Sun Pharmaceuticals (SUNPHA) | 568static-news.moneycontrol.com/...SunPharmaceuticals... ·...
Transcript of Sun Pharmaceuticals (SUNPHA) | 568static-news.moneycontrol.com/...SunPharmaceuticals... ·...
May 29, 2017
ICICI Securities Ltd | Retail Equity Research
Result Update
Numbers tumble beyond comprehension…
Revenues declined 7% YoY to | 7137 crore (I-direct estimate: | 8065
crore). US declined fell 37% YoY to | 2477 crore (I-direct estimate:
| 3690 crore) mainly due to challenging generic pricing environment.
Domestic sales grew 10% YoY to | 1916 crore (I-direct estimate:
| 1987 crore)
EBITDA margins declined 800 bps YoY to 21.7% vs. I-direct estimate
of 29.5%. EBITDA declined 32% YoY to | 1545 crore (I-direct
estimate: | 2381 crore). Taro Pharma’s EBITDA margins declined to
53.7% from 69.8% in Q4FY16
Net profit declined 17% YoY to | 1183 crore (I-direct estimate: | 1515
crore) mainly due to lower than expected operational performance
US business key lever for growth but new challenges emerge
The US business, which constitutes ~45% of turnover, has grown at 10%
CAGR in FY12-17, on the back of successful acquisitions like Caraco, Taro,
Dusa, URL and timely product launches (gGleevec, gBenicar AG under
exclusivity). US product basket remains robust - 584 ANDAs filed, 427
approvals received. Some niche launches include Lipodox, Doxil,
Doxycycline, Nystatin, etc, besides complex/limited competition products
and plain vanilla generics. US growth is also being backed by extensive
infrastructure - out of the ~50 global manufacturing facilities more than
20 have been approved by USFDA. However, warning letters to Karkhadi,
Halol and acute pricing pressure in the US base business are new
challenges even as it attempts to achieve Ranbaxy synergy.
Ranbaxy’s stronghold in fast growing emerging markets (50% of
Ranbaxy's sales) will complement Sun’s presence in this space. Regarding
US, it is determined to address Ranbaxy’s cGMP issues as four out of five
US centric facilities remain under USFDA embargo. Sun will gain
leadership position in the niche generic derma space and also get entry to
branded and OTC segments. In the domestic space, the acquisition is
likely to provide more therapeutic diversification to Sun’s portfolio and is
likely to improve its market share in key segments in the domestic space.
Its domestic market share has substantially improved to 8.9% from 5.5%
with leadership in as many as 11 therapies. The management expects
~US$300 million synergy benefits by FY18. We expect US sales to
decline at a CAGR of 8% to | 11580 crore in FY17-19E due to high base
and price erosion in base business. Similarly, the Indian formulations
business is likely to grow at 10% CAGR to | 9417 crore in FY17-19E.
Delay in Halol resolution, US pricing pressure major dampeners
Dismal Q4 numbers (both from Taro, Sun) have summarised the recent
pricing woos in the US generics space but more worrisome for Sun is the
delay in Halol resolution. By the management’s own assertion the
resolution is unlikely before FY18 end against earlier expectation of
Q2FY18. Unlike other generic players, the approval momentum is also
dismal in Sun’s case, mainly due to pending Halol resolution. On the US
generic pricing front, the management expects challenges to remain in
FY18 as well. Hence, they have guided for single digit revenue decline for
the year. The shift towards specialty products such as Tildrakizumab
(dermatology), BromSite, Seciera (both ophthalmic) and Odomzo
(oncology) are long term game plans, the benefits of which are back-
loaded. For now, the company is bracing for ‘’new normal’’, a scenario
where product specific price erosion continuum and prolonged cGMP
resolution delays are here to stay. We downgrade to HOLD with a new
target price of | 550 based on 20x FY19E EPS of | 25.7 and | 36 NPV for
Tildrakizumab.
Rating matrix
Rating : Hold
Target : | 549
Target Period : 12-15 months
Potential Upside : -3%
What’s Changed?
