Equity Research | India AARTHISUNDARI JAYAKUMAR, +91 22 66679950 ajayakumar@mfglobal.

com

15 November 2011

MF Global Quarterly Report

Sun Pharma
| Strong growth across India and US, Taro performance not sustainable

PHARMACEUTICALS

SUNP IN: BUY

RS 504

Healthy growth in India and US: Sun Pharma reported strong numbers with revenue growing by 38% to Rs 18.9bn driven by Taro consolidation (revenue of US$ 138mn). Sun Pharmas earnings in the US, excluding upsides from Taro, saw a decline of 64% as Q2FY11 revenue included upsides from generic Eloxatin. RoW exports posted robust 85% to Rs 2.6bn, which includes Taros sales outside the US. Adjusting for upsides from Taro, the RoW sales grew by 20%. Sales in India grew by 15% above the Indian market to Rs 6.7bn as the company maintained its leadership position across key segments. Taros superior performance props up margins: Operating profits stood at Rs 7.8bn with margins surging by over 1,000bps to 41%, led by healthy contribution from India and Taros superior margins (45% for the quarter). The management indicated that Taros performance is a result of a favourable market environment and not sustainable. PAT was curtailed to Rs 6.0bn, up 19% YoY, as the upsides from strong operating performance, higher other income (Rs 765mn) and interest income (Rs 417mn) was offset by higher depreciation (up 90% YoY), higher tax (15% of PBT as against 3% of PBT in Q2FY11) and higher minority income. Robust outlook intact: We continue to maintain our positive stance on Sun given its leadership position in specialty segments in the Indian market and its robust growth potential in the US. For the US, Sun has a pipeline of ~150 ANDAs pending approval (including substantial Para IVs). We expect Suns core business to shine, led by its rich product pipeline. With a war chest of US$ 850mn, Sun has one of the healthiest balance sheets among its peers. Valuations: Given Sun Pharmas leadership presence in India, best-in-class margin, large-scale operations in the US market and product pipeline; we believe that Sun Pharma should trade at a premium to its peers. We recommend a Buy with a target price of Rs 566 per share (25x FY13E EPS of Rs 22.6 per share).
VALUATION SUMMARY Y/E MAR, RS MN NET SALES GROWTH, % EBIDTA EBIDTA MARGINS, % NET PROFIT NET PROFIT MARGIN, % EPS, RS EPS GROWTH, % PER, X EV/EBIDTA, X EV/NET SALES, X PRICE/BOOK VALUE, X ROIC, % ROE, % DIVIDEND YIELD, % FY2009 41,905 27.2 18,640 44.5 18,177 43.4 17.6 22.2 28.7 4.1 1.8 7.2 43.3 29.3 0.5 FY2010 38,079 -9.1 11,645 30.6 11,189 29.4 10.8 (38.4) 46.6 6.4 1.9 6.5 21.6 14.7 0.5 FY2011 57,217 50.3 19,700 34.4 17,784 31.1 17.2 58.9 29.3 24.5 8.4 5.1 29.7 19.4 0.7 FY2012E 72,741 27.1 22,076 30.3 19,394 26.7 18.7 9.0 26.9 21.6 6.5 4.4 25.2 17.5 0.7 FY2013E 81,524 12.1 26,234 32.2 23,428 28.7 22.6 20.8 22.3 17.6 5.7 3.8 27.4 18.3 0.7

TARGET Rs 566 (+12%)

SECTOR RATING
OW N UW

STOCK RATING
BUY > 15% NEUTRAL -15% TO +15% SELL < -15%

COMPANY DATA O/S SHARES: MARKET CAP (RS): MARKET CAP (USD): 52 - WK HI/LO (RS): LIQUIDITY 3M (USD) : FACE VALUE (RS): SHARE HOLDING PATTERN, % PROMOTERS: FII / NRI: FI / MF: NON-PROMOTER CORP. HOLDINGS: PUBLIC & OTHERS: PRICE PERFORMANCE, % 1MTH ABS 5.4 REL TO BSE 6.5 PRICE VS. SENSEX 3MTH 5.7 5.5

1030MN 520BN 10.4BN 538 / 392 10.6MN 5 63.7 18.6 7.2 5.1 5.5 1YR 9.3 26.2

240 210 180 150 120 90 60 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Sun Pharma Rel. to BSE

