3QFY2017 Result Update | Pharmaceutical

February 15, 2017

Sun Pharma

BUY

CMP

`650

Performance Highlights

Target Price

`847

(` cr)

3QFY2017 2QFY2017

% chg (qoq) 3QFY2016

% chg (yoy)

Investment Period

12 months

Net sales

7,683

7,764

(1.0)

7,087

8.4

Other income

352

621

(43.3)

208

68.9

Stock Info

Gross profit

5,435

5,924

(8.3)

5,354

1.5

Sector

Pharmaceutical

Operating profit

2,224

2,667

(16.6)

2,210

0.6

Market Cap (` cr)

156,476

Adj. Net profit

1,722

2,235

(23.0)

1,940

(11.2)

Net Debt (` cr)

(6,960)

Source: Company, Angel Research

Beta

0.7

52 Week High / Low

898/572

For 3QFY2017 Sun Pharmaceuticals posted results marginally lower than

Avg. Daily Volume

465,142

expectations on sales front, while OPM came in much below expectation,

Face Value (`)

however, net profit was slightly below expectations. Sales came in at `7,683cr

BSE Sensex

28,339

(v/s `7800cr expected) v/s `7,087cr in 3QFY2016, a yoy growth of 8.4%. Indian

Nifty

8,792

sales at `1,969cr, posted a yoy growth of 5%, while USA finished dosage sales

Reuters Code

SUN.BO

(45% of sales) at US$507mn, posted a yoy growth of 4%. On EBITDA front, the

Bloomberg Code

SUNP@IN

company posted an EBITDA of 28.9% (v/s 33.6% expected) v/s 31.2% in

3QFY2016. Consequently, Adj. PAT came in at `1,722cr (v/s `1,734cr expected)

v/s `1,940cr in 3QFY2016, a yoy de-growth of 11.2% yoy. We maintain

Shareholding Pattern (%)

our Buy.

Promoters

54.4

MF / Banks / Indian Fls

15.6

OPM lower than expectations: Sales came in at `7,683cr (v/s `7,800cr expected)

FII / NRIs / OCBs

22.0

v/s `7,087cr in 3QFY2016, a yoy growth of 8.4%. Indian sales at `1,969cr,

posted a yoy growth of 5%, while USA finished dosage sales (45% of sales) at

Indian Public / Others

8.0

US$507mn, posted a yoy growth of 4%. On EBITDA front, the company posted

an EBITDA of

28.9% (v/s

33.6% expected) v/s

31.2% in 3QFY2016.

Abs. (%)

3m 1yr

3yr

Consequently, Adj. PAT came in at

`1,722cr (v/s

`1,734cr expected) v/s

Sensex

5.7

23.3

39.1

`1,940cr in 3QFY2016, a yoy de-growth of 11.2% yoy.

Sun Pharma

(5.6)

(23.4)

6.8

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

12.7% (including Ranbaxy Laboratories) to `35,258cr and EPS to post a CAGR of

3-year price chart

26.5% to `35.3 over FY2016-18E. We recommend a Buy rating on the stock.

1,200

Key financials (Consolidated)

1,000

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

800

Net sales

27,287

27,744

31,129

35,258

600

% chg

70.6

1.7

12.2

13.3

400

Adj. Net profit

4,743

5,306

7,260

8,495

% chg

(10.0)

11.9

36.8

17.0

200

EPS (`)

22.9

22.0

30.2

35.3

EBITDA margin (%)

28.6

26.2

32.0

32.9

Source: Company, Angel Research

P/E (x)

28.4

29.5

21.6

18.4

RoE (%)

21.1

18.3

20.0

20.1

RoCE (%)

21.1

16.6

18.9

P/BV (x)

5.9

4.3

3.5

2.9

Sarabjit Kour Nangra

EV/Sales (x)

4.8

5.5

4.7

3.9

+91 22 39357600 Ext: 6806

EV/EBITDA (x)

16.8

20.9

14.6

11.9

[email protected]