Target Changed from | 850 to | 549
EPS FY17E Changed from | 30.1 to | 29
EPS FY18E Changed from | 31.9 to | 20.9
EPS FY19E Changed from | 38.7 to | 25.7
Rating Unchanged
Quarterly Performance
Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%)
Revenue 7,137.0 7,654.3 -6.8 7,912.7 -9.8
EBITDA 1,547.5 2,271.9 -31.9 2,453.1 -36.9
EBITDA (%) 21.7 29.7 -800 bps 31.0 -932 bps
Adj. Net Profit 1,182.7 1,416.1 -16.5 1,471.8 -19.6
Key Financials
(| Crore) FY16 FY17E FY18E FY19E
Net Sales 28563.0 31557.7 30143.5 32901.2
EBITDA 8724.3 10089.3 7912.1 9291.9
Adj. Profit 5652.6 6964.4 5014.0 6162.7
Adj. EPS (|) 23.4 29.0 20.9 25.7
Valuation summary
FY16 FY16 FY18E FY19E
PE (x) 27.6 27.6 27.2 22.1
EV to EBITDA (x) 15.0 15.0 15.9 13.1
Price to book (x) 4.4 4.4 3.3 3.0
RoNW (%) 18.0 18.0 12.3 13.4
RoCE (%) 18.6 18.6 14.0 15.2
Stock data
Particular
Market Capitalisation
Debt (FY16)
Cash & Cash Equivalents (FY16)
EV (| Cr)
52 week H/L (|) 855/564
Equity capital
Face value | 1
| 124616 crore
| 240.7 crore
Amount
| 136192 crore
| 8091 crore
| 19667 crore
Price performance (%)
1M 3M 6M 1Y
Sun Pharma -11.7 -15.8 -20.5 -27.2
Dr Reddy's -7.5 -16.4 -23.8 -21.9
Lupin -18.9 -23.3 -26.3 -24.3
Research Analyst
Siddhant Khandekar
Mitesh Shah
Harshal Mehta
Sun Pharmaceuticals (SUNPHA) | 568
ICICI Securities Ltd | Retail Equity Research Page 2
Variance analysis
Q4FY17 Q4FY17E Q4FY16 Q3FY17 YoY (%) QoQ (%) Comments
Revenue 7,137.0 8,065.2 7,654.3 7,912.7 -6.8 -9.8 YoY decline of 35% in the US was partly offset by consolidation of acquisitions in
Japan and Russia
Raw Material Expenses 2,195.2 2,097.0 1,408.6 2,248.7 55.8 -2.4 YoY decline of 1140 bps in gross margins to 69.2% mainly due to adverse
product mix and one-off US$ 45 million of inventory write-off
Employee Expenses 1,248.8 1,209.8 1,187.0 1,215.1 5.2 2.8
Other Expenditure 2,145.5 2,377.3 2,786.8 1,995.8 -23.0 7.5
Total Expenditure 5,589.5 5,684.0 5,382.4 5,459.5 3.8 2.4
EBITDA 1,547.5 2,381.2 2,271.9 2,453.1 -31.9 -36.9
EBITDA (%) 21.7 29.5 29.7 31.0 -800 bps -932 bps YoY decline mainly due to a sharp decline in gross margins. Miss vis-à-vis I-
direct estimates was mainly due to lower-than-expected gross margins
Interest 45.0 166.5 103.0 166.5 -56.3 -73.0 Volatility mainly due to forex element
Depreciation 338.2 302.5 288.0 306.8 17.4 10.2
Other income 224.5 124.5 206.0 122.2 9.0 83.8
EO 0.0 0.0 0.0 0.0 NA NA
PBT 1,388.8 2,036.7 2,086.9 2,102.0 -33.5 -33.9
Tax 44.3 305.5 417.6 372.9 -89.4 -88.1
MI 161.9 216.3 246.7 250.0 -34.4 -35.3
Adj. Net Profit 1,182.7 1,514.9 1,416.1 1,471.8 -16.5 -19.6 YoY decline and miss vis-a-vis I-direct estimates mainly due to lower operational
performance, which was partly offset by lower taxation and interest expenses
Key Metrics
India formulations 1,916.4 1,987.2 1,743.5 1,969.4 9.9 -2.7
US formulations 2,554.5 3,689.9 3,910.3 3,419.3 -34.7 -25.3 YoY sharp decline mainly due to higher-than-expected price erosion and
postponement of few products to the next quarters
Emerging Markets 1,212.7 1,003.8 836.5 1,159.9 45.0 4.6 Included consolidation of JSC Biosintez acquisition in Russia
RoW 732.3 776.5 533.2 760.3 37.3 -3.7 Included consolidation of acquisition in Japan
APIs 409.3 372.9 392.5 365.7 4.3 11.9
Source: Company, ICICIdirect.com Research
Change in estimates
(| Crore) Old New % Change Old New % Change
Total Operating Income 31,689.1 30,143.5 -4.9 37,013.0 32,901.2 -11.1 Downward revision mainly due to higher-than-expected price erosion and
delay in product approvals in the US
EBITDA 10,621.3 7,912.1 -25.5 12,045.6 9,291.9 -22.9
EBITDA Margin (%) 33.5 26.2 -725 bps 32.5 28.2 -430 bps Change mainly due to lower US sales estimates on the back of higher
than expected price erosion
Adjusted PAT 7,241.0 5,014.0 -30.8 8,476.7 6,162.7 -27.3
EPS (Adjusted) 30.1 20.9 -30.6 35.3 25.7 -27.3 Change in sync with EBITDA
FY18E FY19E
Source: Company, ICICIdirect.com Research
Assumptions
| crore FY16 FY17E FY18E FY19E FY18E FY19E
Indian Formulations 7,299.2 7,749.1 8,408.5 9,417.5 8,758.2 9,809.2
US Formulations 13,516.9 13,758.8 10,679.7 11,580.3 13,490.5 15,618.8 Downward revision mainly due to higher-than-expected price erosion in base
business and delay in product approvals
RoW markets 5,746.1 7,128.0 8,545.8 9,400.4 8,199.6 9,019.6
APIs 1,475.2 1,634.5 1,667.2 1,700.5 1,630.0 1,662.6
Current Earlier
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 3
Company Analysis
Established in 1983, Sun Pharma is the largest Indian pharmaceutical
company both in terms of market capitalisation and turnover (FY16).
The company manufactures and markets a large basket of pharmaceutical
formulations in India, the US and several other markets across the world.
However, US and Indian formulations are by far the core strengths and
growth drivers for the company. The company has ~50 manufacturing
sites across the world.
The US business has been built mostly on acquisitions and generic focus.
It owns the largest product basket among Indian players with as many as
584 product (ANDA) filings.
In Indian formulations, the company is a leader in niche therapy areas of
psychiatry, gastroenterology, neurology, cardiology, nephrology,
orthopaedics and ophthalmology.
