s

`1,602cr expected and V/s `1,070cr in 1QFY2016. We maintain our Buy

Bloomberg Code

SUNP@IN

rating.

Results outperform: Company’s sales for 1QFY2017 came in higher than

Shareholding Pattern (%)

expected at `8,007cr V/s `7,414cr expected and V/s `6,526cr in 1QFY2016, a

Promoters

55.0

yoy growth of 22.7%, mainly driven by exports. Export formulations (`5,664cr)

MF / Banks / Indian Fls

12.9

grew 25.6% yoy, while Indian formulations (`1,854cr) grew 7.6% yoy. API sales

FII / NRIs / OCBs

25.1

(`470cr) grew 73.1% yoy. On the operating front, the EBITDA margin came in at

Indian Public / Others

7.0

33.5% V/s 29.5% expected and V/s 23.5% in 1QFY2016, mainly driven by gross

margin expansion

(76.9% in 1QFY2017 V/s

74.1% in 1QFY2016). R&D

expenditure during the quarter was

9.1% of sales V/s

5.5% of sales in

Abs. (%)

3m 1yr

3yr

1QFY2016. Thus, the Adj. net profit came in at `2,034cr V/s `1,602cr expected

Sensex

9.4

(0.0)

50.9

and V/s `1,070cr in 1QFY2016.

Sun Pharma

8.3

67.0

609.0

Outlook and valuation: Sun Pharma is one of the largest and fastest growing

3-year price chart

Indian pharmaceutical companies. We expect its net sales to post a 12.7% CAGR

1,200

(including Ranbaxy Laboratories) to `35,258cr and EPS to post a 22.0% CAGR to

1,100

1,000

`32.8 over FY2016-18E. We recommend a Buy on the stock.

900

800

Key financials (Consolidated)

700

600

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

500

Net sales

27,287

27,744

31,129

35,258

400

300

% chg

70.6

1.7

12.2

13.3

200

Adj. Net profit

4,743

5,306

6,735

7,895

% chg

(10.0)

11.9

26.9

17.2

EPS (`)

22.9

22.0

28.0

32.8

Source: Company, Angel Research

EBITDA margin (%)

28.6

26.2

30.0

30.9

P/E (x)

35.0

36.4

28.7

24.4

RoE (%)

21.1

18.3

18.7

18.9

RoCE (%)

21.1

16.6

17.7

33.1

P/BV (x)

7.3

5.3

4.4

3.7

Sarabjit Kour Nangra

EV/Sales (x)

6.0

6.8

5.8

5.0

+91 22 39357600 Ext: 6806

EV/EBITDA (x)

20.8

25.9

19.5

16.1

[email protected]

Source: Company, Angel Research; Note: CMP as of August 16, 2016

Please refer to important disclosures at the end of this report

Sun Pharma | 1QFY2017 Result Update

Exhibit 1: 1QFY2017 performance (Consolidated)

Y/E March (` cr)

1QFY2017

4QFY2016

% chg QoQ 1QFY2016

% chg yoy

FY2016

FY2015

% chg

Net sales

8,007

7,414

8.0

6,527

22.7

27,744

27,287

1.7%

Other income

393.4

185.3

112.3

398.8

(1.3)

984.8

599.0

64.4

Total income

8,400

7,599

10.5

6,926

21.3

28,729

27,886

3.0

Gross profit

6,160

5,962

3.3

4,836

27.4

21,261

20,547

3.5

Gross margin (%)

76.9

80.4

74.1

76.6

75.3

Operating profit

2,685

2,300

16.7

1,533

75.1

7,271

7,679

(5.3)

Operating margin (%)

33.5

31.0

23.5

26.2

28.1

Interest

135

52.0

135

0.1

477

579

(17.6)

Depreciation

316

264

19.5

240

31.5

1,014

1,295

(21.7)

Extraordinary item loss/ ( gain)

685

-590

-204

PBT

2,628

2,132

23.2

872

201.3

6,765

6,404

5.6

Provision for taxation

352.7

170.6

106.8

113

212.8

935

915

2.2

PAT before extra-ordinary item

2,275

1,962

15.9

759

199.6

5,830

5,489

6.2

Minority interest(MI)

241

248

(2.9)

203

18.5

1,114

949

17.5

Reported PAT

2,034

1,714

18.7

1,070

90.1

4,716

4,540

3.9

Adj. PAT

2,034

1,714

18.7

556

265.8

5,306

4,743

11.9

Adj. EPS (`)

8.4

7.1

2.3

22.0

19.7

Source: Company, Angel Research

Exhibit 2: 1QFY2017 - Actual V/s Angel estimates

(` cr)

Actual

Estimates

Variance (%)

Net sales

8,007

7,414

8.0

Other income

393

185

112.3

Operating profit

2,685

2,190

22.6

Tax

353

171

106.7

Adj. Net profit

2,034

1,602

26.9

Source: Company, Angel Research

Better than expected performance: Company’s sales for 1QFY2017 came in higher

than expected at `8,007cr V/s `7,414cr expected and V/s `6,526cr in 1QFY2016,

a yoy growth of 22.7%, mainly driven by exports. Amongst key markets- India

(`1,854cr) posted a growth of 7.6% yoy, US (US$609mn) posted a growth of 25%

yoy, Emerging Markets (US$154mn) were up 16% yoy and ROW (US$84mn) was

down 7.3% yoy.