Source: Company, Angel Research; Note: CMP as of February 14, 2017

Please refer to important disclosures at the end of this report

Sun Pharma | 3QFY2017 Result Update

Exhibit 1: 3QFY2017 performance (Consolidated)

Y/E March (` cr)

3QFY2017

2QFY2017

% chg QoQ 3QFY2016

% chg yoy 9MFY2017 9MFY2016

% chg

Net sales

7,683

7,764

(1.0)

7,087

8.4

23,439

20,472

14.5

Other income

351.6

620.5

(43.3)

208.1

68.9

1,365

737.2

85.2

Total income

8,035

8,385

(4.2)

7,295

10.1

24,805

21,209

17.0

Gross profit

5,435

5,924

(8.3)

5,354

1.5

17,504

15,550

12.6

Gross margin (%)

70.7

76.3

75.6

74.7

76.0

Operating profit

2,224

2,667

(16.6)

2,210

0.6

7,575

4,916

54.1

Operating margin (%)

28.9

34.3

31.2

32.3

24.0

Interest

167

210.3

128

30.7

355

420

(15.6)

Depreciation

307

304

1.0

251

22.3

927

750

23.6

Extraordinary item loss/ ( gain)

609

PBT

2,102

2,930

(28.3)

2,040

3.0

7,659

4,484

70.8

Provision for taxation

372.9

441.7

(15.6)

88.8

319.9

1,167

496

135.2

PAT before extra-ordinary item

1,729

2,488

(30.5)

1,951

(11.4)

6,492

3,988

62.8

Minority interest(MI)

253

(97.1)

(37.5)

(8)

Reported PAT

1,722

2,235

(23.0)

1,940

(11.2)

6,461

3,996

61.7

Adj. PAT

1,722

2,235

(23.0)

1,940

(11.2)

6,461

4,605

40.3

Adj. EPS (`)

7.2

9.3

8.1

26.8

9.4

Source: Company, Angel Research

Exhibit 2: 3QFY2017 - Actual V/s Angel estimates

(` cr)

Actual

Estimates

Variance (%)

Net sales

7,683

7,800

(1.5)

Other income

352

255

38.0

Operating profit

2,224

2,621

(15.2)

Tax

373

542

(31.2)

Adj. Net profit

1,722

1,734

(0.7)

Source: Company, Angel Research

Numbers just in-line with expectations: Sales came in at `7,683cr (v/s `7800cr

expected) v/s `7087cr in 3QFY2016, a yoy growth of 8.4%. Indian sales at

`1,969cr, posted a yoy growth of 5%, while USA finished dosage sales (45% of

sales) at US$507mn, posted a yoy growth of 4%.

Sales of branded formulations in India for 3QFY2017 stood at `1,969.4cr, up

5.1% yoy and accounted for 26% of total sales. Sun Pharma is ranked No. 1 and

holds ~8.7% market share in the `100,000cr pharmaceutical market as per the

December-2016 AIOCD-AWACS report.

Sales in the US came in at US$507mn for the quarter, accounting for 45% of total

sales. Sales in emerging markets were at US$172mn for 3QFY2017, a yoy growth

of 14% and accounted for 14% of total sales. Formulation sales in Rest of World

(ROW) markets excluding US and Emerging markets were US$113mn in

3QFY2017, a growth of 33% yoy and accounted for ~10% of revenues for the

quarter.

The company had a total of 424 ANDAs filed with the USFDA. Currently, ANDAs

for 149 products await USFDA approval, including 14 tentative approvals.

February 15, 2017

Sun Pharma | 3QFY2017 Result Update

Exhibit 3: Sales trend

7000

6153

5755

5714

6000

5673

5212

5000

4000

3000

2010

1969

1890

1807

1854

2000

1000

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Domestic Formulation

Export Formulation, Bulk and others

Source: Company, Angel Research

OPM at 28.9%; lower than an expected 33.6%: On EBITDA front, the company posted

an EBITDA of 28.9% (v/s 33.6% expected) v/s 31.2% in 3QFY2016. The dip in the OPM was

on the back of lower GPM, which came in at 70.7% v/s 75.6% in 3QFY2016. The R&D

expenses came in at 8.0% of sales, in-line with last year, posting a yoy growth of 5.0%.