The company completed the $3.2 billion acquisition of Ranbaxy
Laboratories after almost a year of navigating the regulatory gauntlet to
create the world’s fifth-largest generic pharmaceutical company by
revenue.
The company has planned a capex of US$250 million for Tildrakizumab,
the IL-23 monoclonal anti-body in-licensed from MSD (US) over four or
five years to be utilised for its psoriasis trials. The company has guided
for filing of Investigational IL-23p19 inhibitor, Tildrakizumab, in FY18 and
potential approval in FY19
Sun acquired Odomzo (oncology) from Novartis in December, 2016, for
$175 million and additional milestones payments. USFDA approved this
in July, 2015 for treatment of locally advanced basal cell cancer and is the
first branded oncology product for Sun Pharma in the US. Total 70% who
prescribe are dermatologists and rest are oncologists for this drug.
Seciera (for dry eyes disease), which was acquired from Ocular
Technologies, has shown promising phase III results. The company will
enter into dialogue with FDA regarding further course of action for the
product.
A snapshot of the galloping performance in the last five years - sales grew
at ~40% CAGR to | 31558 crore, EBIDTA grew at CAGR of ~39% to
| 10089 crore. Adjusted PAT grew at a CAGR of ~31% to | 6964 crore.
Going ahead, we expect revenues to grow at a CAGR of 2% in FY17-19E
to | 32901 crore after considering Ranbaxy acquisition.
ICICI Securities Ltd | Retail Equity Research Page 4
Exhibit 1: Revenues to grow at CAGR of 2% in FY17-19E
5,721.4
8,011.6
11,299.9
16,080.4
28,563.0
31,557.730,143.5
32,901.2
0
5000
10000
15000
20000
25000
30000
35000
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
(|
crore)
Total Operating Income
Source: Company, ICICIdirect.com Research
The US business, which constitutes ~45% of the turnover, has grown at a
CAGR of 10% in FY12-17 on the back of successful acquisitions such as
Caraco and Taro (recently Dusa, URL) and timely product launches (recent
gGleevec launch under exclusivity). The US product basket remains
robust - 584 ANDAs filed, 427 approvals received, some niche launches
include Lipodox/Doxil (~US$150 million), Doxycycline (~US$100 million),
Nystatin (~US$90 million), etc, besides complex/limited competition
products and plain vanilla generics. US growth is also being backed by
extensive infrastructure. Out of the ~50 global manufacturing facilities,
~20 have been approved by the USFDA. The only blot in an otherwise
smooth journey is the warning letter to the Halol plant. We expect the US
business to decline at a CAGR of 8% to | 11580 crore in FY17-19E due to
high base and sharp price erosion in base business.
Exhibit 2: US business to decline at CAGR of 8% in FY17-19E
8,695.6
10,054.9
13,324.213,719.6 13,516.9 13,758.8
10,679.7
11,580.3
0
2000
4000
6000
8000
10000
12000
14000
16000
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
(|
crore)
US
Source: Company, ICICIdirect.com Research
Source: Company, ICICIdirect.com Research
Indian formulations, which form 26% of the turnover, have grown at a
CAGR of 22% in FY12-17. With a market share of 8.6%, the company is
ranked No. 1 in domestic formulations. The acute, chronic and sub-
chronic segments were at 41%, 45% and 14% of revenues, respectively.
It is a leader in at least seven therapeutic categories, five of them chronic
therapies. Indian formulation growth was unaffected despite NLEM 2011
implementation vagaries and channel disturbances due to trade margin
issues with wholesalers/distributors. We expect Indian formulations to
grow at a CAGR of 10% to | 9418 crore in FY17-19E backed by new
launches and price hikes.
40.7% CAGR
2.1% CAGR
9.6% CAGR 8.3% CAGR
ICICI Securities Ltd | Retail Equity Research Page 5
Exhibit 3: India sales to grow at CAGR of 10% in FY17-19E
2,915.4 2,965.7
3,691.8
6,716.6
7,299.2
7,749.1
8,408.5
9,417.5
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E(|
crore)
Domestic
Source: Company, ICICIdirect.com Research
Exhibit 4: Sales from RoW markets to grow at CAGR of 15% in FY17-19E
1,112.41,527.1
1,908.4
6,064.65,746.1
7,128.0
8,545.8
9,400.4
0
2000
4000
6000
8000
10000
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
(|
crore)
ROW
Source: Company, ICICIdirect.com Research
24.2% CAGR
10.5% CAGR
45.0% CAGR
14.8% CAGR
ICICI Securities Ltd | Retail Equity Research Page 6
Exhibit 5: Sales from API business to grow at CAGR of 2% in FY17-19E
614.7
754.9801.0
1,070.2
1,475.2
1,634.51,667.2 1,700.5
0
200
400
600
800
1000
1200
1400
1600
1800
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E(|
crore)
API & Others
Source: Company, ICICIdirect.com Research
Exhibit 6: EBITDA to decline at CAGR of 4% in FY17-19E
1967.23258.0
4967.2
7195.6
8724.3
10089.3
7912.1
9291.9
40.7
44.0
30.5
26.228.2
34.4
44.7
32.0
0
2000
4000
6000
8000
10000
12000
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
(|
crore)
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
EBITDA EBITDA margins (%)
Source: Company, ICICIdirect.com Research
Exhibit 7: Net profit to decline at CAGR of 6% in FY17-19E
1,816.1
2,587.3
3,008.13,204.4
4,967.5
6,964.4
5,014.0
6,162.7
32.3
26.6
18.7
31.7
19.9
17.4
22.116.6
0
1000
2000
3000
4000
5000
6000
7000
8000
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
(|
crore)
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
PAT Net Profit Margins (%)
Source: Company, ICICIdirect.com Research
21.6% CAGR
2.0% CAGR
ICICI Securities Ltd | Retail Equity Research Page 7
Exhibit 8: Trends in return ratios
27.8
34.3 34.3
18.8 18.6
21.3 21.321.9
19.8
14.0
19.217.0
18.6 18.0
19.0
12.3
0
5
10
15
20
25
30
35
40
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
(|
crore)
RoCE(%) RoNW (%)
Source: Company, ICICIdirect.com Research
SWOT Analysis
Strengths - Above average profitability margins, healthy return ratios
despite higher cash component, one of the first companies to identify
potential of innovative R&D and generic R&D, robust infrastructure to
scale up US business, India business built around chronic focus, one of
the few companies defying the slowdown in Indian formulations.
