1QFY2018 Result Update | Pharmaceutical

August 18, 2017

Sun Pharma

BUY

CMP

`485

Performance Highlights

Target Price

`558

(` cr)

1QFY2018

4QFY2017

% chg (qoq)

1QFY2017

% chg (yoy)

Investment Period

12 months

Net sales

6,167

6,825

(9.6)

8,007

(23.0)

Other income

194

536

(63.8)

393

(50.7)

Stock Info

Gross profit

4,489

4,630

(3.0)

6,160

(27.1)

Sector

Pharmaceutical

Operating profit

1,054

1,235

(14.7)

2,685

(60.8)

Market Cap (` cr)

1,16,414

Adj. Net profit

526

1,385

(62.0)

2,268

(76.8)

Net Debt (` cr)

(8,242)

Source: Company, Angel Research

Beta

0.7

Sun Pharmaceuticals posted poor set of numbers for 1QFY2018. Sales came in at

52 Week High / Low

818/433

`6,167cr (`6,825cr expected) v/s. `8,007cr in 1QFY2017, a yoy de-growth of 23.0%,

Avg. Daily Volume

4,49,346

mainly driven by the Indian formulation sales dip and US (which was impacted on the back

Face Value (`)

of pricing pressures and base effect). On operating front, the EBITDA margins came in at

BSE Sensex

31,771

17.1% (17.7% expected) v/s. 33.5% in 1QFY2017, mainly on the back of lower than

Nifty

9,897

expected sales during the quarter and base effect. Excluding the Modafinil settlement, its

Reuters Code

SUN.BO

adjusted net profit was at `526cr, down 77% over 1QFY2017, with resulting adjusted net

Bloomberg Code

SUNP@IN

profit margin of 8.5%. Net profit for 1QFY2017 last year included the benefit of the 180-

day exclusivity for Imatinib which expired in July-2016. We maintain our Buy.

Shareholding Pattern (%)

Results lower than expectations: Sales came in at `6,167cr (`6,825cr expected) v/s.

Promoters

54.4

`8,007cr in 1QFY2017, a yoy de-growth of

23.0%, mainly driven by the Indian

MF / Banks / Indian Fls

17.1

formulation sales dip and US (which was impacted on the back of pricing pressures and

base effect). On operating front, the EBITDA margins came in at 17.1% (17.7% expected)

FII / NRIs / OCBs

20.1

v/s. 33.5% in 1QFY2017, mainly on the back of lower than expected sales during the

Indian Public / Others

8.4

quarter and base effect. Net profit for the quarter was adversely impacted by settlements

with certain plaintiffs related to the Modafinil antitrust litigation in the US, with the

Abs. (%)

3m 1yr

3yr

settlement amounting to `950cr. Excluding the Modafinil settlement, its adjusted net profit

Sensex

8.0

13.2

20.4

for 1QFY2018 was at `526cr, down 77% over 1QFY2017 last year.

Sun Pharma

(28.4)

(38.0)

(40.5)

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 2.5% (including

Ranbaxy Laboratories) to `31,826cr and EPS to come in at `24.8 over FY2017-19E. We

3-year price chart

recommend a Buy on the stock with a target price of `558.

1,200

1,000

Key financials (Consolidated)

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

800

Net sales

27,888

30,264

28,466

31,826

600

% chg

2.2

8.5

(5.9)

11.8

400

Adj. Net profit

6,248

7,846

5,101

5,949

200

% chg

31.7

25.6

(35.0)

16.6

EPS (`)

26.0

32.7

21.3

24.8

EBITDA margin (%)

24.6

29.0

20.8

22.4

Source: Company, Angel Research

P/E (x)

18.7

14.8

22.8

19.6

RoE (%)

21.0

22.2

13.0

15.2

Sarabjit Kour Nangra

RoCE (%)

15.6

18.8

11.5

12.3

+91 22 39357600 Ext: 6806

P/BV (x)

3.5

3.2

2.9

2.6

[email protected]

EV/Sales (x)

4.0

3.6

3.7

3.2

EV/EBITDA (x)

