Sun Pharmaceutical Q4FY12: Strong performance, but may not sustain
Strong Performance, But May Not Sustain
Sun Pharmaceutical Industries (SPL) reported stellar earnings for Q4FY12 and FY12, but Nirmal Bang believe they may not sustain going forward owing to the following reasons: a) Increase in tax rate in FY13 due to implementation of MAT for its partnership firm in Sikkim, b) Lower margins following a rise in R&D expenditure, c) Weak domestic formulations sales in H1FY13 due to pre-booked revenue in Q4FY12,and d) Lower revenue growth of Taro, as FY12 revenue was largely led by hike in product prices. At the current levels, Nirmal bang believe the stock is fairly valued and so they retain their Hold rating on it with a TP of Rs596, valuing it at 21x FY14E EPS of Rs28.3.
Q4FY12 results above expectations:
SPL’s Q4FY12 revenue at Rs23.4bn (up 60% YoY, 9% QoQ) and PAT of Rs8.2bn were above Nirmal bang/consensus estimates. Revenue growth was strong across geographies led by the US (up 83% YoY, 66% YoY in US dollar terms and flat QoQ – driven by Taro and anticancer drug-Lipodox sales), India (up 49% YoY; 21% YoY excluding pre-booked sales of Rs1.8bn) and ROW formulations (up 48% YoY, 31% YoY in US dollar terms and 15% QoQ). Margins stood at 41%, also above our/consensus estimates of 40%/39%, respectively, aided by robust margins of Taro and pre-booked domestic revenue. Tax rate at 16% was higher than normal, but was negated by higher other income (up 63%YoY due to maturing of investments), thereby leading to PAT growth of 85% YoY and 23% QoQ.
Taro’s performance beats expectations once again:
Taro once again exceeded expectations with revenue, EBITDA margin and PAT of USD145mn, 46% and USD47mn, respectively, all above Nirmal Bang/consensus estimates. However, a large portion of this was driven by product price hikes in the US, which, Nirmal Bang believe, is not sustainable. Also, with a thin US pipeline (only 16 ANDAs pending regulatory approval), Nirmal Bang believe SPL may struggle to sustain its FY12 performance.
Strong guidance, partially driven by favourable currency movement: SPL’s FY13 guidance of 18-20% revenue growth assumes an average rupee-dollar rate of Rs51 versus Rs47.9 in FY12, implying 6.5% growth due to favourable currency movement and another 12-13% growth in the base business. This indicates that maintaining growth on a high base may be difficult; barring Prandin, SPL’s own US generic pipeline looks quite ordinary to us.
Nirmal Bang roll over valuation to FY14E earnings; retain Hold rating on stock: Nirmal Bang roll over valuation to FY14E earnings and value SPL at 21xFY14E EPS of Rs28.3 to arrive at a target price of Rs596. They retain their Hold rating on the stock.
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