Weakness - Pending Ranbaxy compliance issues.
Opportunities - The US generics space, the biosimilars space where Sun
is yet to make meaningful foray.
Threats - Increased USFDA scrutiny across the globe regarding cGMP
issues, pricing pressure due to client consolidation in the US, pricing
probe by the Department of Justice (DoJ) in the US, proposed tightening
by the new regime by adapting to the bidding process and imposition of
border adjustment tax on imported drugs in the US. Halol facility has
received warning letter from the USFDA which is yet to be resolved.
ICICI Securities Ltd | Retail Equity Research Page 8
Exhibit 9: Trends in quarterly financials
(| Crore) Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 YoY (%) QoQ (%)
Total Operating Income 6157.0 6761.5 6873.3 7122.3 7654.3 8243.0 8265.1 7912.7 7137.0 -6.8 -9.8
Raw Material Expenses 1597.4 1691.2 1497.8 1732.8 1408.6 1847.0 1839.9 2248.7 2195.2 55.8 -2.4
Gross Profit Margin (%) 74.1 75.0 78.2 75.7 81.6 77.6 77.7 71.6 69.2
Employee Expenses 1128.6 1235.2 1212.4 1137.7 1187.0 1239.3 1199.1 1215.1 1248.8 5.2 2.8
% of Revenue 18.3 18.3 17.6 16.0 15.5 15.0 14.5 15.4 17.5
Other Expenditure 2638.6 2067.2 2290.2 2006.2 2786.8 2235.7 2058.4 1995.8 2145.5 -23.0 7.5
% of Revenue 42.9 30.6 33.3 28.2 36.4 27.1 24.9 25.2 30.1
Total Expenditure 5364.7 4993.7 5000.4 4876.7 5382.4 5322.0 5097.4 5459.5 5589.5 3.8 2.4
% of Revenue 87.1 73.9 72.8 68.5 70.3 64.6 61.7 69.0 78.3
EBITDA 792.4 1767.8 1872.9 2245.6 2271.9 2921.0 3167.7 2453.1 1547.5 -31.9 -36.9
EBITDA Margin (%) 12.9 26.1 27.2 31.5 29.7 35.4 38.3 31.0 21.7
Depreciation 461.8 240.2 258.4 250.9 288.0 316.0 303.8 306.8 338.2 17.4 10.2
Other Income 382.5 164.1 115.2 172.9 206.0 157.1 119.4 122.2 224.5 9.0 83.8
Profit before Interest & Tax 713.0 1691.8 1729.8 2167.7 2189.9 2762.1 2983.3 2268.5 1433.8 -34.5 -36.8
Interest 124.8 134.5 158.2 127.6 103.0 134.6 53.7 166.5 45.0 -56.3 -73.0
Less: Exceptional Items 0.0 685.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 NA NA
PBT 588.3 872.1 1571.6 2040.1 2086.9 2627.5 2929.5 2102.0 1388.8 -33.5 -33.9
Total Tax -599.9 112.8 294.6 88.8 417.6 352.7 441.7 372.9 44.3 -89.4 -88.1
PAT 1188.2 759.3 1277.0 1951.3 1669.3 2274.8 2487.9 1729.1 1344.5 -19.5 -22.2
Minority Interest 301.2 203.4 270.4 394.8 246.7 241.1 236.0 250.0 161.9 -34.4 -35.3
PAT after MI 886.9 555.9 1006.6 1556.4 1422.7 2033.7 2251.9 1479.1 1182.7 -16.9 -20.0
EPS (|) 3.7 2.3 4.2 6.5 5.9 8.5 9.4 6.2 4.9 -16.9 -20.0
Share Capital (cr) 239.9 239.9 239.9 239.9 239.9 239.9 239.9 239.9 239.9
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 9
Conference call highlights
US finished dosage sales benefited from authorised generic sales
of gBenicar (Olmesartan; CVS) and its combinations during the
quarter
The management has ruled out Halol resolution in FY18. It is
looking for site transfer arrangements for some of the key
products from Halol
The management has cautioned on a challenging FY18 mainly on
account of US generic pricing pressure and pending Halol
resolution. It expects single digit de-growth in overall revenues for
FY18
R&D spend for FY18 will be 9-10% of overall revenues
It has guided for ~US$350 million capex for FY18
The management has identified dermatology, ophthalmology,
oncology and CNS as priority areas
As per management, pricing pressure in the US generics space is
product specific and not for the entire segment
It expects price erosion in generics even in exclusivity period,
going forward
As per the management, the company has achieved two-third of
the targeted US$300 million synergy pertaining to Ranbaxy
acquisition
The managements expects Tildrakizumab launch in early FY19.
