RESULTS REVIEW 3QFY17 15 FEB 2017

Sun Pharma
BUY
INDUSTRY PHARMA
Promising specialty pipeline
Sun Pharma (SUNP) posted underwhelming numbers Halol facility likely to persist for the next few quarters,
CMP (as on 14 Feb 2017) Rs 649 in 3QFY17. Revenues grew ~12% YoY, EBITDA margin we expect 3-4% rev. CAGR over FY17-19E for its US
was at 31% (down 732bps QoQ) and PAT came in at generic business. Product launches from the speciality
Target Price Rs 850
Rs 14.7bn. Substantially lower gross margins on pipeline will be the key growth drivers for the US
Nifty 8,792 segment beyond FY19. At present, we value these
account of Olmesartan AG sales in the US and
Sensex 28,339 opportunities at Rs 40/share.
integration of Novartiss business in Japan dragged
KEY STOCK DATA the overall EBITDA margin down. However, with AG While the India business growth for 3Q was muted, we
Bloomberg SUNP IN sales likely to be higher only during the exclusivity expect SUNP to leverage its market leadership position
No. of Shares (mn) 2,399 period, we believe that this is only temporary. and chronic heavy portfolio to drive ~14% rev. CAGR
over FY17-19E (slightly above IPM).
MCap (Rs bn) / ($ mn) 1,558/23,266 Overall, we are of the view that the stock is trading
6m avg traded value (Rs mn) 2,849 at enticing valuations (19.6x FY18E/17.1x FY19E), Highlights of the quarter
STOCK PERFORMANCE (%) with the earnings risk on account of expected price Concall takeaways: (1) 8 ANDAs were filed during the
52 Week high / low Rs 898/572 erosion in Taros base business and slower ramp up quarter and 1 approval was received, (2) Tildra BLA to
of Halol sales largely factored in. Ranbaxy synergies be filed in FY18 and launched in FY19, (3) Halol
3M 6M 12M
of US$ 300mn and sales from the robust specialty remediation to be completed over the next few
Absolute (%) (1.7) (21.7) (24.0)
portfolio (MK-3222, Odomzo and Seceira) are likely quarters, (4) Site transfer of critical products is now
Relative (%) (5.7) (22.6) (42.0)
to be the key growth drivers going forward. Maintain being considered, (5) Specialty business focus will
SHAREHOLDING PATTERN (%) BUY with a revised TP of Rs 850 (22x on Dec-18E). continue to be on ophthal, derma and oncology, (6)
Promoters 54.4 acquired Odomzo during 3QFY17, a branded oncology
The US business grew ~7% YoY (down 8%QoQ). The
FIs & Local MFs 12.2 product.
sales of gGleevec and the launch of Olmesartan AG
FPIs 21.7 were the primary drivers behind YoY growth. With Near-term outlook: Progress in the clearance of the
Public & Others 11.7 increased competition for Taro and the issues with the Halol facility is the key monitorable in the near term.
Source : BSE Financial Summary
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Amey Chalke Net Sales 79,127 70,821 11.7 82,651 (4.3) 2,77,442 3,11,033 3,36,414 3,72,484
amey.chalke@hdfcsec.com EBIDTA 24,531 21,690 13.1 31,677 (22.6) 84,816 1,11,674 1,14,749 1,28,003
+91-22-6171-7321 APAT 14,718 14,166 3.9 24,711 (40.4) 47,069 70,763 79,304 91,119
Diluted adj. EPS (Rs) 19.6 29.5 33.1 38.0
Siddhant Mansukhani P/E (x) 33.2 22.0 19.7 17.1
siddhant.mansukhani@hdfcsec.com RoE (%) 16.5 20.5 19.4 19.0
+91-22-6639-2476 Source: Company, HDFC sec Inst Research # Consolidated
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
 SUN PHARMA: RESULTS REVIEW 3QFY17

