sun pharma - motilal oswal– detailed report

8/12/2019 Sun Pharma - Motilal Oswal Detailed Report

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3/13/2014 Sun Pharma: Right chemistry in place; good growth visibility Detailed Report

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12 September 2013

Annual Report Update | Sector: Healthcare

Sun PharmaBSE Sensex

19,997

S&P CNX

5,913 CMP: INR562 TP: INR600 Buy

Right chemistry in place; good growth visibilityContinued focus on differentiated offerings, maintaining cost leadership

We went through Sun Pharmaceutical Industries (SUNP) annual report for

FY13. Our key takeaways:

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel.Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Well charted strategy provides good growth visibili ty

SUNP IN

2,071.1

581/328

-8/-14/18

1,164.4

18.4

SUNPs FY13 annual report provides good visibility on the key growth leversfrom its important markets like US and India. The company intends to continue

focusing on (1) developing complex and differentiated products, and (2)

maintaining cost leadership through vertical integration. It will adopt a

conservative approach towards inorganic initiatives.

Financials: URL seen a value buy; working capital days reduced

Financial Snapshot (INR B)2013 2014E 2015EY/E March

Net Sales 112.4 153.4 176.5

EBITDA

Adj PAT

EPS (INR)

Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

48.3

32.8

15.8

41

72

24.1

31.5

35.5

7.8

66.7

43.2

20.9

32

82

27.0

26.0

26.9

6.9

72.8

48.8

23.6

13

104

25.3

38.3

23.9

5.4

Shareholding pattern %

As on

Promoter

Dom. Inst

Foreign

Others

Jun-13 Mar-13 Jun-12

63.7

3.2

22.9

10.2

63.7

3.4

22.7

10.2

63.7

5.3

20.6

10.4

Consolidation of URL Pharma: SUNPs cash flows indicate that the

acquisition price paid for URL Pharma was USD71m, implying a valuation of 0.4x EV/Sales as per our assumption. Lower-than-expected acquisition cost

coupled with faster-than-expected ramp-up at URL will shorten the

estimated payback period for the acquisition. URL Pharma was consolidated

for 55 days in 4QFY13. For this period, it reported sales of USD33m, with

PAT margin of ~15%.

Hedges: SUNP has outstanding hedges of USD300m, for which it has madeprovisions of INR1.29b.

Working capital: Net working capital days stood at 112 at the end of March

2013 against 146 at the end of March 2012.Spin-off of India business: SUNP has spun off its India business into a 100%

subsidiary, Sun Pharma Laboratories, which reported sales of INR27.4b,

with a negative PBT of INR1.4b. The new structure might help SUNP toreduce overall effective tax ra te, going forward.

Managerial changes: Mr Israel Makov was appointed Chairman of the

company in FY13. Ms Vidhi Shanghvi, daughter of founder, Mr Dilip

Shanghvi, joined the company from 9 November 2012.

USFDA clearances/approvals: The USFDA gave clearance to Caraco for

manufacturing three products, post inspection of its facilities and confirmedthat it is now in compliance with USFDA cGMP requirements. SUNP

received a total of 20 ANDA approvals from the USFDA during the year,

including that for Doxorubicin Liposomal Injection.

Other highlights

Stock Performance (1-year)

Valuation and viewWe believe the US will continue to be the core earnings driver for SUNP, with

support from India and RoW. We estimate 22% CAGR in core EPS over FY13-15.

The stock trades at 26.9x FY14E and 23.9x FY15E core EPS. Maintain Buy with atarget price of INR600.

Alok Dalal([email protected]);+91 22 3982 5584

Hardick Bora([email protected]);+91 22 3982 5423Investors are advised to refer through disclo sures made at the end of the Research Report.


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Sun Pharma

Well charted strategy provides good growth visibilityAfter achieving USD2b in sales in FY13, SUNP has laid out a clear strategy for its next leg of

growth:

To generate sustainable revenues and free cash flows from differentiated

product offerings, with focus on chronic therapies in India and other emerging

markets.

To focus on developing complex and differentiated products, while taking a

conservative approach towards inorganic initiatives.

To maintain cost leadership through vertically integrated capabilities andoptimize operational expenses.

US as % of salesUS Market | Size: USD322bOutlook

Projected to grow at 1-4% CAGR over 2012-16 to reach USD350b-380b by 2016.

Growth would be slow due to expiration of patents worth USD73b over 2013-16.

This is, in fact, positive for generic drug makers like SUNP.

SUNPs strategy

Focus on complex generics, including injectables and differentiated dosage

forms.Significant portion of this pipeline being backward integrated through in-house

API capabilities.

Manufacturing capabilities across a wide array of dosage forms will enable SUNP

to tap multiple opportunities.

Focus on growing recently acquired DUSA and URL Pharma, and enhancing their

profitability.