Sale of branded formulations in India for 1QFY2017 stood at `1,854cr, up 7.6%

yoy and accounted for 23% of total sales. Withdrawal of bonus offers continues to

adversely impact sales in the acute segment. Sun Pharma is ranked No. 1 and

holds ~8.7% market share in the `1,00,000cr pharmaceutical market as per the

March-2016 AIOCD-AWACS report.

Sales in the US came in at US$609mn for the quarter (accounting for 51% of the

company’s total sales) boosted primarily due to the benefit of the 180-day

exclusivity for Imatinib which commenced from 01-Feb-2016. At the same time,

Taro posted 1QFY2017 sales of US$234mn, up 9.0% over 1QFY2016.

August 17, 2016

Sun Pharma | 1QFY2017 Result Update

Sales in Emerging markets were at US$154mn for 1QFY2017, up 16% yoy, and

accounted for 13% of total sales. Formulation sales in Rest of World (ROW)

markets excluding US and Emerging Markets were US$84mn in 1QFY2017, a de-

growth of 7.3% yoy. ROW markets accounted for ~7% of revenues for 1QFY2017.

The company had a total of 417 ANDAs filed with the USFDA. Currently, ANDAs

for 150 products await USFDA approval, including 15 tentative approvals.

Exhibit 3: Sales trend

7000

6000

5000

4000

3000

2000

1000

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Domestic Formulation

Export Formulation, Bulk and others

Source: Company, Angel Research

OPM at 33.5%; higher than an expected 29.5%: On the operating front, the

EBITDA margin came in at 33.5% V/s 29.5% expected and V/s 23.5% in

1QFY2016, mainly driven by gross margin expansion (76.9% in 1QFY2017

V/s 74.1% in 1QFY2016). R&D expenditure during the quarter was 9.1% of

sales in 1QFY2017 V/s 5.5% of sales in 1QFY2016.

Exhibit 4: OPM trend (%)

35.0

33.5

31.0

30.3

30.0

27.9

25.0

23.5

20.0

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research, Note- post 4QFY2015 numbers are of merged entity

Net profit came in higher than our expectation: Thus, the Adj. net profit came in at

`2,034cr V/s `1,602cr expected and V/s `1,070cr in 1QFY2016.

August 17, 2016

Sun Pharma | 1QFY2017 Result Update

Exhibit 5: Adjusted Net profit trend (`cr)

2,500

2,034

2,000

1,714

1,417

1,500

1,070

1,107

1,000

500

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Concall takeaways

 The company is on track to achieve US$300mn from Ranbaxy synergies by

FY2018E; a part of it will also be in FY2017.

 NLEM impact to be ~`1,500cr in FY2017.

 Halol remediation over; the company has invited USFDA for re-inspection.

 Restructuring exercise in domestic business largely over; growth to recover

from 2QFY2017.

 Tax rate guidance of 14-15% provided for FY2017.

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 52% of its sales in FY2016. In terms of ANDAs, the

company cumulatively has 417 products, out of which 150 products now await

USFDA approval, including 15 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 back of supply constraints at

the Halol facility, although the company has taken redemption measures including

site transfers. Overall, we expect the region to post a 14.5% CAGR in sales over

FY2016-18E, accounting for almost 49% of the overall sales in FY2018E.

Domestic Business: Sun Pharma’s domestic formulation business is among the

fastest growing in the Indian pharmaceutical industry. It contributed 23% to the

company’s total turnover in FY2014. Sun Pharma is ranked second and holds a

market share of 5.4% in the domestic formulation market, with exposure to

psychiatry, neurology, CVS, diabetic and gastroenterology segments. With Ranbaxy

Laboratories’ merger, the company is now the segment leader with a 9.2% market

share 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

August 17, 2016

Sun Pharma | 1QFY2017 Result Update

of 12.5% over FY2016-18E, thus contributing by 25% to the overall formulation

sales of the company in FY2018.

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 12.7% CAGR

(including Ranbaxy Laboratories) to `35,258cr and EPS to post a 22.0% CAGR to

`32.8 over FY2016-18E. We recommend a Buy on the stock.