Source: Company, MF Global India Research Estimates

Source: Bloomberg, MF Global India Research

mfglobal.com

Equity Research | India 15/11/2011 MF GLOBAL QUATERLY | SUN PHARMA

Q2FY12 RESULTS RS MN REVENUE QOQ (%) YOY (%) EXPENDITURE RAW MATERIAL COSTS AS A % OF SALES QOQ (%) YOY (%) GROSS PROFITS GROSS MARGINS (%) EMPLOYEE EXPENSES AS % OF SALES QOQ (%) YOY (%) OTHER EXPENSES AS A % OF SALES QOQ (%) YOY (%) EBIDTA EBIDTA MARGIN (%) QOQ (%) YOY (%) OTHER INCOME INTEREST EXPENSES DEPRECIATION PRE-TAX PROFIT AS A % OF SALES QOQ (%) YOY (%) TAX (CURRENT + DEFERRED) TAX RATE (%) PROFIT AFTER TAX MINORITY INTERESTS NET INCOME PAT MARGINS (%) QOQ (%) YOY (%)
Source: Company, MF Global India Research

SEP 10 13,701 (2.1) 15.6 3,794 27.7 13.0 32.8 9,906 72.3 1,456 10.6 16.8 16.6 3,780 27.6 16.9 15.5 4,670 34.1 (24.2) 4.4 924 0 352 5,242 38.3 (10.7) 3.1 172 3.3 5,070 34 5,037 36.8 (10.8) 11.0

DEC 10 16,011 16.9 56.8 4,324 27.0 14.0 51.3 11,687 73.0 2,754 17.2 89.2 136.9 4,528 28.3 19.8 80.8 4,405 27.5 (5.7) 19.6 580 0 805 4,181 26.1 (20.3) 14.5 545 13.0 3,636 134 3,502 21.9 (30.5) 3.3

MAR 11 14,633 (8.6) 35.5 3,132 21.4 (27.6) 17.7 11,501 78.6 2,540 17.4 (7.8) 119.0 4,525 30.9 (0.1) 61.9 4,436 30.3 0.7 6.0 1,108 0 482 5,062 34.6 21.1 29.7 22 0.4 5,039 612 4,428 30.3 26.4 12.2

JUN 11 16,357 11.8 16.9 4,071 24.9 30.0 21.3 12,287 75.1 2,786 17.0 9.7 123.6 4,026 24.6 (11.0) 24.5 5,474 33.5 23.4 (11.1) 969 0 647 5,796 35.4 14.5 (1.3) 143 2.5 5,653 643 5,010 30.6 13.2 (11.2)

SEP 11 18,946 15.8 38.3 3,639 19.2 (10.6) (4.1) 15,307 80.8 2,727 14.4 (2.1) 87.3 4,740 25.0 17.7 25.4 7,840 41.4 43.2 67.9 1,183 0 668 8,355 44.1 44.2 59.4 1,281 15.3 7,074 1097 5,977 31.5 19.3 18.7

Equity Research | India 15/11/2011 MF GLOBAL QUATERLY | SUN PHARMA

REVENUE BREAK-UP RS MN DOMESTIC FORMULATIONS AS A % OF REVENUE QOQ (%) YOY (%) BULK DRUGS AND OTHER AS A % OF REVENUE QOQ (%) YOY (%) TOTAL DOMESTIC AS A % OF REVENUE QOQ (%) YOY (%) EXPORTS FORMULATIONS AS A % OF REVENUE QOQ (%) YOY (%) BULK DRUGS AND OTHER AS A % OF REVENUE QOQ (%) YOY (%) TOTAL EXPORTS AS A % OF REVENUE QOQ (%) YOY (%) GROSS REVENUE QOQ (%) YOY (%) LESS: EXCISE DUTY AS A % OF DOMESTIC REVENUE NET REVENUE QOQ (%) YOY (%)
Source: Company, MF Global India Research

SEP 10 6,409 46.1 7.1 36.1 299 2.1 (12.0) 3.6 6,707 48.2 6.1 34.2 5,960 42.8 (12.1) 0.5 1,246 9.0 12.8 6.7 7,206 51.8 (8.6) 1.5 13,913 (2.1) 15.0 213 3.2 13,701 (2.1) 15.6

DEC 10 6,403 39.5 (0.1) 20.2 274 1.7 (8.3) (5.2) 6,677 41.2 (0.5) 18.9 8,661 53.4 45.3 137.4 887 5.5 (28.8) (21.8) 9,548 58.8 32.5 99.6 16,225 16.6 56.0 214 3.2 16,011 16.9 56.8

MAR 11 5,887 39.7 (8.1) 20.2 268 1.8 (2.3) 123.0 6,155 41.5 (7.8) 22.6 7,761 52.3 (10.4) 98.5 929 6.3 4.7 (10.2) 8,690 58.5 (9.0) 75.7 14,844 (8.5) 49.0 212 3.4 14,633 (8.6) 46.9