Currently, trials are ongoing for application in other indications
Taro’s revenues declined 26% YoY to US$196 million in the
backdrop of continuing increased competition and a challenging
pricing environment. Overall volumes increased 3%. EBITDA
margins contracted 1608 bps YoY to 53.7%. Net profit declined
28% YoY to US$83 million
For Q4FY17, 14 ANDAs were filed while four approvals were
received. Overall, 427 ANDA have been approved in the US while
157 ANDAs await approval. Additionally, the pipeline includes 36
approved NDAs while five NDAs pending for approval
The company launched 11 new products in the Indian market in
Q4FY17
Odomzo (oncology) was acquired from Novartis in December,
2016, for $175 million and additional milestones payments. This
was approved by USFDA in July, 2015 for treatment of locally
advanced basal cell cancer and is the first branded oncology
product for Sun Pharma in the US. Total 70% who prescribed this
drug are dermatologists while the rest are oncologists
Seciera (for dry eyes disease), which was acquired from Ocular
Technologies, has shown promising phase III results. The
company will enter into dialogue with FDA regarding further
course of action for the product
The company has guided for filing of Investigational IL-23p19
inhibitor, Tildrakizumab, in FY18 and potential approval in FY19
ICICI Securities Ltd | Retail Equity Research Page 10
Exhibit 10: Trends in return ratios
Location Segmant Regulatory Approvals
Samba J&K Formulations
Jammu, J&K Formulations
Baddi Himachal Prdesh Formulations
Batamandi, Himachal Pradesh Formulations
Mohali, Punjab Formulations
Paonta Sahib, Himachal Pradesh Formulations
Taonsa, Punjab API
Sikkim Formulations
Guwahati, Assam Formulations
Malanpur, Madhya Pradesh API
Dewas, Madhya Pradesh Formulations
Halol, Gujarat Formulations USFDA, UKMHRA
Baska, Gujrat Formulations
Karkhadi, Gujrat Formulations, API USFDA, EU GMP
Ankleshwar, Gujrat API ISO 9002, WHO GMP
Panoli, Gujarat API USFDA, TGA, EU GMP, DKMA
Ahmadnagar, Maharashtra API USFDA, EU GMP
Dadra, Dadra & Nagar Haveli Formulations USFDA
Silvassa, Dadra & Nagar Haveli Formulations
Goa Formulations
Madhuramthakam, Tamil Nadu API ISO 9002, WHO GMP
Sungai Patani, Malasia Formulations
Dhaka, Bangladesh Formulations
Be-Tabs, South Africa Formulations
Lagos, Nigeria Formulations
Morocco, Africa Formulations
Egypt, Africa Formulations
Haifa, Isreal Formulations USFDA
Terapia S.A., Cluj, Romania Formulations
Tiszavasvari, Hungary Formulations USFDA, EU GMP
Cashel, Isreal Formulations
Jardin Pompeia, Brazil Formulations
Soa Paolo, Brazil Formulations
Del. Iztapalapa, Mexico Formulations
Chattanooga, TN, USA API USFDA
Philladelphia, PA, USA Formulations USFDA
Wilmington, MA, USA Formulations USFDA
Cranbery, New Jersey, USA Formulations USFDA
New Brunwick, NJ, USA Formulations
North Brunswick, NJ, USA Formulations
Brampton, Canada Formulations USFDA
Detriot, MI, USA Formulations USFDA
Chicago, IL, USA Formulations USFDA
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 11
Valuation
Dismal Q4 numbers (both from Taro and Sun) have summarised the
recent pricing woos in the US generics space. However, more worrisome
for Sun is the delay in Halol resolution. By the management’s own
assertion, the resolution is unlikely before the end of FY18 against earlier
expectation of Q2FY18. Unlike other generic players, the approval
momentum is also dismal in Sun’s case, mainly due to pending Halol
resolution. On the US generic pricing front, the management expects
challenges to remain in FY18 as well. Hence, it has guided for single digit
revenue decline for the year. The shift towards specialty products such as
Tildrakizumab (dermatology), BromSite, Seciera (both ophthalmic) and
Odomzo (oncology) are long term game plans, the benefits of which are
back-loaded. For now, the company is bracing for a ‘’new normal’’, a
scenario where product specific price erosion continuum and prolonged
cGMP resolution delays are here to stay. We downgrade the stock to
HOLD with a new target price of | 550 based on 20x FY19E EPS of | 25.7
and | 36 NPV for Tildrakizumab.