Exhibit 6: Key assumptions

FY2017E

FY2018E

Domestic Formulation sales growth (%)

10.0

15.0

Export Formulation sales growth (%)

14.3

13.5

Growth in employee expenses (%)

15.0

20.0

Operating margins (%)

30.0

30.9

Tax as % of PBT

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 17, 2016

Sun Pharma | 1QFY2017 Result Update

Exhibit 8: Valuation summary

Company

Reco

CMP Tgt. price Upside

FY2018E

FY16-18E

FY2018E

(`)

% PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

647

21.3

2.8

13.3

(10.8)

27.5

25.3

Aurobindo Pharma Buy

735

877

19.3

15.5

2.6

10.8

18.1

22.5

26.1

Cadila Healthcare

Accumulate

364

400

9.9

18.2

2.7

12.4

15.8

24.3

26.6

Cipla

Reduce

554

490

(11.5)

20.4

2.6

14.0

20.4

13.5

15.2

Dr Reddy's

Neutral

3,008

19.1

2.8

11.2

6.9

18.1

17.1

Dishman Pharma

Sell

170

(73.6)

15.1

1.8

7.7

3.1

10.3

10.9

GSK Pharma*

Neutral

3,049

51.3

6.6

35.1

15.9

35.8

31.8

Indoco Remedies

Sell

306

225

(26.5)

19.6

2.3

12.5

31.5

19.1

19.2

Ipca labs

Buy

517

613

18.6

26.2

1.8

11.9

36.5

8.8

9.4

Lupin

Accumulate

1,590

1,809

13.8

22.9

3.8

14.1

17.2

24.4

20.9

Sanofi India

Neutral

4,343

25.7

3.2

18.5

21.2

24.9

28.4

Sun Pharma

Buy

783

944

20.6

23.9

4.8

15.5

22.0

33.1

18.9

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 17, 2016

Sun Pharma | 1QFY2017 Result Update

Profit & Loss statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017E

FY2018E

Gross sales

16,200

27,652

28,110

31,412

35,578

Less: Excise duty

195

366

283

320

Net sales

16,004

27,287

27,744

31,129

35,258

Other operating income

147

526

Total operating income

16,080

27,433

28,270

31,655

35,784

% chg

42.3

70.6

3.0

12.0

13.0

Total expenditure

9,081

19,470

20,473

21,799

24,348

Net raw materials

2,779

6,739

6,483

7,274

8,239

Other mfg costs

699

1,192

1,212

1,360

1,540

Personnel

2,074

4,430

4,797

5,382

6,459

Other

3,528

7,109

7,981

7,782

8,109

EBITDA

6,923

7,817

7,271

9,330

10,910

% chg

41.1

12.9

-7.0

-23.2

-19.3

(% of Net Sales)

43.3

28.6

26.2

30.0

30.9

Depreciation & amort.

409

1,195

1,014

1,214

1,414

EBIT

6,514

6,622

6,783

8,642

10,022

% chg

42.5

1.7

2.4

(20.7)

16.0

(% of Net Sales)

40.7

24.3

24.4

27.8

28.4

Interest & other charges

579

477

Other income

552

451

1,050

(% of PBT)

7.8

6.8

14.3

11.4

9.9

Share in profit of Asso.

Recurring PBT

7,098

6,641

7,356

9,215

10,595

% chg

44.9

-6.4

10.8

-15.6

0.0

Extraordinary expense/(inc.)

2,517

237.8

590.5

PBT (reported)

7,098

6,641

6,765

9,231

10,595

Tax

702.2

914.7

934.9

1,384.6

1,589.3

(% of PBT)

9.9

13.8

15.0

PAT (reported)

6,396

5,726

5,830

7,846

9,006

Add: Share of earnings of asso.

(13)

(2)

Less: Minority interest (MI)

738

936

1,111

Prior period items

PAT after MI (reported)

3,141

4,539

4,716

6,735

7,895

ADJ. PAT

5,273

4,743

5,306

6,735

7,895

% chg

52.6

(10.0)

11.9

(12.6)

17.2

(% of Net Sales)

19.6

16.6

0.0

1.0

2.0

Basic EPS (`)

25.5

22.9

22.0

28.0

32.8

Fully Diluted EPS (`)

25.5

22.9

22.0

28.0

32.8

% chg

52.6

(10.0)

(3.7)

(24.8)

17.2

August 17, 2016

Sun Pharma | 1QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

207

241

Preference capital

Reserves & surplus

18,318

26,300

31,164

37,617

45,231

Shareholders’ funds

18,525

26,507

31,404

37,858

45,472

Minority interest

1,921

2,851

4,085

5,196

6,307

Total loans

2,561

7,596

8,338

Deferred tax liability

(911)

(1,752)

(2,126)

Other Long Term Liabilities

Long Term Provisions

2,602

2,710

2,293

2,287

2,554

Total liabilities

24,707

37,922

44,005

51,563

60,555

APPLICATION OF FUNDS

Gross block

6,389

15,041

18,621

19,621

20,621

Less: Acc. depreciation

3,668

4,863

6,102

7,315

8,729

Net block

2,721

10,179

12,519

12,306

11,892

Capital work-in-progress

842

303

1,144

Goodwill

4,097

3,701

4,181

Investments

2,786

2,716

1,309

1,551

1,388

Long term long & adv.