Exhibit 4: OPM trend (%)

40.0

34.3

31.2

31.0

28.9

30.0

20.0

10.0

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research,

Net profit slightly below expectations: Consequently, Adj. PAT came in at `1,722cr

(v/s `1,734cr expected) v/s `1,940cr in 3QFY2016, a yoy de-growth of 11.2%

yoy. Other income came in at `351.6cr v/s `208.1cr in 3QFY2016, a yoy growth

of 68.9%.

February 15, 2017

Sun Pharma | 3QFY2017 Result Update

Exhibit 5: Adjusted Net profit trend (` cr)

3,000

2,500

2,235

2,034

2,000

1,722

1,417

1,500

1,000

500

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Concall takeaways

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

FY2018E. The focus areas for integration include cGMP compliance, sourcing

efficiencies as well as revenue synergies.

 Company plans to shift key products from Halol.

 Tildrakizumab NDA filling will be done by Merck in FY2018.

 Revenue from sale of rights to sell Keveyis is part of other operating income.

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 424 products, out of which 149 products now await

USFDA approval, including 14 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 CAGR of 14.5% 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, 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

12.5% over

FY2016-18E, contributing 25% to the overall formulation sales of the company in

FY2018.

February 15, 2017

Sun Pharma | 3QFY2017 Result Update

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

12.7% (including Ranbaxy Laboratories) to `35,258cr and EPS to post a CAGR of

26.5% to `35.3 over FY2016-18E. We recommend a Buy rating 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 (%)

32.0

32.9

Tax as % of PBT

15.0

14.0

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

February 15, 2017

Sun Pharma | 3QFY2017 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

558

18.4

3.0

11.4

(10.8)

27.5

25.3

Aurobindo Pharma Buy

659

877

33.0

13.9

2.7

9.8

18.1

22.5

26.1

Cadila Healthcare

Accum.

366

400

9.4

19.0

3.6

13.3

13.4

22.7

25.7

Cipla

Sell

577

465

(19.4)

23.5

3.2

15.9

14.2

12.2

13.9

Dr Reddy's

Neutral

2,944

20.6

3.0

11.8

1.7

16.2

15.9

Dishman Pharma

Neutral

216

19.1

2.5

9.5

13.3

10.3

10.9

GSK Pharma*

Neutral

2,683

44.5

7.9

32.8

16.9

37.5

34.5

Indoco Remedies

Reduce

266

240

(9.6)

16.6

2.3

10.7

33.2

19.1

20.1

Ipca labs

Buy

523

613

17.2

26.5

2.1

12.0

36.5

8.8

9.4

Lupin

Buy

1,435

1,809

26.0

20.7

4.1

12.7

17.2

24.4

20.9

Sanofi India

Neutral

4,165

24.2

3.9

17.3

22.2

25.6

28.8

Sun Pharma

Buy

650

847

30.3

18.4

4.6

11.7

26.5

18.9

20.1

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.

February 15, 2017

Sun Pharma | 3QFY2017 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

21,177

23,643

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

7,160

7,404

EBITDA

6,923

7,817

7,271

9,953

11,615

% chg

41.1

12.9

(7.0)

(18.0)

(14.1)

(% of Net Sales)

43.3

28.6

26.2

32.0

32.9

Depreciation & amort.

409

1,195

1,014

1,214

1,414

EBIT

6,514

6,622

6,783

9,265

10,727

% chg

42.5

1.7

2.4

(15.0)

15.8

(% of Net Sales)

40.7

24.3

24.4

29.8

30.4

Interest & other charges

579

477

Other income

552

451

1,050

(% of PBT)

7.8

6.8

14.3

10.7

9.3

Share in profit of Asso.