16.3

12.5

17.9

14.4

Source: Company, Angel Research; Note: CMP as of August 16, 2017

Please refer to important disclosures at the end of this report

Sun Pharma | 1QFY2018 Result Update

Exhibit 1: 1QFY2018 performance (Consolidated)

Y/E March (` cr)

1QFY2018

4QFY2017

% chg QoQ

1QFY2017

% chg yoy

FY2017

FY2016

% chg

Net sales

6,167

6,825

(9.6)

8,007

(23.0)

30,264

27,888

8.5

Other income

194.1

536.4

(63.8)

393.4

(50.7)

1,902

1,847

3.0

Total income

6,361

7,362

(13.6)

8,400

(24.3)

32,166

29,735

8.2

Gross profit

4,489

4,630

(3.0)

6,160

(27.1)

22,133

21,558

2.7

Gross margin (%)

72.8

67.8

76.9

73.1

77.3

Operating profit

1,054

1,235

(14.7)

2,685

(60.8)

8,810

6,874

28.2

Operating margin (%)

17.1

18.1

33.5

29.1

24.6

Interest

109

143.2

135

(18.7)

400

523

(23.6)

Depreciation

347

338

2.5

316

9.7

1,265

1,038

21.9

Extraordinary item loss/ ( gain)

951

590

PBT

792

1,389

(43.0)

2,628

(69.9)

9,048

7,161

26.4

Provision for taxation

162

44.3

265.2

352.7

(54.1)

1,212

914

32.6

PAT before extra-ordinary item

630

1,344

(53.2)

2,275

(72.3)

7,836

6,247

25.4

Minority interest(MI)

(2)

(41)

(10)

Reported PAT

526

1,385

(62.0)

2,268

(76.8)

7,846

6,248

25.6

Adj. PAT

(323)

1,385

2,268

7,846

5,658

38.7

Adj. EPS (`)

2.2

5.8

9.4

32.6

26.0

Source: Company, Angel Research

Exhibit 2: 1QFY2018 - Actual V/s Angel estimates

(` cr)

Actual

Estimates

Variance (%)

Net sales

6,167

6,825

(9.6)

Other income

194

500

(61.2)

Operating profit

1,054

1,211

(13.0)

Tax

162

265.2

Adj. Net profit

526

1,324

(60.3)

Source: Company, Angel Research

Sales lower than expectations: Sales came in at `6,167cr (`6,825cr expected) v/s.

`8,007cr in 1QFY2017, a yoy de-growth of 23.0%, mainly driven by the Indian

formulation sales dip and US (which was impacted on back of pricing pressures and

base effect). India sales at `1,761cr (which accounted for 29% of sales), was down by

5% yoy, mainly on back of GST implementation.

Sales in the US were US$351mn for the quarter; de-growth of 42% yoy over same

period last year and accounted for 37% of total sales. Sales for 1QFY2017 included the

benefit of generic Imatinib exclusivity, which expired in July 2016. Besides Imatinib, the

overall pricing pressure in the US generics market also impacted the yoy growth. Sales

in emerging markets were at US$168mn for 1QFY2018; a growth of 9% compared to

the same quarter last year and accounted for 18% of total sales. The growth was partly

boosted by the consolidation of the Biosintez acquisition in Russia.

Formulation sales in Rest of World (ROW) markets excluding US and Emerging Markets

were US$115mn in 1QFY2018, a growth of 37% from 1QFY2017 and accounting for

approximately 12% of revenues. The growth was partly boosted by the consolidation of

revenues from the acquisition of 14 brands from Novartis.

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

The company had a total of 433 ANDAs filed with the USFDA. Currently, ANDAs for

151 products await USFDA approval, including 16 tentative approvals. For the quarter,

5 ANDAs were filed and 8 approvals were received. Additionally, the pipeline includes

37 approved NDAs while 5 NDAs await USFDA approval.

