1QFY2012 Result Update | Pharmaceutical

30 July, 2011

Sun Pharma
Performance Highlights
(`cr) Net sales Other income Gross profit Operating profit Adj. net profit 1QFY2012 1,636 97 1,229 547 501 4QFY2011 1,463 58 1,064 616 611 % chg qoq 11.8 67.0 15.4 (11.2) (18.0) 1QFY2011 1,400 12 1,064 616 565 % chg yoy 16.9 739.3 15.4 (11.2) (11.2)

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 53,520 0.7 538/341 69011 1 18,197 5,482 SUN.BO SUNP@IN

`517 -

Source: Company, Angel Research

Sun Pharma reported higher-than-expected 1QFY2012 results on the net profit front. Net sales reported growth of 16.9% yoy, while the 11.2% yoy dip in net profit was lower than expected. Better-than-expected results on the net profit front were driven by the higher-than-expected improvement in OPM. The stock is currently trading 28.8x and 22x its FY2012E and FY2013E EPS, respectively. We maintain our Neutral recommendation on the stock. Better-than-expected results: Sun Pharma reported net sales of `1,636cr (`1,400cr), up 16.9% yoy, mainly driven by the inclusion of Taros financials as well as strong growth in overall exports. However, the companys OPM declined to 33.5% (44.0%) mainly because of higher employee and R&D expenses, which grew by 123.6% yoy to `278.6cr and 58% yoy to `88.5cr, respectively, on account of inclusion of Taros financials. Adjusted net profit reported a dip of 11.2% yoy to `501.0cr (`564.5cr), but was higher than our estimate of `431.2cr. For AprilJune 2011, Taro reported net sales growth of 14% yoy to US$112mn and profit of US$36mn. Outlook and valuation: Sun Pharma is one of the largest and fastest growing

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.7 12.2 18.6 5.5

Abs. (%) Sensex Sun Pharma

3m (4.9) 11.1

1yr 1.1 45.5

3yr 31.9 83.3

Indian pharmaceutical companies. Management has guided 2830% topline growth for FY2012.Growth reported during the year is also attributed to the
consolidation of Taros financials. Managements guidance for FY2012E includes all growth aspects from Taro as well. We expect Sun Pharmas net sales to post a 29% CAGR to `9,516cr and EPS to register a 15.8% CAGR to `23.5 over FY201113E.We recommend Neutral on stock. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 4,007 (6.2) 1,680 (7.6) 13.0 37.3 39.6 22.6 17.3 6.8 13.3 35.6

FY2011 5,721 42.8 1,816 8.1 17.5 34.4 29.5 21.0 19.1 5.6 9.0 26.3

FY2012E 7,576 32.4 1,861 2.5 18.0 30.1 28.8 18.4 18.1 5.0 7.0 23.2

FY2013E 9,516 25.6 2,436 30.9 23.5 31.1 22.0 20.9 20.7 4.2 5.5 17.7

Sarabjit Kour Nangra

+91 22 39357600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Sun Pharma | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance (Consolidated)

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin (%) Operating profit Operating margin (%) Interest Depreciation PBT Provision for taxation PAT before extra-ordinary item Minority interest(MI) Extraordinary item PAT after extra-ordinary item & MI EPS (`)
Source: Company, Angel Research

1QFY2012

4QFY2011

% chg qoq

1QFY2011

% chg yoy

FY2011

FY2010

% chg

1,636 96.9 1,733 1,229 78.6 547 33.5 0 65 580 14 565 64 0 501 4.8

1,463 58.0 1,521 1,064 73.0 616 42.1 0 40 634 10 624 13 0 611 5.5

11.8 67.0 14 15.4 (11.2) 61.0 (8.6) 47.1 (9.4) 383.2 (18.0)

1,400 11.5 1,411 1,064 75.4 616 44.0 0 40 588 10 578 13 0 565 4.3

16.9 739.3 22.8 15.4 (11.2)

5,721 272.7 5,994 4,261 74.5 1,967 34.4 0

4,007 205.3 4,213 2,910 72.6 1,363 34.0 0 153 1,415 68 1,347 0 1,351 13.0

42.8 32.8 42.3 46.44 44.3 33.1 43.9 89.3 41.6

61.0 (1.3) 47.1 (2.2) 383 (11.2)

204 2,036 128 1,907 (91) 0 1,816 17.5

4 (2,327) 34.4

Exhibit 2: 1QFY2012 Actual vs. Angel estimates

(`cr) Net sales Other income Operating profit Tax Adj net profit
Source: Company, Angel Research

Actual

Estimates

Variance (%)

1,636 97 547 14 501

1,894 12 581 85 431

(13.6) 739.3 (5.7) (83.2) 16.2

Disappointment on the sales front: Sun Pharma reported net sales of `1,636cr (`1,400cr), up 16.9% yoy, led by the inclusion of Taros financials to the consolidated reporting. This was, however, lower than our estimate of `1,894cr. The companys domestic segment reported overall growth of 11.9% yoy, with the formulations segment registering 11.9% yoy growth during the quarter, accounting for almost 39% of total sales. Excluding third-party business, which has been discontinued, underlying growth stood at 18%.

