Sun Pharmaceutical Industries Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Pharmaceuticals & Drugs

Company

Sun Pharmaceutical Industries Ltd

Reco Price
Rs. 750.00
Price Target (1 Year)
Rs. 900.00
Upside
20.00%

Date

June 14, 2016
Sensex
26395.71
CNX Nifty
8108.85

Exchange

Code

NSE
SUNPHARMA
BSE
524715

FDA approval for the Halol plant will increase revenues and profitability for the company.

Integration of Ranbaxy:
In March 2015, Sun Pharma had completed the acquisition of Ranbaxy, creating India’s largest and the world’s fifth largest drug maker. The integration between the India businesses of both Sun Pharma and Ranbaxy is on-track; the major realization of the targeted synergies of $300 million is expected to be accrued in FY2017 and be completed during FY2018.

The company plans to increase the R&D productivity and introduce innovative products to increase the share of value-added products. The company will possibly evade very competitive and low margin products. This will have an impact on top line, but it will also potentially improve the overall percentage of cost of goods. They are also in process to try and improve the cost; followed by an increase in the usage of the facility. So what is being bought from outside, will now be produced in house.

Japanese market penetration:
The company has acquired 14 Novartis brands in Japan. This was a strategic business decision for the company in order to create a base to enter the Japanese market in the future. The Japanese acquisition will start contributing to the revenues of the company from the second half of FY17.

Halol Plant:
The company has been working towards remedying the problems that were identified during the FDA inspection in September 2014. They have been strictly adhering to the timelines and are on the brink of completing these remedial measures at the Halol Plant. Further to which, the company would request a USFDA re-inspection during the first quarter of FY17. In addition, the company has also been gradually increasing its capacity at the Halol Plant irrespective of the re-inspection process. The Halol plant makes up about 15 percent of Sun Pharma’s sales in its largest market, the United States. It is critical to the company as it has the capabilities to manufacture injectable products, which are difficult to manufacture and hence cater to a fairly niche and lucrative market for drug makers.

Further capex plans for development of psoriasis drug:
Sun Pharma acquired worldwide rights to “Tildrakizumab” for use in all human indications from Merck in exchange for an upfront payment of $80 million, milestone payments and tiered royalties. Merck will continue all clinical development and regulatory activities, which will be funded by Sun Pharma. Upon final approval for the product, Sun Pharma will be responsible for all subsequent activities. The drug is currently being evaluated in Phase 3 trials to treat chronic plaque psoriasis, a skin ailment. Sun is planning a capex of $250 million for Tildrakizumab, the IL-23 monoclonal anti-body in-licensed from MSD (US) over four to five years to be utilized for its psoriasis trials.

Financials:
The company’s revenues grew at a 5 year CAGR of 37% to Rs. 27744 crores, while the EBIDTA grew at a CAGR of ~33% to Rs. 7956 crores and the PAT grew at a CAGR of ~25% to Rs. 5830 crores in FY16. The company also showed returns on equity and capital employed post tax at an average of 25% each.At CMP of Rs. 750, the stock is trading at 21.3x to FY 2018E which is low valuation for the company. We assign a “BUY” rating on stock with target price of Rs. 900 where it trades at 25.5x, which is fair valuation for the stock in the long term.

Stock Data

CMP (Rs)
753.70
Face value (Rs)
1
52 Week Range (Rs)
966.00 - 704.00
Market cap (Rs Crores)
181156.37
Price To Book Value (x)
5.77
P/E Ratio (x)
38.41
EV/EBIDTA (x)
20.04

One Year indexed Stock Performance

Sun Pharmaceutical Industries LtdSensex
Sun Pharmaceutical Industries Ltd
Return (%)
1m
6m
12m
36m
Absolute
-5.53
-1.94
-10.03
58.08
Sensex
2.89
4.95
-0.72
37.64

Shareholders

(in %)
31-Mar
Promoter
54.97
Public
45.02
Others
0.01
Total
100

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Industry

The Indian Pharmaceutical market has witnessed the kind of growth that no other sector has experienced in the last 1-2 decades. The sector is currently valued at around $27 Billion, i.e. ~ 3% of the global pharmaceutical industry in terms of value and 10% in terms of volume. It is poised to reach $55 Billion in the next 4 years. The Generic Drugs segment dominates the market with a 70% share in terms of revenues making it the largest segment in the Indian pharmaceutical sector. Similarly, Over-The-Counter (OTC) medicines constitute close to 21% and Patented Drugs occupy the remaining 9% of the total market. Indian pharmaceutical market grew at a handsome CAGR of 17.5% over the past 10 years. It is now expected to grow by 15% annually over the next 5 years as against the global growth estimate of just 5%. Currently, India is second after the US for highest number of US Food and Drug Administration (USFDA) approved plants in the world. This is huge in itself as 22% of such plants in the world are Indian. Additionally, India has 1400 plants that have been approved by the World Health Organization Good Manufacturing Practices (WHO GMP) and 253 by the European Directorate of Quality Medicines (EDQM).

Profile

Sun Pharma is a global specialty pharmaceutical company, with a large presence in the US and India, and a footprint across 40 other countries. In Indian formulations, the company is a leader in niche treatment areas of psychiatry, gastroenterology, neurology, cardiology, nephrology, orthopedics & ophthalmology. The US business has been built typically on acquisitions and generic focus. It owns the largest product portfolio amid Indian players with as many as 572 product (ANDA) filings; 413 approved and 159 pending approval in the pipeline.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar-14
Mar-15
Mar-16
Mar-17E
Mar-18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • % Margin
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • PBT
  • Tax
  • Tax Rate (%)
  • Profit After Tax
  • Margin (%)
  • PAT Growth (%)
  • Adjusted EPS
  • 16080
  • 42.3
  • 9121
  • 6959
  • 43
  • 593
  • 7552
  • 44
  • 7508
  • 409
  • 7099
  • 702
  • 9.9
  • 6396
  • 39.8
  • 57.6
  • 15.17
  • 27433
  • 70.6
  • 19682
  • 7751
  • 28
  • 663
  • 8414
  • 579
  • 7835
  • 1195
  • 6641
  • 915
  • 13.8
  • 5726
  • 20.9
  • -10.5
  • 21.92
  • 27744
  • 1.1
  • 19788
  • 7956
  • 29
  • 459
  • 8941
  • 477
  • 7779
  • 1014
  • 6765
  • 935
  • 13.8
  • 5830
  • 21.0
  • 1.8
  • 19.60
  • 30426
  • 9.7
  • 19752
  • 10674
  • 35
  • 0
  • 10674
  • 528
  • 10146
  • 1038
  • 9108
  • 1457
  • 16.0
  • 7651
  • 25.1
  • 31.2
  • 31.79
  • 35940
  • 18.1
  • 24120
  • 11820
  • 33
  • 0
  • 11820
  • 502
  • 11318
  • 1092
  • 10226
  • 1738
  • 17.0
  • 8487
  • 23.6
  • 10.9
  • 35.27
Source: Stockaxis Research, Company Data

Valuation

At CMP of Rs. 750, the stock is trading at 21.3x FY 2018E. The FDA approval at the Halol plant will unlock the shareholders value along with the integration of Ranbaxy; we expect a target price of Rs. 900 where it trades at 25.5x, which is fair valuation for the stock in the long term.

 

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