Exhibit 3: Sales trend

7000

6153

5755

5714

6000

4909

5000

4406

4000

3000

1854

2010

1969

1916

1761

2000

1000

1QFY2017

2QFY2017

3QFY2017

4QFY2017

1QFY2018

Domestic Formulation

Export Formulation, Bulk and others

Source: Company, Angel Research

OPM at 17.1%, lower than expected: On operating front, the EBITDA margins came in

at 17.1% (17.7% expected) v/s. 33.5% in 1QFY2017, mainly on the back of lower than

expected sales during the quarter and base effect. Gross margins came in at 72.8%

v/s. 76.9% in 1QFY2017, while R&D expenses were at 8.5% of sales, mainly on the

back of lower sales while it dipped 28% yoy. Also, the last year operating profitability

included the benefit of the 180-day exclusivity for Imatinib.

Exhibit 4: OPM trend (%)

40.0

33.5

34.3

28.9

30.0

20.0

18.1

17.1

10.0

1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018

Source: Company, Angel Research,

Net profit below expectations: Net profit for the quarter was adversely impacted by

settlements with certain plaintiffs related to the Modafinil antitrust litigation in the US,

with the settlement amounting to `950cr. Excluding the Modafinil settlement, its

adjusted net profit for 1QFY2018 was at `526cr, down 74% over 1QFY2017 last year,

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

with resulting adjusted net profit margin of 8.5%. Net profit for 1QFY2017 last year

included the benefit of the 180-day exclusivity for Imatinib which expired in July 2016.

Exhibit 5: Adjusted Net profit trend (` cr)

3,000

2,500

2,268

2,235

2,000

1,472

1,385

1,500

1,000

526

500

1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018

Source: Company, Angel Research

Concall takeaways

 Ranbaxy Lab integration benefits of US$300mn by end of FY2018E.

 Revenue may decline due to challenges in the US (assuming no new approval

from Halol and no disruption at Dadra).

 Remediation measures at Halol over; awaiting USFDA inspection.

 2HFY2018E EBITDA margin to be ~20-22%.

 Tildrakizumab NDA launch expected by early 2019.

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 37% of its sales in FY2017. In terms of ANDAs, the

company cumulatively has 433 products, out of which 151 products now await

USFDA approval, including 16 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 the back of supply constraints

at the Halol facility although the company has taken redemption measures

including site transfers. Also, during FY2018, the company like other generic

players in the US is expecting the pricing dip on back of the consolidation in the

buyers chain (4 players hold now 90% market share). Overall, we expect the

region to post a CAGR of (10.4)% in sales over FY2017-19E, accounting for

almost 34% of the overall sales in FY2019E.

Domestic business: Sun Pharma’s domestic formulation business is among the

fastest growing in the Indian pharmaceutical industry. It contributed 23% to the

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

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

15.0% over

FY2017-19E, contributing 32% to the overall formulation sales of the company in

FY2019.

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 2.5%

(including Ranbaxy Laboratories) to `31,826cr and EPS to post a CAGR of 8.0% to

`24.8 over FY2017-19E. We recommend a Buy rating on the stock with a target

price of `558.

Exhibit 6: Key assumptions

FY2018E

FY2019E

Domestic Formulation sales growth (%)

12.0

18.0

Export Formulation sales growth (%)

(11.8)

9.9

Growth in employee expenses (%)

15.0

Operating margins (%)

20.8

22.4

Tax as % of PBT

15.0

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

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

Exhibit 8: Valuation summary

Company

Reco

CMP

Tgt. Price

Upside

FY2019E

FY17-19E

FY2019E

(`)

% PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Buy

515

600

16.5

18.9

2.1

11.0

12.8

24.3

20.6

Aurobindo Pharma

Buy

714

823

15.3

13.9

2.1

9.7

14.2

25.3

22.7

Cadila Healthcare

Reduce

484

426

(11.9)

22.7

3.7

18.0

21.0

17.3

22.9

Cipla

Sell

590

458

(22.4)

24.5

2.5

15.7

38.7

10.9

13.1

Dr Reddy's

Accumulate

1,999

2,219

11.0

18.0

2.0

11.2

23.6

11.2

13.0

Dishman Pharma

Under Review

293

18.9

1.3

10.1

(7.2)