Sequential decline in sales is Quarterly Financials Snapshot (Consolidated)

on account of increased Particulars 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
competition in gGleevec Net Sales 79,127 70,821 11.7 82,651 (4.3)
Material Expenses 22,487 17,554 28.1 18,399 22.2
Employee Expenses 12,151 11,483 5.8 11,991 1.3
R&D Expenses 5,362 5,760 (6.9) 5,530 (3.0)
Other Expenses 14,596 14,334 1.8 15,055 (3.0)
R&D expenses were at 8% of EBITDA 24,531 21,690 13.1 31,677 (22.6)
sales overall (including capital Depreciation 3,068 2,508 3,038
expenditure) EBIT 21,463 19,183 11.9 28,639 (25.1)
Other Income 1,222 2,192 1,194
Interest Cost 1,665 1,170 537
PBT 21,020 20,205 4.0 29,295 (28.2)
Tax 3,729 2,020 4,417
Higher interest costs
RPAT 17,291 18,185 24,879
sequentially are on account of
Minority interest + Share of Asso. 2,573 4,019 168
forex loss incurred during the
APAT 14,718 14,166 3.9 24,711 (40.4)
quarter
Source: Company, HDFC sec Inst Research

Margin Analysis
3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
Material Expenses % Net Sales 28.4 24.8 363 22.3 616
Gross margins declined Employee Expenses % Net Sales 15.4 16.2 -86 14.5 85
significantly due to the launch R&D Expenses % Net Sales 6.8 8.1 -136 6.9 -12
of Olmesartan AG, which is Other Expenses % Net Sales 18.4 20.2 -179 18.0 44
procured from the innovator EBITDA Margin (%) 31.0 30.6 38 38.3 -732
and hence more expensive Tax Rate (%) 4.7 2.9 186 5.3 -63
APAT Margin (%) 18.6 20.0 -140 29.9 -1130
Source: Company, HDFC sec Inst Research

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 SUN PHARMA: RESULTS REVIEW 3QFY17

US Business Trend India Business Trend

149 ANDAs await the US FDA Domestic Formulations Revenue (Rs bn)
US Formulations Revenue (Rs bn) YoY Growth (%)
nod, including 14 tentative YoY Growth (%)
approvals 64.7 89.7
84.3

65.8
28.3
22.6
12.0
2.2 31.7 6.8
26.4
-5.5 19 19 20 20
18 17 18 18 18
16
Additionally, the pipeline -22.2 11.1
15.1
11.1
8.3
includes 36 approved NDAs 0.4 4.2
43 34 30 31 33 32 39 41 37 34
while 4 await US FDA
approval, of which 2 NDAs 2QFY15 4.0

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
were filed in 9MFY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

EBITDA Margin Trajectory R&D Expense Trajectory

EBITDA margin was impacted
EBITDA (Rs bn) EBITDA Margin (%) R&D Expenses (Rs bn) R&D to Sales (%)
largely by the hit on gross
margins 38.1 38.3
8.9 9.1
8.2
33.0 7.7
31.2 30.6 31.0 6.8 7.0 7.1 7.0
27.4 27.2 6.5
35.4 5.2

14.5
We foresee R&D expenses
scaling up again in the future,
as the requirements of 31 22 9 18 19 22 25 29 32 25 4 5 5 5 5 6 7 5 6 5
fuelling the specialty pipeline
2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
increase

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 SUN PHARMA: RESULTS REVIEW 3QFY17

Segmental Quarterly Performance

India and US businesses
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
disappointed during the
India 19,694 18,903 4.2 20,090 -2.0
quarter, recording sequential US 34,193 32,003 6.8 37,144 -7.9
declines RoW 19,201 15,510 23.8 16,692 15.0
API 3,657 4,405 -17.0 3,669 -0.3
Other 88 207 -57.6 45 95.8
Total 76,832 71,028 8.2 77,640 -1.0
Source: HDFC sec Inst Research
RoW business received a Assumptions
boost from the acquisition of FY16 FY17E FY18E FY19E
the Novartis portfolio in India 72,815 80,375 91,699 1,04,654
Japan. The full impact of the Growth (%) 8.4 10.4 14.1 14.1
acquisition will only be seen US 1,37,580 1,46,296 1,47,263 1,56,249
from the next quarter Growth (%) 0.3 6.3 0.7 6.1
RoW 57,829 70,003 80,991 93,263
Growth (%) -4.6 21.1 15.7 15.2
API 14,025 13,609 15,461 17,318
Growth (%) 41.5 -3.0 13.6 12.0
Other 796 750 1,000 1,000
Total 2,83,044 3,11,033 3,36,414 3,72,484
Growth (%) 2.7 9.9 8.2 10.7
Source: HDFC sec Inst Research

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 SUN PHARMA: RESULTS REVIEW 3QFY17