JUN 11 6,385 38.5 8.5 6.7 350 2.1 30.8 3.1 6,735 40.6 9.4 6.5 8,741 52.6 12.6 28.9 1,128 6.8 21.4 2.1 9,869 59.4 13.6 25.1 16,604 11.9 16.8 246 3.7 16,357 11.8 16.9

SEP 11 7,046 36.7 10.4 9.9 350 1.8 0.0 17.2 7,396 38.5 9.8 10.3 10,558 55.0 20.8 77.1 1,257 6.5 11.5 0.9 11,815 61.5 19.7 64.0 19,211 15.7 38.1 265 3.6 18,946 15.8 38.3

REVISION IN ESTIMATES RS MN NET SALES EBITDA PAT EPS, RS

Source: MF Global India Research Estimates

EARLIER ESTIMATES FY12E 70,398 20,565 18,160 17.5 FY13E 78,739 24,620 22,173 21.4

REVISED ESTIMATES FY12E 72,741 22,076 19,394 18.7 FY13E 81,524 26,234 23,428 22.6

UPGRADE/ (DOWNGRADE) (%) FY12E 3.3 7.3 6.8 7.0 FY13E 3.5 6.6 5.7 5.7

Equity Research | India 15/11/2011 MF GLOBAL QUATERLY | SUN PHARMA

FINANCIALS
INCOME STATEMENT Y/E MAR, RS MN NET SALES GROWTH, % TOTAL INCOME OPERATING EXPENSES EBITDA (CORE) GROWTH, % MARGIN, % DEPRECIATION EBIT GROWTH, % MARGIN, % INTEREST PAID OTHER NON-OPERATING INCOME NON-RECURRING ITEMS PRE-TAX PROFIT TAX PROVIDED PROFIT AFTER TAX NET PROFIT MF NET PROFIT GROWTH, % NET PROFIT (ADJUSTED) EXTRAORDINARY ITEMS: GAINS/(LOSSES) UNADJ. SHARES (M) WTD AVG SHARES (M) FY2009 41,905 27 41,905 -23,266 18,640 20.2 44.5 -1,233 17,407 19.7 41.5 -59 2,144 0 19,492 -712 18,780 18,177 18,177 22.2 18,177 0 207 1,036 FY2010 38,079 -9 38,079 -26,434 11,645 (37.5) 30.6 -1,533 10,112 (41.9) 26.6 -62 1,776 2,322 14,148 -679 13,470 13,511 11,189 (38.4) 11,189 2,322 207 1,036 FY2011 57,217 50 57,217 -37,517 19,700 69.2 34.4 -2,041 17,659 74.6 30.9 0 2,323 376 20,358 -1,284 19,074 18,161 17,784 58.9 17,784 376 1,036 1,036 FY2012E 72,741 27 72,741 -50,665 22,076 12.1 30.3 -3,063 19,014 7.7 26.1 -149 3,765 0 22,630 -2,037 20,594 19,394 19,394 9.0 19,394 0 1,036 1,036 FY2013E 81,524 12 81,524 -55,290 26,234 18.8 32.2 -3,326 22,909 20.5 28.1 -170 4,655 0 27,394 -2,465 24,928 23,428 23,428 20.8 23,428 0 1,036 1,036

CASH FLOW Y/E MAR, RS MN PRE-TAX PROFIT DEPRECIATION CHG IN WORKING CAPITAL TOTAL TAX PAID OTHER OPERATING ACTIVITIES CASH FLOW FROM OPERATING ACTIVITIES CAPITAL EXPENDITURE CHG IN INVESTMENTS CHG IN MARKETABLE SECURITIES CASH FLOW FROM INVESTING ACTIVITIES FREE CASH FLOW EQUITY RAISED/(REPAID) DEBT RAISED/(REPAID) DIVIDEND (INCL. TAX) CASH FLOW FROM FINANCING ACTIVITIES NET CHG IN CASH FY2009 19,492 1,233 1,029 -1,482 117 20,388 -7,914 -1,420 -9,614 -18,948 1,440 5,572 353 -2,545 2,862 4,302 FY2010 14,148 1,533 -4,664 -890 0 10,128 -2,920 518 -12,586 -14,989 -4,861 -2,350 -77 -3,332 -5,757 -10,618 FY2011 20,358 2,041 -1,425 -4,046 3,077 20,005 -16,864 4,782 3,573 -8,510 11,495 -481 2,544 -3,321 4,369 15,864 FY2012E 22,630 3,063 -7,675 -2,037 0 15,981 -4,700 0 0 -4,700 11,281 0 0 -4,213 -5,413 5,868 FY2013E 27,394 3,326 -5,825 -2,465 0 22,429 -3,525 0 0 -3,525 18,904 0 0 -4,226 -5,726 13,177