2.9

2.5

GSK Pharma

Neutral

2,365

40.4

5.4

30.3

30.6

28.9

26.5

Indoco Remedies

Sell

193

153

(20.9)

15.2

1.5

10.1

23.0

11.3

15.6

Ipca labs

Buy

420

620

47.6

16.7

1.3

8.5

27.9

12.8

11.2

Lupin

Buy

962

1,467

52.5

14.4

2.0

8.4

8.2

20.5

17.5

Sanofi India*

Reduce

4,127

3,845

(6.8)

26.8

2.8

16.5

9.2

23.9

25.8

Sun Pharma

Buy

485

558

15.0

19.6

3.2

14.4

8.0

12.3

15.2

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.

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

Profit & Loss statement (Consolidated)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E

FY2019E

Gross sales

27,652

28,254

30,536

28,724

32,115

Less: Excise duty

366

272

259

289

Net sales

27,287

27,888

30,264

28,466

31,826

Other operating income

147

599

1,314

Total operating income

27,433

28,487

31,578

29,780

33,140

% chg

70.6

3.8

10.9

(5.7)

11.3

Total expenditure

19,470

21,014

21,489

22,537

24,699

Net raw materials

6,739

6,330

8,131

7,686

8,550

Other mfg costs

1,192

1,218

1,322

1,244

1,390

Personnel

4,430

4,772

4,902

5,638

6,483

Other

7,109

8,693

7,134

7,970

8,275

EBITDA

7,817

6,874

8,775

5,928

7,127

% chg

12.9

-12.1

(27.5)

-56.0

3.7

(% of Net Sales)

28.6

24.6

29.0

20.8

22.4

Depreciation & amort.

1,195

1,038

1,265

1,465

1,665

EBIT

6,622

6,436

8,825

5,778

6,777

% chg

1.7

(2.8)

(18.7)

(34.5)

17.3

(% of Net Sales)

24.3

23.1

29.2

20.3

21.3

Interest & other charges

579

523

400

Other income

451

1,248

623

(% of PBT)

6.8

17.4

6.9

10.4

8.9

Share in profit of Asso.

Recurring PBT

6,641

7,161

9,048

6,001

7,000

% chg

-6.4

7.8

(16.8)

0.0

0.1

Extraordinary expense/(inc.)

237.8

589.9

1.0

PBT (reported)

6,641

7,161

9,048

6,001

6,999

Tax

914.7

913.8

1,211.6

900.1

1,049.8

(% of PBT)

13.8

12.8

13.4

15.0

PAT (reported)

5,726

6,247

7,836

5,101

5,949

Add: Share of earnings of asso.

(13)

Less: Minority interest (MI)

936

Prior period items

PAT after MI (reported)

4,539

5,658

7,846

5,101

5,949

ADJ. PAT

4,743

6,248

7,846

5,101

5,949

% chg

(10.0)

31.7

65.4

(35.0)

16.6

(% of Net Sales)

16.6

0.0

1.0

2.0

3.0

Basic EPS (`)

22.9

26.0

32.7

21.3

24.8

Fully Diluted EPS (`)

22.9

26.0

32.7

21.3

24.8

% chg

(10.0)

13.4

42.8

(35.0)

16.6

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E

FY2019E

SOURCES OF FUNDS

Equity share capital

207

241

240

Preference capital

Reserves & surplus

26,300

32,742

36,400

40,378

45,204

Shareholders’ funds

26,507

32,982

36,640

40,618

45,444

Minority interest

2,851

4,085

3,791

Total loans

7,596

8,316

8,091

Deferred tax liability

(1,752)

(3,046)

(2,178)

Other Long Term Liabilities

Long Term Provisions

2,710

2,106

1,342

2,364

2,591

Total liabilities

37,922

44,443

47,685

52,686

57,739

APPLICATION OF FUNDS

Gross block

15,041

15,084

18,162

19,162

20,162

Less: Acc. depreciation

4,863

7,139

8,404

9,869

11,534

Net block

10,179

7,945

9,758

9,293

8,628

Capital work-in-progress

842

303

Goodwill

3,701

9,261

10,417

Investments

2,716

1,830

1,192

1,388

1,389

Long term long & adv.

