Ritik Gupta | Pee Aar Securities Ltd. 1 Ritik Gupta | Pee Aar Securities Ltd. SUM PHARMASUTICALS INDS LTD. Healthcare | Drugs & Pharma | Research & Development Sun Pharma has shown great results from April 2020 to March 2021. As per my fundamental analysis the investors who are long in Sun Pharma should HOLD it for long term investment (at least 3 years). Sun Pharma can give you close to 13% CAGR in 3 years and those investors who are thinking of going long on Sun Pharma should wait for the dip. It can show a little correction in some time then it will be the right opportunity to ENTER. Investors who are long can go for COST AVERAGING that time. RITIK GUPTA: 10 th June 2021 Premium Coverage
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Ritik Gupta | Pee Aar Securities Ltd. 1
Ritik Gupta | Pee Aar Securities Ltd.
SUM PHARMASUTICALS INDS LTD.
Healthcare | Drugs & Pharma | Research & Development
Sun Pharma has shown great results from April 2020 to March 2021. As per my fundamental analysis the investors who are long in Sun Pharma should HOLD it for long term investment (at least 3 years). Sun Pharma can give you close to 13% CAGR in 3 years and those investors who are thinking of going long on Sun Pharma should wait for the dip. It can show a little correction in some time then it will be the right opportunity to ENTER. Investors who are long can go for COST AVERAGING that time.
un-Pharmaceuticals, the country's largest pharma company has seen a meteoric rise to the top of the
pharma world in its four-decade history. A successful track record of acquisitions has today made it the
world's fourth largest generic pharma company. In the last five years though, hit by near simultaneous
knocks, Sun lost the market's favor. It still trades 40 per cent lower from its peak last seen in 2015. Sun's
investments in specialty drugs have now started to pay-off (specialty drugs are complex and expensive). The
move requires heavy upfront investments. Returns are uncertain till the end. Sun is estimated to have spent
$2 billion in specialty drugs. Without going anywhere. Until now, earnings from specialty drugs have just
begun. Sun has a lot of scope for multi-year gains. It is now selling more specialty drugs than before the
pandemic. Furthermore, Sun's domestic business is growing faster than its peers. On the chance that
specialty takes time to scale up, the stock has already priced in a number of negatives. From quality issues at
its Halol manufacturing facility, to the increased competition in US generics space. From the infamous
whistleblower complaint (now resolved) to price-fixing issues in the US (now settled). From lower sales of its
Israeli subsidiary to the impact of covid-19. The downside in Sun therefore is limited, especially when its
formidable domestic business provides a cushion to earnings growth. Sun is thus set to go up from current
levels. We recommend you buy Sun Pharma before earnings start gaining momentum.
Why we like Sun Pharma
The only Indian company to make inroads into the difficult specialty market. Sun has a portfolio of nine
specialty drugs - the highest among Indian pharma companies. Market leader. Sun is the market leader in
India with a share of 8.2 per cent. What's more, it is the leader in nine therapies.
Why you should buy Sun Pharma now
Specialty bet paying off. Sun's investments in specialty drugs have started paying off. These will drive earnings
up going forward. Domestic business growing faster than industry. Sun's domestic business is no slouch
either. The market leader has been growing faster than its peers.
What's special about Sun Pharma?
World's 4th largest generic pharma company. Sun has improved its global generic pharma ranking from 5th
largest, five years ago, to one place up. With revenue worth over $ 4.4 billion today, it also ranks 11th in the
US generic market. It has 43 manufacturing sites across the world and is present in more than 100 countries.
Diversified revenue base: Over the years, Sun has diversified its business away from the US and into other markets. Five years ago, US formulations brought in 50 per cent of revenue. Today, it makes up just 33 per cent. India, five years ago, brought in 24 per cent of revenue, but today accounts for 30 per cent.
India's largest domestic pharma company: Sun is the largest domestic pharma company with a market share of 8.2 per cent. What's more, it has held on to its market leadership position even with the tumultuous years of late. The following graphic shows Sun's position today.