Exhibit 11: One year forward PE
0
500
1000
1500
2000
2500
May-1
1
Nov-1
1
May-1
2
Nov-1
2
May-1
3
Nov-1
3
May-1
4
Nov-1
4
May-1
5
Nov-1
5
May-1
6
Nov-1
6
May-1
7
(|)
Price 66.2x 54.3x 34.5x 18.7x 10.7x
[
Source: Company, ICICIdirect.com Research
Exhibit 12: One year forward PE of company vs. CNX Pharma
-10
0
10
20
30
40
50
60
70
80
90
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
(x)
Sun Pharma CNX Pharma
50% premium
Source: Company, ICICIdirect.com Research
Exhibit 13: Valuation
Revenues Growth EPS Growth P/E EV/EBITDA RoE RoCE
(| crore) (%) (|) (%) (x) (X) (%) (%)
FY16 28563 4.1 23.4 18.3 27.6 15.0 18.0 18.6
FY17E 31558 10.5 29.0 23.2 19.6 12.8 19.0 19.8
FY18E 30144 -4.5 20.9 -28.0 27.2 15.9 12.3 14.0
FY19E 32901 9.1 25.7 22.9 22.1 13.1 13.4 15.2
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 12
Recommendation history vs. Consensus
0
200
400
600
800
1,000
1,200
May-17Feb-17Dec-16Sep-16Jul-16May-16Feb-16Dec-15Sep-15Jul-15May-15
(|
)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
(%
)
Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Reuters, Company, ICICIdirect.com Research
Key events
Date Event
Jun-09 USFDA seizes more than 33 generic drugs from Caraco for failing to meet FDA cGMP requirements
Aug-10 Manufacturing facility in Cranbury, New Jersey receives warning letter from USFDA
Sep-10 Increases stake in Taro Pharma to 48.7% with voting rights of 65.8%
Apr-11 Forms joint venture with Merck & Co Inc to develop, manufacture and commercialise new combinations, novel formulations and branded generics in emerging
markets
Sep-11 Receives establishment inspection report (EIR) from USFDA for its Cranbury, New Jersey facility
Feb-12 USFDA grants special approval to Sun Pharma to supply short supply oncology product Doxil to the US market
Aug-12 USFDA gives approval to Caraco Pharma’s manufacturing facility & packaging sites to resume production for two drugs
Nov-12 Acquires US based dermatology company Dusa Pharma, which was marketing innovative drug & device Levulan (aminolevulinic acid HCl)
Dec-12 Acquires generic business of URL Pharma from Takeda Pharmaceuticals
Feb-13 Receives final approval for Doxorubicin Hcl Liposome injection (Doxil)
May-14 Karkhadi unit receives warning letter from the USFDA
Sep-14 Halol unit receives Form 483 observation letter from the USFDA
Mar-15 Sun Pharma acquires GSK's Opiates Business in Australia with two Opiates manufacturing facilities in Port Fairy & Latrobe
Apr-15 Completes Ranbaxy merger
Dec-15 Receives warning letter from the USFDA for its Halol manufacturing facility
Feb-16 Launches generic version of Gleevec (Imatinib Mesylate Tablets) in the US. The company has sole 180 days exclusivity for this product
Mar-16 Acquires14 established prescription brands in Japan from Novartis for a cash consideration of US$ 293 million
Dec-16 Halol unit receives Form 483 observations from the USFDA post re-inspection of the plant
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern
Rank Investor Name Latest Filing Date % O/S PositionPosition Change
1 Shanghvi (Dilip Shantilal) 5-Oct-16 0.10 230.52m (0.62)m
2 Viditi Investment Pvt. Ltd. 5-Oct-16 0.08 200.85m (0.54)m
3 Tejaskiran Pharmachem Industries Pvt. Ltd. 5-Oct-16 0.08 194.82m (0.52)m
4 Family Investment Pvt. Ltd. 5-Oct-16 0.08 182.44m (0.49)m
5 Quality Investment Pvt. Ltd. 5-Oct-16 0.08 182.38m (0.49)m
6 Virtuous Finance, Ltd. 5-Oct-16 0.04 96.84m (0.26)m
7 Virtuous Share Investment Pvt. Ltd. 5-Oct-16 0.03 83.75m (0.22)m
8 Life Insurance Corporation of India 30-Sep-16 0.03 82.33m 0.00m
9 Aditya Medisales, Ltd. 5-Oct-16 0.02 40.15m (0.05)m
10 GIC Private Limited 30-Sep-16 0.01 35.03m (1.62)m
(in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
Promoter 54.7 55.0 55.0 55.0 54.4
Others 45.3 45.0 45.0 45.0 45.6
Source: Reuters, ICICIdirect.com Research
Recent Activity
Investor name Value ($) Shares Investor name Value ($) Shares
Valia (Sudhir V) 160.7m 14.3m OppenheimerFunds, Inc. -109.9m -10.6m
ICICI Prudential Asset Management Co. Ltd. 51.3m 5.0m Axis Asset Management Company Limited -68.9m -7.4m
Pratham Investments. 51.4m 4.6m Capital International Investors -71.1m -6.4m
J.P. Morgan Asset Management (Hong Kong) Ltd. 44.0m 4.2m Fidelity Management & Research Company -49.0m -4.7m
SBI Funds Management Pvt. Ltd. 21.7m 2.1m GIC Private Limited -18.1m -1.6m
Buys Sells
Source: Reuters, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 13
.