Equity Research | India 15/11/2011 MF GLOBAL QUATERLY | SUN PHARMA

BALANCE SHEET AS AT 31ST MAR, RS MN CASH & BANK MARKETABLE SECURITIES AT COST DEBTORS INVENTORY LOANS & ADVANCES TOTAL CURRENT ASSETS INVESTMENTS GROSS FIXED ASSETS LESS: DEPRECIATION ADD: CAPITAL WIP NET FIXED ASSETS TOTAL ASSETS FY2009 16,690 13,296 8,811 9,757 7,425 55,979 5,299 24,730 -6,851 1,571 19,450 80,728 FY2010 6,073 25,882 11,748 10,739 8,562 63,003 4,782 27,401 -8,013 1,448 20,836 88,621 FY2011 21,936 22,310 11,716 14,794 11,726 82,482 0 53,240 -20,286 2,706 35,660 118,142 FY2012E 27,805 22,310 15,135 18,916 14,126 98,291 0 57,940 -23,349 2,706 37,297 135,588 FY2013E 40,982 22,310 16,973 20,563 15,841 116,669 0 61,465 -26,674 2,706 37,497 154,166

CURRENT LIABILITIES PROVISIONS TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES TOTAL LIABILITIES

3,866 3,333 7,198 1,110 8,308

4,258 3,322 7,579 821 8,400

10,020 4,213 14,234 604 14,837

12,286 4,226 16,513 604 17,116

11,662 4,226 15,888 604 16,492

PAID-UP CAPITAL RESERVES & SURPLUS SHAREHOLDERS EQUITY TOTAL EQUITY & LIABILITIES

1,036 69,414 72,420 80,728

1,036 77,254 80,221 88,621

1,036 93,798 103,305 118,142

1,036 108,965 118,472 135,588

1,036 128,167 137,674 154,166

PER-SHARE DATA FY2009 MF EPS (INR) GROWTH, % BOOK NAV/SHARE (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) 17.6 22.2 69.9 17.6 18.7 17.5 2.8 FY2010 10.8 (38.4) 77.5 10.8 10.0 8.1 2.8 FY2011 17.2 58.9 99.8 17.2 18.8 14.1 3.5 FY2012E 18.7 9.0 114.4 18.7 21.7 11.8 3.5 FY2013E 22.6 20.8 132.9 22.6 25.8 17.2 3.5

FINANCIAL STRUCTURE FY2009 TOTAL DEBT/EQUITY (%) NET DEBT/EQUITY (%) 2.5 (20.6) FY2010 2.1 (5.4) FY2011 4.1 (17.1) FY2012E 3.6 (19.9) FY2013E 3.1 (26.7)

Equity Research | India 15/11/2011 MF GLOBAL QUATERLY | SUN PHARMA

PROFITABILITY, PRODUCTIVITY, LIQUIDITY AND VALUATION RATIOS FY2009 RETURN ON ASSETS (%) RETURN ON EQUITY (%) RETURN ON INVESTED CAPITAL (%) ROIC/COST OF CAPITAL (X) ROIC - COST OF CAPITAL (%) RETURN ON CAPITAL EMPLOYED (%) COST OF CAPITAL (%) ROCE - COST OF CAPITAL (%) 26.8 29.3 43.3 5.4 35.3 29.7 8.0 21.7 FY2010 16.0 14.7 21.6 2.7 13.6 17.5 8.0 9.5 FY2011 18.4 19.4 29.7 3.7 21.7 20.6 8.0 12.6 FY2012E 16.3 17.5 25.2 3.2 17.2 18.6 8.0 10.6 FY2013E 17.3 18.3 27.4 3.4 19.4 19.5 8.0 11.5

ASSET TURNOVER (X) SALES/TOTAL ASSETS (X) SALES/NET FA (X) WORKING CAPITAL/SALES (X) FIXED CAPITAL/SALES (X) RECEIVABLE DAYS INVENTORY DAYS PAYABLE DAYS CURRENT RATIO (X) QUICK RATIO (X) INTEREST COVER (X) DIVIDEND COVER (X)