1,051

2,736

3,032

3,402

3,854

Current assets

16,688

27,005

30,149

38,366

47,641

Cash

7,590

10,998

13,989

20,005

27,173

Loans & advances

3,774

2,193

2,006

2,480

2,481

Other

3,816

13,813

14,154

15,881

17,987

Current liabilities

3,477

9,256

8,026

8,546

9,545

Net current assets

13,211

17,748

22,123

29,820

38,096

Others

Total assets

24,707

37,922

44,005

51,563

60,555

August 17, 2016

Sun Pharma | 1QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017E FY2018E

Profit before tax

7,098

6,641

7,356

9,215

10,595

Depreciation

409

1,195

1,014

1,214

1,414

(Inc)/Dec in working capital

(1,782)

(4,322)

(1,680)

(4,815)

(14,776)

Direct taxes paid

702

915

935

1,385

1,589

Cash Flow from Operations

5,024

2,598

5,754

4,229

(4,357)

(Inc.)/Dec.in Fixed Assets

681

(8,653)

(3,580)

(3,141)

(1,842)

(Inc.)/Dec. in Investments

(374)

1,408

1,165

163

Other income

Cash Flow from Investing

306

(8,583)

(2,172)

(1,975)

(1,679)

Issue of Equity

Inc./(Dec.) in loans

(548)

(4,928)

(1,157)

(1,165)

268

Dividend Paid (Incl. Tax)

(606)

(282)

Others

(645)

14,320

847

(1,404)

13,217

Cash Flow from Financing

(1,799)

9,392

(592)

(2,850)

13,204

Inc./(Dec.) in Cash

3,531

3,408

2,991

(596)

7,168

Opening Cash balances

4,059

7,590

10,998

20,601

20,005

Closing Cash balances

7,590

10,998

13,989

20,005

27,173

August 17, 2016

Sun Pharma | 1QFY2017 Result Update

Key Ratios

Y/E March

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

31.5

35.0

36.4

28.7

24.4

P/CEPS

46.8

29.0

33.7

24.3

20.7

P/BV

9.0

7.3

5.3

4.4

3.7

Dividend yield (%)

0.3

0.4

0.1

EV/Sales

10.1

6.0

6.8

5.8

5.0

EV/EBITDA

23.2

20.8

25.9

19.5

16.1

EV / Total Assets

6.5

4.3

3.5

2.9

Per Share Data (`)

EPS (Basic)

25.5

22.9

22.0

28.0

32.8

EPS (fully diluted)

25.5

22.9

22.0

28.0

32.8

Cash EPS

17.1

27.7

23.8

33.0

38.7

DPS

2.5

3.0

1.0

Book Value

89.4

110.2

151.6

182.8

219.5

Dupont Analysis

EBIT margin

40.7

24.3

24.4

27.8

28.4

Tax retention ratio

90.1

86.2

85.0

Asset turnover (x)

1.1

1.2

1.0

1.1

ROIC (Post-tax)

40.5

26.1

20.9

26.2

26.6

Cost of Debt (Post Tax)

2.9

9.8

5.2

5.1

9.7

Leverage (x)

0.0

Operating ROE

40.5

26.1

20.9

26.2

26.6

Returns (%)

ROCE (Pre-tax)

32.0

21.1

16.6

17.7

33.1

Angel ROIC (Pre-tax)

57.4

38.3

28.6

36.0

71.4

ROE

32.3

21.1

18.3

18.7

18.9

Turnover ratios (x)

Asset Turnover (Gross Block)

2.3

2.6

1.7

1.8

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

(0.3)

(0.1)

(0.2)

(0.3)

(0.4)

Net debt to EBITDA

(0.7)

(0.4)

(0.8)

(1.3)

(1.7)

Interest Coverage (EBIT/Int.)

August 17, 2016

Sun Pharma | 1QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

offering of securities of the company covered by Analyst during the past twelve months.

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decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

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the merits and risks of such an investment.

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trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

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contrary view, if any.

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Disclosure of Interest Statement

Sun Pharma

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

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 17, 2016