Overall exports grew by 25.3% yoy to `1,022cr (`815cr). Sale of finished dosage products in the US stood at US$139mn in 1QFY2012, accounting for 37% of total sales. For AprilJune 2011, Taro reported net sales growth of 14% yoy to US$112mn and profit of US$36mn. Sale of generic formulations in markets outside India and the US accounted for US$56mn in 1QFY2012. Taros sales outside US are included in the current quarter but not in 1QFY2011. Excluding this, underlying sales growth is in excess of 20% across the two quarters. On the regulatory front, during the quarter, ANDAs for six products have been filed four by Sun Pharma (now includes Caraco) and two by Taro.

July 29, 2011

Sun Pharma | 1QFY2012 Result Update

Counting these, cumulatively ANDAs for 383 products have been filed by Sun Pharma and Taro with the USFDA. ANDAs for seven products received approvals in 1QFY2012, taking the total number of approvals to 232. Counting these, ANDAs for 151 products now await USFDA approval, including 19 tentative approvals. Exhibit 3: Sales trend
800 632 600 531 955 400 200 0 4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 Domestic Sales
Source: Company, Angel Research

671

668

615

638 1022

(`cr)

789 494

869

721

Export Sales

OPM affected by Taros inclusion: During the quarter, Sun Pharmas OPM
declined to 33.5% (44.0%) mainly because of by the increase in employee and R&D expenses, which grew by 123.6% yoy to `278.6cr (`124.6cr) and 58% yoy to `88.5cr (`56cr), respectively, on account of inclusion of Taros financials. However, the margin at 33.5% was higher than our expectation of 30.7%. The margin reported an improvement on a sequential basis (30.3% in 4QFY2011).

Exhibit 4: OPM trend

50.0 45.0 40.0 35.0 38.7 34.1 27.5 30.3 33.5 44.0

(%)

30.0 25.0 20.0 15.0 10.0

4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012

Source: Company, Angel Research

Net profit higher than expected: For 1QFY2012, the companys net profit came in at `501cr (`564.5cr), down 11.2% yoy. This was higher than the estimated net profit of `431.2cr on account of higher-than-expected OPM.

July 29, 2011

Sun Pharma | 1QFY2012 Result Update

Exhibit 5: Adjusted net profit trend

600 500 400 565 504 443 350 501

(` cr)

300 200 100 0 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012

Source: Company, Angel Research

Concall takeaways
For FY2012, management has guided for revenue growth of 2830%. With respect to the ANDA filings for the US market, the company has guided ~25 filings in FY2012. Shareholders of Caraco Pharmaceutical Laboratories Ltd. approved resolutions by which Caraco is now a wholly owned subsidiary of Sun Pharma.

July 29, 2011

Sun Pharma | 1QFY2012 Result Update

Recommendation rationale
Strongest ANDA pipeline: Sun Pharmas US business posted a 33% CAGR over FY200510, which contributed 30% to its total turnover in FY2010. Sun Pharma, along with Caraco and Taro, now has 151 ANDAs pending USFDA approval, which is one of the highest in the Indian pharma space. Sun Pharma has filed around 30 ANDAs in each of the past few years. The company indicated that it would file ~25 ANDAs in FY2012 as well. Some of the key products for Sun Pharma with limited competition include the generic versions of Stalevo, Gabitril, Exelon, Strattera and Gleevec. On the Caraco front, management indicated that the resolution of the USFDA issue would not happen in FY2011 due to longer time taken than expected. The companys remediation work plan to the USFDA on Caraco is ongoing. Domestic business: Sun Pharmas domestic formulation business has grown above the industrys average over FY200510 at a 24% CAGR; it contributed 42% to the companys total turnover in FY2011. The company has a strength of 2,600MRs and one of the highest field force productivity of around of `70lakh/MR per year, which has resulted into high margins from the segment. The company has a market share of around 4.4%, with exposure to psychiatry, neurology, CVS, diabetic and gastroenterology. In FY2011, Sun Pharma launched 39 products in the domestic market. Healthy balance sheet: Sun Pharma has one of the strongest balance sheets in the sector, with cash of around `2,194cr (~5% of mcap). Management has indicated that it is looking at inorganic growth and scouting for acquisitions, especially in the US and emerging markets. Outlook and valuation: Sun Pharma is one of the largest and fastest growing Indian pharmaceutical companies. Management has guided 2830% top-line growth for FY2012, with OPM in the historic range post the inclusion of Taros financials at the consolidated level. Further, management expects R&D expenses to be ~6% of net sales and capex at `450cr for FY2012.
Growth reported during the year is also attributed to the consolidation of Taros financials. Managements guidance for FY2012E includes all growth aspects from Taro as well. We expect Sun Pharmas net sales to post a 29% CAGR to `9,516cr and EPS to register a 15.8% CAGR to `23.5 over FY201113E. We recommend Neutral on the stock.