Financial summary
Profit and loss statement | Crore
(Year-end March) FY16 FY17E FY18E FY19E
Revenues 28,563.0 31,557.7 30,143.5 32,901.2
Growth (%) 4.1 10.5 -4.5 9.1
Raw Material Expenses 6,483.2 8,130.7 8,741.6 9,212.3
Employee Expenses 4,765.2 4,902.3 5,049.6 5,349.2
Other Expenditure 8,590.3 8,435.4 8,440.2 9,047.8
Total Operating Expenditure 19,838.7 21,468.5 22,231.5 23,609.3
EBITDA 8,724.3 10,089.3 7,912.1 9,291.9
Growth (%) 10.9 15.6 -21.6 17.4
Depreciation 1,026.3 1,264.8 1,401.3 1,473.3
Interest 476.9 399.8 304.6 254.6
Other Income 481.0 623.2 586.0 642.0
PBT 7,702.0 9,047.9 6,792.3 8,206.0
Less: Exceptional Items 685.2 0.0 0.0 0.0
Total Tax 934.9 1,211.6 1,018.8 1,230.9
PAT 4,967.5 6,964.4 5,014.0 6,162.7
Minority Interest 1,114.5 889.0 799.5 852.4
Adjusted PAT 5,652.6 6,964.4 5,014.0 6,162.7
Growth (%) 18.3 23.2 -28.0 22.9
EPS (Adjusted) 23.4 29.0 20.9 25.7
Source: Company, ICICIdirect.com Research
Cash flow statement | Crore
(Year-end March) FY16 FY17E FY18E FY19E
Profit/(Loss) after taxation 4967.5 6964.4 5014.0 6162.7
Depreciation 1026.3 1264.8 1401.3 1473.3
(Inc)/Dec in Current Assets -153.6 -1056.2 72.9 -2298.4
(Inc)/Dec in Current Liabilities -699.0 1874.7 -119.8 1010.6
Others 476.9 399.8 304.6 254.6
CF from operation 5618.1 9447.4 6672.9 6602.7
Purchase of Fixed Assets -3366.9 -2844.4 -1200.0 -1200.0
(Inc)/Dec in Investments 1407.7 116.7 -2305.4 -2305.4
Others 417.0 -3134.1 487.7 523.8
CF from Investing Activities -1542.1 -5861.8 -3017.7 -2981.6
Inc / (Dec) in Loan Funds -658.0 -247.1 -2000.0 -1000.0
Inc / (Dec) in Equity Capital -14.2 -0.7 0.0 0.0
Dividend and dividend tax -233.5 -1785.7 -857.1 -1053.4
Other Financial Activities -179.3 -400.5 -304.6 -254.6
CF from Financing Activities -1085.0 -2434.0 -3161.6 -2308.0
Cash generation during the year 2990.9 1151.6 493.6 1313.0
Op bal Cash & Cash equivalents 10998.3 13989.2 15140.8 15634.4
Closing Cash/ Cash Equivalent 13989.2 15140.8 15634.4 16947.4
Free Cah Flow 2251.2 6603.0 5472.9 5402.7
Source: Company, ICICIdirect.com Research
Balance sheet | Crore
(Year-end March) FY16 FY17E FY18E FY19E
Equity Capital 240.7 239.9 239.9 239.9
Reserve and Surplus 31,163.6 36,342.2 40,499.1 45,608.4
Total Shareholders funds 31,404.9 36,582.2 40,739.1 45,848.3
Total Debt 8,338.1 8,091.0 6,091.0 5,091.0
Deferred Tax Liability 61.6 314.8 339.7 364.6
Minority Interest 4,085.3 3,790.9 4,590.3 5,442.7
Other LT Liabitlies & LT Provision 2,303.4 1,496.1 1,570.9 1,649.5
Total Liabilities 46,193.3 50,274.9 53,331.0 58,396.1
Gross Block 18,005.9 22,154.5 23,354.5 24,554.5
Accumulated Depreciation 8,750.8 10,015.5 11,416.8 12,890.0
Net Block 9,255.2 12,138.9 11,937.7 11,664.4
Capital WIP 4,105.5 2,801.4 2,801.4 2,801.4
Total Fixed Assets 13,360.6 14,940.3 14,739.1 14,465.8
Investments 1,308.6 1,191.9 3,497.3 5,802.7
Deferred tax assets 2,187.5 2,492.8 2,617.5 2,748.3
Goodwill on Consolidation 4,181.1 5,536.2 5,536.2 5,536.2
LT Loans & Advances & Assets 3,032.4 4,526.2 4,752.5 4,990.2
Cash 13,989.3 15,140.8 15,634.4 16,947.4
Debtors 6,795.9 7,202.6 6,422.2 7,035.3
Loans and Advances 2,640.4 1,244.9 1,702.4 2,159.9
Inventory 6,423.6 6,832.8 6,473.0 7,091.0
Other current assets 300.1 1,935.9 2,545.7 3,155.5
Total Current Assets 30,149.3 32,357.0 32,777.7 36,389.2
Creditors 3,489.6 4,394.9 3,612.5 3,957.4
Provisions & other current liability 4,536.7 6,374.7 6,976.8 7,578.9
Total Current Liabilities 8,026.3 10,769.6 10,589.2 11,536.2
Net Current Assets 22,123.0 21,587.5 22,188.5 24,852.9
Application of Funds 46,193.3 50,274.9 53,331.0 58,396.1
Source: Company, ICICIdirect.com Research
Key ratios
(Year-end March) FY16 FY17E FY18E FY19E