2,736

3,276

4,526

3,978

4,425

Current assets

27,005

29,227

32,723

35,822

41,907

Cash

10,998

13,182

15,141

19,147

23,277

Loans & advances

2,193

2,006

2,480

2,344

2,608

Other

13,813

14,040

15,102

14,331

16,022

Current liabilities

9,256

7,938

11,232

8,513

9,330

Net current assets

17,748

21,290

21,491

27,308

32,577

Others

Total assets

37,922

44,443

47,685

52,686

57,739

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E

FY2019E

Profit before tax

6,641

7,161

9,048

6,001

7,000

Depreciation

1,195

1,038

1,265

1,465

1,665

(Inc)/Dec in working capital

(4,322)

(1,898)

(2,505)

(12,139)

(2,341)

Direct taxes paid

915

914

1,212

900

1,050

Cash Flow from Operations

2,598

5,386

6,596

(5,573)

5,273

(Inc.)/Dec.in Fixed Assets

(8,653)

(43)

(1,682)

(1,000)

(Inc.)/Dec. in Investments

886

1,524

(196)

(1)

Other income

Cash Flow from Investing

(8,583)

843

(157)

(1,196)

(1,001)

Issue of Equity

Inc./(Dec.) in loans

(4,928)

(1,333)

(1,873)

1,022

227

Dividend Paid (Incl. Tax)

(282)

(1,123)

Others

14,320

(2,431)

(1,485)

10,876

754

Cash Flow from Financing

9,392

(4,046)

(4,480)

10,775

(142)

Inc./(Dec.) in Cash

3,408

2,184

1,959

4,006

4,130

Opening Cash balances

7,590

10,998

13,182

15,141

19,147

Closing Cash balances

10,998

13,182

15,141

19,147

23,277

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

Key Ratios

Y/E March

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation Ratio (x)

P/E (on FDEPS)

21.2

18.7

14.8

22.8

19.6

P/CEPS

17.5

17.4

12.8

17.7

15.3

P/BV

4.4

3.5

3.2

2.9

2.6

Dividend yield (%)

0.6

0.2

EV/Sales

3.6

4.0

3.6

3.7

3.2

EV/EBITDA

12.4

16.3

12.5

17.9

14.4

EV / Total Assets

2.6

2.5

2.3

2.0

1.8

Per Share Data (`)

EPS (Basic)

22.9

26.0

32.7

21.3

24.8

EPS (fully diluted)

22.9

26.0

32.7

21.3

24.8

Cash EPS

27.7

27.8

38.0

27.4

31.7

DPS

3.0

1.0

Book Value

110.2

137.1

152.3

168.8

188.9

Dupont Analysis

EBIT margin

24.3

23.1

29.2

20.3

21.3

Tax retention ratio

86.2

87.2

86.6

85.0

Asset turnover (x)

1.2

1.0

1.1

0.9

1.0

ROIC (Post-tax)

26.1

19.7

27.5

15.5

17.6

Cost of Debt (Post Tax)

9.8

5.7

4.4

8.4

4.1

Leverage (x)

0.0

Operating ROE

26.1

19.7

27.5

15.5

17.6

Returns (%)

ROCE (Pre-tax)

21.1

15.6

18.8

11.5

12.3

Angel ROIC (Pre-tax)

38.3

29.6

41.3

25.9

29.1

ROE

21.1

21.0

22.2

13.0

15.2

Turnover ratios (x)

Asset Turnover (Gross Block)

2.6

1.9

1.6

1.7

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

(0.1)

(0.2)

(0.3)

Net debt to EBITDA

(0.4)

(0.7)

(0.8)

(1.9)

(2.1)

Interest Coverage (EBIT/Int.)

August 18, 2017

Sun Pharma | 1QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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/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.

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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)

August 18, 2017