July 29, 2011

Sun Pharma | 1QFY2012 Result Update

Exhibit 6: Key assumptions

FY2012 Net sales growth (%) Domestic sales growth (%) Export sales growth (%) Growth in employee expenses (%) Operating margins (%) Net Profit Growth (%) Capex (`cr)
Source: Company, Angel Research

FY2013 25.6 19.2 29.6 25.6 31.1 31.0 450

32.4 21.2 41.1 61.1 30.1 2.5 450

Exhibit 7: One-year forward PE band

600 500 400 300 200 100 -

Source: Company, Angel Research

Exhibit 8: Recommendation summary

Company Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Reduce Buy Buy Buy Buy Neutral Buy Accumulate Buy Buy Accumulate Neutral CMP (`) 171 2,104 884 308 1,588 90 2,346 421 328 455 206 539 517 Tgt Price (`) 278 1937 1,053 377 1,920 133 658 358 593 373 593 Upside % PE (x) 62.2 (7.9) 19.2 22.5 20.9 48.4 56.2 9.1 30.4 80.8 10.0 9.0 23.4 17.2 16.3 16.5 7.7 27.0 6.4 11.9 15.3 5.5 12.0 22.0 FY2013E EV/Sales (x) 1.2 2.9 2.7 3.0 2.9 1.3 6.3 0.8 1.8 2.5 1.3 1.7 5.5 EV/EBITDA (x) 6.8 19.0 13.6 14.0 11.4 7.4 17.6 4.9 8.3 12.8 5.9 7.4 17.6 FY2011-13E CAGR in EPS (%) 29.5 15.6 21.6 25.2 22.7 8.6 14.6 25.8 14.8 24.0 29.6 31.8 15.8 FY2013E RoCE (%) 13.8 15.8 28.3 17.0 22.0 7.4 41.0 17.6 23.3 23.9 11.7 26.8 18.4 ROE (%) 19.0 17.1 35.2 18.5 25.2 9.2 30.7 19.3 24.9 30.8 23.4 25.9 20.9

Source: Company, Angel Research; Note: * December year ending;# Recurring EPS considered for calculations

July 29, 2011

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
5x 10x 15x 20x

Sun Pharma | 1QFY2012 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (`cr) Gross sales Less: Excise duty Net sales Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other income (% of PBT) Recurring PBT % chg PBT (reported) Tax (% of PBT) PAT (reported) Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg 143 8.9 1,599 91.9 1,599 48.5 3.0 1,551 64 1,487 1,487 89.6 44.3 14.4 14.4 77.0 205 10.5 1,950 21.9 1,950 71.2 3.7 1,878 60 1,818 1,818 22.3 42.6 17.6 17.6 22.3 167 9.6 1,743 (10.6) 1,743 67.9 3.9 1,676 (4) 1,680 1,680 (7.6) 41.9 13.0 13.0 (25.7) 273 13.4 2,036 16.8 2,036 128.4 6.3 1,907 91 1,816 1,816 8.1 31.7 17.5 17.5 34.4 247 10.8 2,280 12.0 2,280 361.2 15.8 1,919 58 1,861 1,861 2.5 24.6 18.0 18.0 2.5 276 9.3 2,967 30.1 2,966 454.0 15.3 2,512 75 2,436 2,437 30.9 25.6 23.5 23.5 30.9 FY2008 3,461 104 3,357 3,359 61.5 1,805 722 132 233 718 1,551 130.7 46.2 97 1,454 146.1 43.3 FY2009 4,375 103 4,273 4,276 27.3 2,408 856 202 340 1,011 1,864 20.2 43.6 123 1,741 19.7 40.7 FY2010 3,981 27 4,007 4,244 (0.8) 2,514 1,098 221 401 1,016 1,493 (19.9) 37.3 153 1,340 (23.0) 33.4 FY2011 FY2012E FY2013E 5,807 85 5,721 5,721 34.8 3,754 1,461 314 800 1,494 1,967 31.7 34.4 204 1,763 31.6 30.8 7,697 121 7,576 7,580 32.5 5,297 1,515 357 1,288 2,136 2,279 15.9 30.1 250 2,030 15.1 26.8 9,661 144 9,516 9,521 25.6 6,558 1,903 449 1,618 2,588 2,958 29.8 31.1 272 2,686 32.3 28.2