Per share data (|)
Adjusted EPS 23.4 29.0 20.9 25.7
BV per share 130.2 152.5 169.8 191.1
Dividend per share 1.0 7.4 3.6 4.4
Cash Per Share 58.0 63.1 65.2 70.6
Operating Ratios (%)
Gross Margin 77.3 74.2 71.0 72.0
EBITDA Margin 30.5 32.0 26.2 28.2
PAT Margin 19.8 22.1 16.6 18.7
Inventory days 82.1 79.0 78.4 78.7
Debtor days 86.8 83.3 77.8 78.0
Creditor days 44.6 50.8 43.7 43.9
Asset Turnover 0.6 0.7 0.6 0.6
EBITDA Conversion rate 64.4 93.6 84.3 71.1
Return Ratios (%)
RoE 18.0 19.0 12.3 13.4
RoCE 18.6 19.8 14.0 15.2
RoIC 30.6 29.8 21.0 23.2
Valuation Ratios (x)
P/E 27.6 19.6 27.2 22.1
EV / EBITDA 15.0 12.8 15.9 13.1
EV / Net Sales 4.6 4.1 4.2 3.7
Market Cap / Sales 4.8 4.3 4.5 4.1
Price to Book Value 4.4 3.7 3.3 3.0
Solvency Ratios
Debt / EBITDA 1.0 0.8 0.8 0.5
Debt / Equity 0.3 0.2 0.1 0.1
Current Ratio 2.0 1.6 1.6 1.7
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 14
ICICIdirect.com coverage universe (Healthcare)
Company I-Direct CMP TP Rating M Cap
Code (|) (|) (| Cr) FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
Ajanta Pharma AJAPHA 1785 1,960 Buy 15711.5 45.4 59.7 66.3 75.3 39.3 29.9 26.9 23.7 42.9 39.2 34.9 31.7 34.2 33.1 28.4 25.6
Alembic Pharma ALEMPHA 561 615 Hold 10572.0 38.2 22.0 24.5 30.6 14.7 25.5 22.9 18.3 51.5 26.0 23.1 24.8 44.9 21.9 20.8 21.9
Apollo Hospitals APOHOS 1247 1,440 Buy 17348.2 22.2 21.8 31.4 45.3 56.2 57.2 39.7 27.5 8.2 8.1 10.3 13.3 8.9 8.2 10.7 13.6
Aurobindo Pharma AURPHA 658 965 Buy 38524.6 33.9 40.1 40.7 50.7 19.4 16.4 16.2 13.0 23.3 24.3 21.3 23.0 28.1 25.3 20.7 20.8
Biocon BIOCON 1075 1,120 Buy 21508.0 23.1 32.6 34.4 44.2 46.5 32.9 31.2 24.3 9.1 13.0 13.7 16.5 11.4 14.4 13.7 15.4
Cadila Healthcare CADHEA 365 380 Hold 37392.2 15.0 11.2 15.1 18.9 24.4 32.5 24.1 19.4 26.7 14.4 18.3 20.9 28.6 18.5 21.1 22.0
Cipla CIPLA 576.1 575 Hold 46338.2 18.5 17.8 24.7 31.9 31.1 32.3 23.3 18.1 12.0 10.9 14.0 16.6 12.5 10.9 13.4 15.0
Divi's Lab DIVLAB 725 925 Buy 19233.2 41.8 44.6 51.8 57.9 17.3 16.3 14.0 12.5 30.7 28.5 28.0 26.5 25.9 23.0 22.2 20.7
Dr Reddy's Labs DRREDD 2941 2,930 Hold 48727.8 141.4 74.5 114.5 154.3 20.8 39.5 25.7 19.1 17.3 7.0 11.5 15.1 20.6 10.0 13.6 15.8
Glenmark Pharma GLEPHA 946 1,155 Buy 26686.1 32.2 63.0 54.4 60.8 29.4 15.0 17.4 15.6 16.2 26.8 20.8 21.9 21.2 29.7 20.6 18.8
Indoco Remedies INDREM 267 315 Buy 2460.4 9.4 8.9 14.2 18.5 28.4 30.1 18.8 14.4 12.9 9.7 14.9 18.1 14.8 12.6 17.4 19.2
Ipca Laboratories IPCLAB 522 560 Hold 6589.9 10.0 15.1 24.1 31.2 52.1 34.6 21.7 16.8 5.7 9.9 12.8 14.8 5.5 7.8 11.3 13.0
Jubilant Life JUBLIF 681.5 810 Buy 10855.0 26.0 37.4 53.9 67.5 26.2 18.2 12.6 10.1 12.0 14.2 16.2 18.3 14.2 17.3 20.2 20.4
Lupin LUPIN 1431 1,890 Buy 64616.9 50.4 62.2 67.5 83.8 28.4 23.0 21.2 17.1 18.6 20.3 20.8 23.9 20.7 21.1 19.2 19.9
Natco Pharma NATPHA 776 750 Buy 13526.3 8.5 12.8 13.1 15.0 91.3 60.6 59.3 51.6 16.0 19.9 17.5 17.8 11.9 15.6 14.0 14.1
Sun Pharma SUNPHA 649 765 Buy 155780.7 23.4 29.9 29.9 35.3 27.7 21.7 21.7 18.4 18.6 19.1 17.3 18.0 18.0 19.2 16.6 16.8
Syngene Int. SYNINT 485 570 Hold 9708.0 11.1 15.5 16.9 20.5 51.3 36.7 33.7 27.7 13.2 17.8 18.1 20.7 21.0 23.2 20.6 20.4
Torrent Pharma TORPHA 1260 1,475 Buy 21317.0 107.8 55.7 62.2 77.6 11.7 22.6 20.3 16.2 46.7 21.0 23.8 26.5 53.8 23.0 21.5 22.3
Unichem Lab UNILAB 278.3 285 Hold 2529.0 12.3 13.2 17.5 23.7 22.6 21.1 15.9 11.7 13.8 14.5 16.2 18.9 11.7 11.3 13.3 15.6
RoE (%)EPS (|) PE(x) RoCE (%)
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 15
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
ICICI Securities Ltd | Retail Equity Research Page 16
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