US generic sales (INR m) driven by acquisitions and new launches105,812

92,987

61,538

34,714

15,47522,538

11,117

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Source: MOSL, Company

Note: Taro's US revenue cons olida ted from FY11 onwards ; DUSA & URL from 4QFY13 onwards

12 September 2013 2


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Sun Pharma

India as % of salesIndian Formulations Market | Size: USD14bOutlook

Expected to grow at a CAGR of 14-17% over 2012-16.

Growth will be driven by increased healthcare spending, rising income levels,

rapid urbanization and increasing healthcare insurance.

SUNPs strategySUNP is sharpening its focus on building brands and strengthening customer

relationships.

It continues to strengthen its product portfolio and increase in-licensing

products.

Going ahead, SUNP will continue to concentrate on the chronic segments, which

offer stable returns and ensure competitive long-term stability.

Domestic formulations sales (INR m) sustained momentum


RoW as % of sales Pharmerging Markets | Size: USD180b

OutlookProjected to grow at 12-15% CAGR over 2012-16 to USD310b-350b.

The key contributing countries will be Brazil, Russia, China, Mexico and South

Africa.

Rising income and increased access to medicines will be a common trend driving

growth in these markets.

SUNPs strategy

The focus ahead will be to leverage on the chronic portfolio to enhance

presence in key emerging markets.

In addition, SUNP is focusing on expanding its presence to new geographies.

Some of the focus markets for the future include Latin America, Russia & CIS,

China, South Africa, etc.SUNP plans to replicate its specialty product basket in these markets, including

technology-based products.

12 September 2013 3


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Sun Pharma

RoW sales (INR m) to grow at 22% CAGR over FY13-15


Note: Taro's emerging market sa les cons olidated from FY12 onwards

APIs as % of sales Active Pharmaceutical Ingredients (APIs) | Size: USD100bOutlook

Projected to grow at 8-10% over the next few years.

The API market is highly fragmented and is expected to witness consolidation.Growth will be fueled by patent expiries, greater outsourcing and demand for

potent and biogeneric APIs.

SUNPs strategyFocus on ensuring long-term competitiveness of the formulations business

through strong backward integration.

Establish long-term contracts with customers in regulated markets for

sustainable revenue growth and margins.

API sales (INR m) subdued growth due to high captive consumption


12 September 2013 4


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Sun Pharma

EBITDA and EBITDA margin trend Healthy free cash generation to continue

Source: MOSL, Company Source: MOSL, Company

Working capital trend Growing cash & cash equivalents

Source: MOSL, Company Source: MOSL, Company

Financials: Working capital days reduced; new structure couldhelp save tax

Consolidation of URL Pharma: SUNPs cash flows indicate that INR16.4b

(USD301m) was spent on the acquisition of subsidiaries in FY13. It acquired DusaPharma for USD230m, which indicates that the acquisition price paid for URL

Pharma was USD71m, implying a valuation of 0.4x EV/Sales as per our

assumption. Recent price increases taken in doxycycline hyclate will enhance

profitability for the subsidiary. Lower-than-expected acquisition cost coupled

with faster-than-expected ramp-up at URL will shorten the estimated payback

period for the acquisition. URL Pharma was consolidated for 55 days in 4QFY13.For this period, it reported sales of USD33m, with PAT margin of ~15%.

Hedges: SUNP has outstanding hedges of USD300m, for which it has made

provisions of INR1.29b.

Intangible assets: Intangible assets (ex-goodwill) increased from INR3bn to

INR13.5bn mainly due to the Dusa Pharma acquisition.Working capital: Net working capital days stood at 112 at the end of March2013 against 146 at the end of March 2012.

Interest income: SUNPs interest income was INR2.4b, implying a yield of 5.8%

on its cash of INR40.6b. The yield is lower due to low yield at Taro. Excluding

Taro, the yield is ~7.5%.

12 September 2013 5


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Sun Pharma

Spin-off of India business: SUNP has spun off its India business into a 100%subsidiary, Sun Pharma Laboratories, which reported sales of INR27.4b, with a

negative PBT of INR1.4b. The new structure might help SUNP to reduce overall

effective tax rate, going forward.

Consultancy fees: SUNPs consultancy fees doubled in FY13 to INR1.5b.

Loans and advances: Long-term loans and advances increased 40% to INR8.4b.

However, as a percentage of sales, long-term loans and advances remainunchanged at 7.4%.

Capex: Capex for FY13 including acquisitions of Dusa Pharma and URL Pharma

was INR8.5b.

Patent infringement litigation: For FY13, SUNP made a provision of INR5.8b

towards settlement for patent infringement litigation related to generic versions

of Protonix.