Income Statement (Consolidated) Balance Sheet (Consolidated)

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 272,865 277,442 311,033 336,414 372,484 SOURCES OF FUNDS
Growth (%) 70.5 1.7 12.1 8.2 10.7 Share Capital - Equity 2,406 2,406 2,399 2,399 2,399
Material Expenses 67,392 64,832 78,691 79,730 88,651 Reserves 253,826 311,636 373,435 438,794 514,613
Employee Expenses 44,299 47,971 48,803 51,500 55,196 Total Shareholders Funds 256,232 314,042 375,834 441,193 517,013
SG&A Expenses 24,183 29,400 30,058 32,187 36,046 Minority Interest 28,661 40,859 48,109 57,359 67,609
Other Operating Expenses 59,794 55,677 53,975 60,648 67,587 Long-term Debt 15,548 31,167 16,791 13,433 10,747
Operating Profits 77,198 79,561 99,506 112,349 125,003 Short-term Debt 62,279 52,214 30,517 21,362 14,953
Operating Profit Margin (%) 28.3 28.7 32.0 33.4 33.6 Total Debt 77,827 83,381 47,308 34,795 25,700
Other Operating Income 1,469 5,256 12,168 2,400 3,000 Net Deferred Taxes (17,516) (21,259) (21,259) (21,259) (21,259)
EBITDA 78,667 84,816 111,674 114,749 128,003 Long-term Provisions & Others 25,323 10,970 14,758 19,090 29,754
EBITDA Margin (%) 28.8 30.6 35.9 34.1 34.4 TOTAL SOURCES OF FUNDS 370,527 427,993 464,751 531,179 618,816
EBITDA Growth (%) 12.4 7.8 31.7 2.8 11.6 APPLICATION OF FUNDS
Depreciation 11,947 10,135 11,750 12,500 13,500 Net Block 69,752 95,919 96,304 95,908 92,706
EBIT 66,720 74,681 99,924 102,249 114,503 CWIP 24,157 26,665 29,515 32,216 35,480
Other Income (Including EO Goodwill 57,073 57,073 57,073 57,073 57,073
5,477 (2,259) 5,250 10,000 12,500
Items) Investments 5,989 5,989 5,989 5,989 5,989
Interest 5,790 4,769 4,125 1,800 1,500 LT Loans & Advances 23,035 22,616 25,856 27,105 30,039
PBT 66,407 67,653 101,049 110,449 125,503 Total Non-current Assets 180,005 208,262 214,736 218,291 221,286
Tax (Incl Deferred) 9,147 9,349 15,157 18,997 22,591 Inventories 56,680 64,236 64,392 65,242 72,542
RPAT 57,260 58,304 85,892 91,452 102,912 Debtors 53,123 67,959 54,900 57,552 63,781
Minority Interest 9,488 11,145 7,250 9,250 10,250 Other Current Assets 50,815 32,873 26,986 28,515 31,562
EO (Loss) / Profit (Net Of Tax) 2,378 90 7,879 2,898 1,544 Cash & Equivalents 131,155 146,990 221,320 285,225 361,369
APAT 45,394 47,069 70,763 79,304 91,119 Total Current Assets 291,773 312,058 367,598 436,534 529,254
APAT Growth (%) 44.5 3.7 50.3 12.1 14.9 Creditors 31,538 21,716 36,826 37,312 41,487
Adjusted EPS (Rs) 18.9 19.6 29.5 33.1 38.0 Other Current Liabilities &
Source: Company, HDFC sec Inst Research
69,713 70,611 80,757 86,334 90,236
Provns
Total Current Liabilities 101,251 92,327 117,584 123,646 131,724
Net Current Assets 190,522 219,731 250,014 312,888 397,530
TOTAL APPLICATION OF FUNDS 370,527 427,993 464,751 531,179 618,816
Source: Company, HDFC sec Inst Research

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 SUN PHARMA: RESULTS REVIEW 3QFY17