1.1 0.6 2.6 0.4 0.6 76.7 85.0 41.5 7.8 6.4 297.5 6.4

0.9 0.4 1.9 0.6 0.7 112.6 102.9 37.2 8.3 6.9 164.4 3.9

1.0 0.6 2.0 0.4 0.9 74.7 94.4 47.7 5.8 4.8

1.1 0.6 2.0 0.4 0.8 75.9 94.9 55.9 6.0 4.8 127.7

1.1 0.6 2.2 0.5 0.8 76.0 92.1 41.1 7.3 6.0 134.6 6.5

4.9

5.4

PER (X) PEG (X) - Y-O-Y GROWTH PRICE/BOOK (X) YIELD (%) EV/NET SALES (X) EV/EBITDA (X) EV/EBIT (X) EV/NOPLAT (X) EV/CE EV/IC (X)
Source: Company, MF Global India Research Estimates

28.7 1.3 7.2 0.5 1.8 4.1 4.4 4.2 1.0 2.0

46.6 (1.2) 6.5 0.5 1.9 6.4 7.3 6.8 0.9 1.7

29.3 0.5 5.1 0.7 8.4 24.5 27.3 26.2 4.6 8.6

26.9 3.0 4.4 0.7 6.5 21.6 25.0 23.8 4.0 6.9

22.3 1.1 3.8 0.7 5.7 17.6 20.2 19.5 3.3 6.1

Equity Research | India 15/11/2011 MF GLOBAL QUATERLY | SUN PHARMA

RECOMMENDATION RECOMMENDATION BUY BUY TARGET, RS 566 535 CMP, RS 504 469 DATE 15 NOVEMBER 2011 10 OCTOBER 2011

Equity Research | India 15/11/2011 MF GLOBAL QUATERLY | SUN PHARMA

VINEET BHATNAGAR SAJID KHALID JIGNESH SHAH EQUITY RESEARCH MANISH AGARWALLA AARTHISUNDARI JAYAKUMAR ABHISHEK RANGANATHAN, CFA ANJALI VERMA ANKUR SHARMA DEEPAK JAIN DHAWAL DOSHI DIPESH SOHANI ENNETTE FERNANDES GAURI ANAND KAPIL BAGARIA NAVEEN KULKARNI, CFA, FRM SACHIT MOTWANI VAIBHAV AGARWAL VIBHOR SINGHAL VIHANG NAIK, CFA VIVEKANAND SUBBARAMAN DHARMESH SHAH JISHAR THOOMBATH NEHA GARG SAURABH RATHI VARUN VIJAYAN GANESH DEORUKHKAR ROSHNI KALLOOR TECHNICAL & QUANT RESEARCH NEPPOLIAN PILLAI SHIKHA KHURANA

MANAGING DIRECTOR HEAD INSTITUTIONAL EQUITIES HEAD EQUITY DERIVATIVES

91-22-2300 2999 91-22-6667 9972 91-22-6667 9735

VBHATNAGAR@MFGLOBAL.COM SAKHALID@MFGLOBAL.COM JSHAH@MFGLOBAL.COM

VP - BANKING PHARMACEUTICALS RETAIL, REAL ESTATE ECONOMIST ENGINEERING, CAPITAL GOODS AUTOMOBILES & AUTO ANCILLARIES METALS, POWER REAL ESTATE, MIDCAP FMCG OIL & GAS, FERTILISER MIDCAP, SUGAR TELECOM, FMCG, MEDIA BANKING CEMENT INFRASTRUCTURE IT SERVICES, MIDCAP TELECOM, MEDIA RESEARCH ASSOCIATE RESEARCH ASSOCIATE RESEARCH ASSOCIATE RESEARCH ASSOCIATE RESEARCH ASSOCIATE PRODUCTION RESEARCH COMPLIANCE OFFICER

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INSTITUTIONAL CASH EQUITY SALES SUDHIR PADIYAR KINSHUK TIWARI KSHITIJ SHAH PAWAN KAKUMANU SHUBHANGI AGRAWAL ROSIE FERNS VP - EQUITY SALES (ASIAPAC) EQUITY SALES EQUITY SALES (EUROPE) EQUITY SALES EQUITY SALES SR. EXEC. EQUITIES SALES SUPPORT 91-22-6667 9991 91-22-6667 9946 91-22-6667 9944 91-22-6667 9934 91-22-6667 9964 91-22-6667 9971 SPADIYAR@MFGLOBAL.COM KTIWARI@MFGLOBAL.COM KSSHAH@MFGLOBAL.COM PKAKUMANU@MFGLOBAL.COM SAGRAWAL@MFGLOBAL.COM RFERNS@MFGLOBAL.COM

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Equity Research | India 15/11/2011 MF GLOBAL QUATERLY | SUN PHARMA

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MF Global Sify Securities India Pvt. Limited 2nd Floor, C-Block, Modern Centre Mahalaxmi, Mumbai 400 011
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