Other highlightsAcquisition of Dusa Pharma: SUNP acquired Dusa Pharma for USD230m. This

provides it with access to Levulan (Aminolevulinic Acid HCl) photodynamic

therapy for the treatment of non-hyperkeratotic actinic keratoses or AKs of theface or scalp. Additionally, Dusas BLU-U treatment has been approved byUSFDA for the treatment of moderate inflammatory acne vulgaris and general

dermatological conditions. This is SUNPs first major initiative in establishing its

presence in the US specialty pharma market.

Acquisition of URL Pharma: Through its subsidiary, Caraco, SUNP acquired URL

Pharmas non-colcrys business from Takeda for an undisclosed amount. This

acquisition expands SUNPs product basket in the US generics market. URLPharma has 107 ANDAs pending approval with the USFDA.

USFDA clearances/approvals: The USFDA gave clearance to Caraco for

manufacturing three products, post inspection of its facilities and confirmed

that it is now in compliance with USFDA cGMP requirements. SUNP received a

total of 20 ANDA approvals from the USFDA during the year, including that forDoxorubicin Liposomal Injection.Prandin judgment: The US courts ruled in favor of Caraco in its patent litigation

against Novo Nordisk over Caracos generic version of Prandin, Repaglinide

Tablets. The final USFDA approval for this product was received in June 2013.

Being the First-to-File Para-IV filer, SUNP launched the product with 180 days of

marketing exclusivity in the US market.

Managerial changes: Mr Israel Makov was appointed Chairman of the companyin FY13. Ms Vidhi Shanghvi, daughter of founder, Mr Dilip Shanghvi, joined the

company from 9 November 2012.

12 September 2013 6


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Sun Pharma

Valuation and viewWe believe the US will remain the core earnings driver for SUNP, with support

from India and RoW.

While Taro had played a key role in shaping SUNP's US performance over the

last two years, SUNPs own pipeline continues to grow at over 20% annually. We

assume flat revenue growth for Taro over FY13-15, but with over 130 ANDAs

awaiting approval, SUNP can sustain the current growth momentum in the USthrough its own pipeline of products. We model revenue CAGR of 30% for

SUNPs own pipeline and believe that there could be positive surprises on this

front.

While India formulations will see a slowdown in FY14, impacted by the New

Pricing Policy, we expect growth to rebound to historical levels of 16-18% in

FY15.We estimate 22% CAGR in core EPS over FY13-15. The stock trades at 26.9x

FY14E and 23.9x FY15E core EPS. We value SUNPs core business at

INR588/share (25x FY15E EPS) and Para-IV pipeline including generic Doxil and

Prandin at INR12/share, giving us a target price of INR600 7% upside.

Strong earnings growth coupled with superior execution track record makes

SUNP an attractive investment opportunity; maintain Buy.

12 September 2013 7


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Sun Pharma

Financials and valuation

Income statementY/E March

Net Sales

Change (%)

EBITDAEBITDA Margin (%)

Depreciation

EBITInterestOther Income

Extraordinary itemsPBT

TaxTax Rate (%)

Min. Int. & Assoc. ShareReported PAT

Adjusted PATChange (%)

Margins (%)