Recurring PBT

7,098

6,641

7,356

9,838

11,300

% chg

44.9

-6.4

10.8

(9.9)

0.0

Extraordinary expense/(inc.)

2,517

237.8

590.5

PBT (reported)

7,098

6,641

6,765

9,848

11,300

Tax

702.2

914.7

934.9

1,477.2

1,695.0

(% of PBT)

9.9

13.8

15.0

PAT (reported)

6,396

5,726

5,830

8,371

9,605

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

7,260

8,495

ADJ. PAT

5,273

4,743

5,306

7,260

8,495

% chg

52.6

(10.0)

11.9

(5.8)

17.0

(% of Net Sales)

19.6

16.6

0.0

1.0

2.0

Basic EPS (`)

25.5

22.9

22.0

30.2

35.3

Fully Diluted EPS (`)

25.5

22.9

22.0

30.2

35.3

% chg

52.6

(10.0)

(3.7)

(18.9)

17.0

February 15, 2017

Sun Pharma | 3QFY2017 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

38,142

46,355

Shareholders’ funds

18,525

26,507

31,404

38,382

46,595

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

2,221

2,480

Total liabilities

24,707

37,922

44,006

52,022

61,605

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

38,581

48,415

Cash

7,590

10,998

13,989

20,220

27,947

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

8,302

9,269

Net current assets

13,211

17,748

22,123

30,279

39,147

Others

Total assets

24,707

37,922

44,006

52,022

61,605

February 15, 2017

Sun Pharma | 3QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017E

FY2018E

Profit before tax

7,098

6,641

7,356

9,838

11,300

Depreciation

409

1,195

1,014

1,214

1,414

(Inc)/Dec in working capital

(1,782)

(4,322)

(1,680)

(5,059)

(15,053)

Direct taxes paid

702

915

935

1,477

1,695

Cash Flow from Operations

5,024

2,598

5,754

4,515

(4,034)

(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)

(1,230)

260

Dividend Paid (Incl. Tax)

(606)

(282)

Others

(645)

14,320

847

5,203

13,462

Cash Flow from Financing

(1,799)

9,392

(592)

(2,921)

13,440

Inc./(Dec.) in Cash

3,531

3,408

2,991

6,231

7,727

Opening Cash balances

4,059

7,590

10,998

13,989

20,220

Closing Cash balances

7,590

10,998

13,989

20,220

27,947

February 15, 2017

Sun Pharma | 3QFY2017 Result Update

Key Ratios

Y/E March

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

25.5

28.4

29.5

21.6

18.4

P/CEPS

37.9

23.5

27.3

18.5

15.8

P/BV

7.3

5.9

4.3

3.5

2.9

Dividend yield (%)

0.4

0.5

0.2

EV/Sales

8.1

4.8

5.5

4.7

3.9

EV/EBITDA

18.7

16.8

20.9

14.6

11.9

EV / Total Assets

5.2

3.5

2.8

2.2

Per Share Data (`)

EPS (Basic)

25.5

22.9

22.0

30.2

35.3

EPS (fully diluted)

25.5

22.9

22.0

30.2

35.3

Cash EPS

17.1

27.7

23.8

35.2

41.2

DPS

2.5

3.0

1.0

Book Value

89.4

110.2

151.6

185.3

225.0

Dupont Analysis

EBIT margin

40.7

24.3

24.4

29.8

30.4

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

28.0

28.3

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

28.0

28.3

Returns (%)

ROCE (Pre-tax)

32.0

21.1

16.6

18.9

Angel ROIC (Pre-tax)

57.4

38.3

28.6

38.4

38.6

ROE

32.3

21.1

18.3

20.0

20.1

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)

(1.2)

(1.7)

Interest Coverage (EBIT/Int.)

February 15, 2017

Sun Pharma | 3QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange Limited. It is also registered as a Depository Participant with CDSL

and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a

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.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

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

make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the

companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

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

fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the

contrary view, if any.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable

sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot

testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.

While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from

or in connection with the use of this information.

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

Yes

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)

February 15, 2017