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Sun Pharma | 1QFY2012 Result Update

Balance Sheet (Consolidated)

Y/E March (`cr) SOURCES OF FUNDS Equity share capital Preference capital Reserves & surplus Shareholders funds Minority interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net block Capital work-in-progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Total assets 1,596 561 1,035 69 173 756 3,937 1,239 508 2,190 637 3,300 5,333 2,148 685 1,463 157 325 1,859 4,268 1,669 742 1,857 720 3,548 7,353 2,334 801 1,533 145 406 3,066 3,712 607 856 2,249 758 2,954 8,104 3,471 822 2,649 145 772 2,231 6,017 2,194 1,173 2,651 1,423 4,594 10,391 3,658 1,184 2,474 145 772 2,231 7,886 1,181 1,629 5,076 1,504 6,382 12,004 4,108 1,412 2,696 145 772 2,231 10,061 1,639 2,046 6,376 1,908 8,153 13,997 104 4,888 4,991 189 144 9 5,333 104 6,941 7,045 197 179 (68) 7,353 104 7,725 7,829 193 171 (89) 8,104 104 9,380 9,483 847 426 (365) 10,391 104 10,597 10,701 905 426 (27) 12,004 104 12,505 12,609 980 426 (18) 13,997 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

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Sun Pharma | 1QFY2012 Result Update

Cash Flow Statement (Consolidated)

Y/E March (`cr) Profit before tax Depreciation (Inc)/Dec in WC Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 1,599 97 (934) 182 580 (200) (500) (699) (1) (3) (2) (17) (22) (141) 1,380 1,239 FY2009 FY2010 1,949 123 3 169 1,907 (590) (974) (1,564) 35 (242) 295 88 430 1,239 1,669 1,415 153 (436) 162 970 (275) (1,158) (1,434) (13) (333) 253 (93) (556) 1,669 1,113 FY2011 FY2012E FY2013E 2,036 204 (53) 2,187 (1,137) (1,137) 254 (402) 684 537 1,586 1,113 2,699 2,280 250 (2,801) 23 (294) (187) (187) (404) (127) (531) (1,013) 2,699 1,687 2,967 272 (1,313) 445 1,481 (450) (450) (529) (44) (573) 458 1,687 2,144

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Sun Pharma | 1QFY2012 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) 2.2 78 114 35 183 2.3 75 98 37 168 1.9 88 88 36 182 2.0 81 75 29 151 2.1 99 87 26 183 2.5 115 105 24 225 31.1 45.2 38.3 27.4 38.5 30.2 17.3 22.1 22.6 19.1 24.8 21.0 18.1 23.6 18.4 20.7 25.2 20.9 43.3 97.0 1.0 41.9 0.0 0.0 41.9 40.7 96.3 0.9 34.3 0.0 0.0 34.3 33.4 96.1 0.6 20.7 0.0 0.0 20.7 30.8 93.7 0.7 21.1 0.0 0.0 21.1 26.8 84.2 0.8 18.0 0.0 0.0 18.0 28.2 84.7 0.8 19.6 0.0 0.0 19.6 14.4 14.4 76.5 10.5 48.2 17.6 17.6 93.7 13.8 68.0 13.0 13.0 88.5 13.8 75.6 17.5 17.5 97.5 16.6 91.6 18.0 18.0 101.9 16.7 103.3 23.5 23.5 130.8 21.8 121.8 36.0 6.8 10.7 2.0 15.6 33.8 9.8 29.5 5.5 7.6 2.7 12.2 27.9 7.1 39.6 5.8 6.8 2.7 13.3 35.6 6.6 29.5 5.3 5.6 3.2 9.0 26.3 5.0 28.8 5.1 5.0 3.2 7.0 23.2 4.4 22.0 4.0 4.2 4.2 5.5 17.7 3.7 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

July 29, 2011

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Sun Pharma | 1QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Sun Pharma No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

July 29, 2011

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