201040,075

-6

13,63334.0

1,533

12,1000

2,048

014,148

2511.8

4113,898

9,826-27

25

201157,214

43

19,56634.2

2,049

17,518739

3,611

3220,357

1,7198.4

-91318,638

14,95252

25

201280,095

40

31,94439.9

2,912

29,032282

4,856

1133,595

2,9918.9

-3,85530,604

27,12581

29

2013112,388

40

48,35243.0

3,362

44,991432

4,491

5,90143,148

8,45619.6

-4,86334,693

37,63839

29

(INR Million)2014E

153,440

37

66,72343.5

4,139

62,584876

4,512

25,17441,046

9,93324.2

-5,10731,113

48,32528

28

2015E176,540

15

72,79641.2

4,403

68,393876

5,872

073,389

13,21018.0

-5,61860,179

54,43413

28

Balance sheetY/E March

Share CapitalReserves

Net Worth

Debt

Deferred TaxTotal Capital Employed

Gross Fixed Assets

Less: Acc Depreciation

Net Fixed Assets

Capital WIP

Investments

Current AssetsInventory

DebtorsCash & Bank

Loans & Adv, OthersCurr Liabs & Provns

Curr. LiabilitiesProvisions

Net Current AssetsTotal Assets

2010

1,03677,254

78,289

1,712

-89081,042

20,880

7,239

13,642

1,448

31,664

36,12110,739

11,7485,089

8,5467,579

4,0953,484

28,54281,042

2011

1,03693,798

94,833

3,717

-3,652103,370

39,128

16,794

22,334

2,355

22,297

61,14614,895

11,04922,046

13,15615,361

10,0785,283

45,785103,371

2012

1,036120,628

121,663

2,739

-5,199130,820

46,542

20,406

26,136

3,447

22,129

90,68120,870

19,26133,672

16,87824,950

14,41010,541

65,730130,820

2013

1,036148,862

149,897

2,072

-7,122161,197

56,026

24,421

31,604

5,626

24,116

113,42025,778

27,10840,587

19,94838,439

15,75222,687

74,981161,198

(INR Million)2014E 2015E

2,071 2,071167,598 213,678

169,669 215,749

1,343 1,343

-7,122 -7,122185,348 237,045

63,839 70,495

28,560 32,963

35,279 37,532

3,313 2,157

26,116 28,116

143,020 192,75534,242 42,839

36,865 42,38449,056 81,338

22,857 26,19347,250 48,384

23,814 23,40923,436 24,975

95,770 144,371185,348 237,045

E: MOSL Estimat es

12 September 2013 8


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Sun Pharma

Financials and valuation

RatiosY/E March

Basic (INR)

EPS

Cash EPS

Book ValueDPS

Payout (incl. Div. Tax.)Valuation(x)

P/ECash P/E

Price / Book ValueEV/Sales

EV/EBITDADividend Yield (%)

Profitability Ratios (%)

RoERoCE

Turnover Ratios (%)Asset Turnover (x)

Debtors (No. of Days)Inventory (No. of Days)

Creditors (No. of Days)Leverage Ratios (%)

Net Debt /Equity (x)

2010

4.8

7.3

37.80.7

33.8

118.077.4

14.928.2

82.80.1

13.318.6

0.5

107.097.8

37.3

0.0

2011

6.8

9.8

45.80.9

28.2

82.957.6

12.319.6

57.40.2

16.223.6

0.6

70.595.0

64.3

0.0

2012

11.2

13.9

58.72.1

18.9

50.040.4

9.613.9

34.80.4

21.530.4

0.6

87.895.1

65.7

0.0

2013

15.8

16.0

72.42.5

32.2

35.535.1

7.89.8

22.80.4

24.131.5

0.7

88.083.7

51.2

0.0

2014E

20.9

14.6

81.93.0

15.0

26.938.6

6.97.1

16.30.5

27.026.0

0.8

87.781.5

56.6

0.0

2015E

23.6

28.5

104.23.5

15.6

23.919.7

5.46.0

14.50.6

25.338.3

0.7

87.688.6

48.4

0.0

Cash flow statementY/E March

OP/(Loss ) before Tax

InterestDirect Taxes Paid

(Inc)/Dec in Wkg Cap

CF from Op. Activi ty

(Inc)/Dec in FA & CWIP

(Pur)/Sale of InvtCF from Inv. Activity

Inc/(Dec) in Net WorthInc / (Dec) in Debt

Interest PaidDivd Paid (incl Tax)

CF from Fin. ActivityInc/(Dec) in Cash

Add: Opening BalanceClosing Balance

201013,633

2,048-890

-4,659

10,133

-2,920

-13,069-15,988

-3,746-77

0-1,923

-5,746-11,601

16,6905,089

201119,534

3,611-4,048

-286

18,811

-16,500

9,367-7,134

6,4132,006

-739-2,400

5,28016,957

5,08922,046

201231,933

4,856-5,373

-8,319

23,096

-10,585

169-10,416

5,321-978

-282-5,115

-1,05511,626

22,04633,672

201342,451

4,491-10,379

-2,336

34,227

-22,501

-1,987-24,488

4,334-668

-432-6,058

-2,8246,915

33,67240,587

(INR Million)2014E 2015E

41,549 72,796

4,512 5,872-9,933 -13,210

-12,320 -16,319

23,809 49,139

-5,500 -5,500

-2,000 -2,000-7,500 -7,500

1,036 0-729 0

-876 -876-7,270 -8,481

-7,839 -9,3578,470 32,282

40,587 49,05649,057 81,338

E: MOSL Estimat es

12 September 2013 9


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h l l l d h

DisclosuresThis report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or

inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution

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merchantability, fitness for a particular purpose, and non-infringement. The recipients of this r eport should rely on their own investigations.

Sun Pharma

This r eport is intended for distri bution to institutional i nvestors. Reci pients who are not institutional i nvestors should seek advice of their independent fi nancial advisor prior to taking any investment decision

based on this report or for any necessary explanation of its contents.

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securiti es mentioned in this report. To enhance transparency, MOSt has incorporated a Discl osure of

Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement

1. Analyst ownership of the stock

2. Group/Directors ownership of the stock3. Broking relationship with company covered

4. Investment Banking relationship with company covered

SUN PHARMACEUTICAL INDUS

No

NoNo

No

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responsible for preparation of MOSt research r eceive compensation based upon various factors, including quality of research, i nvestor cl ient feedback, stock picking, competitive factors and firm revenues.

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12 September 2013

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sun pharma - motilal oswal– detailed report

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