Cash Flow Key Ratios

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 64,029 74,505 101,049 110,449 125,503 PROFITABILITY (%)
Non-operating & EO items (11,753) (6,115) (9,280) (12,367) - GPM 75.3 76.6 74.7 76.3 76.2
Interest expenses 5,790 4,769 4,125 1,800 1,500 EBITDA Margin 28.8 30.6 35.9 34.1 34.4
Depreciation 12,948 10,135 11,750 12,500 13,500 APAT Margin 16.6 17.0 22.8 23.6 24.5
Working Capital Change (392) (34,630) 43,987 3,881 (1,318) RoE 20.6 16.5 20.5 19.4 19.0
Tax Paid (17,404) (9,349) (15,157) (18,997) (22,591) RoIC (or Core RoCE) 27.3 25.5 40.1 39.8 42.4
OPERATING CASH FLOW ( a ) 53,219 39,315 136,473 97,266 116,595 RoCE 25.9 19.7 28.3 33.0 36.7
Capex (23,158) (38,375) (14,242) (14,467) (14,714) EFFICIENCY
Free cash flow (FCF) 30,061 940 122,231 82,799 101,880 Tax Rate (%) 13.8 13.8 15.0 17.2 18.0
Investments (6,367) 14,077 - - - Fixed Asset Turnover (x) 2.1 1.7 1.7 1.8 1.8
Non-operating Income 2,814 6,115 9,280 12,367 - Inventory (days) 75.8 84.5 75.6 70.8 71.1
INVESTING CASH FLOW ( b ) (26,710) (18,183) (4,962) (2,100) (14,714) Debtors (days) 71.1 89.4 64.4 62.4 62.5
Debt Issuance/(Repaid) (5,479) 5,554 (36,073) (12,513) (9,095) Other Current Assets (days) 68.0 43.2 31.7 30.9 30.9
Interest Expenses (2,513) (4,769) (4,125) (1,800) (1,500) Payables (days) 42.2 28.6 43.2 40.5 40.7
FCFE 18,517 21,917 91,313 80,853 91,285 Other Current Liab & Provns
93.3 92.9 94.8 93.7 88.4
Share Capital Issuance 750 1,054 (7) - - (days)
Dividend (3,633) (14,075) (16,843) (16,843) (16,843) Cash Conversion Cycle (days) 79.4 95.7 33.7 30.0 35.4
FINANCING CASH FLOW ( c ) (10,875) (12,236) (57,047) (31,156) (27,438) Debt/EBITDA (x) 1.0 1.0 0.4 0.3 0.2
NET CASH FLOW (a+b+c) 15,635 8,896 74,464 64,010 74,442 Net D/E (x) -0.2 - 0.2 - 0.5 - 0.6 - 0.6
EO Items, Others (18,444) (18,917) (1,979) 104 (1,702) Interest Coverage (x) 11.5 15.7 24.2 56.8 76.3
Closing Cash & Equivalents 34,079 27,813 76,442 63,906 76,144 PER SHARE DATA (Rs)
Source: Company, HDFC sec Inst Research EPS 18.9 19.6 29.5 33.1 38.0
Dividend 5.0 3.0 4.3 5.0 6.0
Book Value 106.5 130.5 156.6 183.9 215.5
VALUATION
P/E (x) 34.4 33.2 22.0 19.6 17.1
P/BV (x) 6.1 5.0 4.1 3.5 3.0
EV/EBITDA (x) 19.2 17.7 12.4 11.4 9.5
EV/Revenues (x) 5.5 5.4 4.4 3.9 3.3
OCF/EV (%) 3.5 2.6 9.9 7.4 9.5
FCF/EV (%) 2.0 0.1 8.8 6.3 8.3
FCFE/Mkt Cap (%) 1.2 1.4 5.9 5.2 5.9
Dividend Yield (%) 0.8 0.5 0.7 0.8 0.9
Source: Company, HDFC sec Inst Research

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 SUN PHARMA: RESULTS REVIEW 3QFY17

RECOMMENDATION HISTORY
Date CMP Reco Target
Sun Pharma TP
1,000 15-Feb-16 848 BUY 953
23-Jan-17 643 BUY 810
900 15-Feb-17 649 BUY 850
800

700

600

500 Rating Definitions

Dec-16
Oct-16
Aug-16

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Apr-16

Nov-16

Jan-17
Feb-16

Sep-16

Feb-17
May-16

Jun-16
Jul-16
Mar-16

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 SUN PHARMA: RESULTS REVIEW 3QFY17

Disclosure:
We, Amey Chalke, MBA and Siddhant Mansukhani, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect
our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,
Senapati Bapat Marg, Lower Parel, Mumbai - 400 013
Board : +91-22-6171-7330 www.hdfcsec.com

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