S
Ritik Gupta | Pee Aar Securities Ltd. 3
COMPANY DETAILS
DIRECTORS DETAILS
DIN Director Name Designation Appointment Date
00005561 SUDHIR VRUNDAVANDAS VALIA Director 31 January 1994
00179072 KALYANASUNDARAM IYER NATESAN
SUBRAMANIAN
Wholetime
Director
01 April 2010
00004612 GAUTAM BHAILAL DOSHI Director 25 May 2018
00005443 SAILESH TRAMBAKLAL DESAI Wholetime
Director
20 September 2006
05299764 ISRAEL MAKOV Director 29 May 2012
00291126 VIVEK CHAAND SEHGAL Director 14 November 2017
00005588 DILIP SHANTILAL SHANGHVI Managing
Director
01 April 2008
06809515 REKHA SETHI Director 13 February 2014
CIN L24230GJ1993PLC019050
Company Name SUN PHARMACEUTICAL INDUSTRIES LIMITED
Company Status Active
ROC ROC-Ahmedabad
Registration Number 19050
Company Category Company limited by Shares
Company Sub Category Non-govt company
Class of Company Public
Date of Incorporation 01 March 1993
Age of Company 28 years, 3 month, 2 days
Ritik Gupta | Pee Aar Securities Ltd. 4
Ritik Gupta | Pee Aar Securities Ltd. 5
RED FLAGS RELATED TO THE MANAGEMENT AND OTHER KMP’S
Mr. Sudhir Valia stepped down from the position of Whole-time Director of the Company to Non-Executive
Director of the Company, with effect from May 29, 2019. He continues to be a Non-Promoter, Non-Executive
and Non-Independent Director of the Company. He is part of Promoter Group but not a promoter.
The reason given behind the stepped down was the business of Mr. Sudhir Valia personal business is growing
and it is taking most of the time. Mr. Sudhir Valia’s main business is from “Suraksha Asset Reconstruction
Limited” which was related party to “Suraksha Realty” whose was under the impression of taking loans from
“Sun Pharmaceutical Industries Limited”
Sun Pharma did not disclose a $325 million loan to an employee and for a whistle-blower letter sent to the
SEBI which makes several allegations of insider trading and questionable real estate and stock market
transactions involving Valia. Sun Pharma has denied these allegations.
Interestingly, till recently Valia-owned companies Lakshdeep Investments and Finance Private Limited
(LIFPL), Suraksha Realty and Surakhsa Asset Management Company were in news for making a bid for Jaypee
Infratech which owns vast tracks of land bank on both sides of Delhi-Agra Expressway. Jaypee was sent to
the NCLT after it defaulted to bank debt worth Rs 100 billion and Lakshdeep was one of the five bidders.
Sun insiders said Valia, who joined Sun Pharma in 1994 and is a chartered accountant, has been involved with
taxation and finance at the company since the company's initial years. But over the years, he was more
involved in investing in other companies. Insiders said it is Shanghvi and Valia who take all the calls on how
to run Sun Pharma. "Whatever decision Valia takes, it is in concurrence with Shanghvi," said a former
employee.
Many have speculated it was Shanghvi who has pumped his own money through Lakshdeep. But Valia, in
earlier interviews to this denied allegations that Shanghvi invested in his personal investment companies.
Lenders said Suraksha Realty and Lakshdeep raised funds against Sun Pharma and Sun Pharma Advanced
Research Company Limited (SPARC) shares held by LIFPL, its subsidiary and the individual directors. The
borrowings were not to exceed Rs 35 billion.
Analysts said while calculating this limit, entire borrowing, as well as all contingent exposures of LIFPL and
its subsidiaries, was taken into account. The cover (i.e., the ratio of market value of Sun Pharma and SPARC
shares held by Valia Group to total borrowings) was always be at least 1.75 times at all times.
Ritik Gupta | Pee Aar Securities Ltd. 6
RED FLAGS RELATED TO THE RELATED PARTY
SEBI had received two whistleblower complaints, wherein allegations were made against Sun
Pharmaceutical Industries Ltd (SPIL) and its wholly-owned subsidiary Sun Pharmaceutical Laboratories Ltd
(SPLL), alleging that the firms had been diverting funds through its sole distributor in India, Aditya Medisales
Ltd. Further, it was alleged that transactions with Aditya Medisales Ltd (AML) were ongoing for several years.
However, the firm did not disclose as a related party of SPIL before financial year 2017-18.
Shanghvi, Valia, Desai, and Subramanian, by virtue of their positions, were in charge of the firm's operations
and decision-making process, therefore allegedly violated provisions of Listing Obligation and Disclosure
Requirements (LODR) norms. SEBI noted that they allegedly failed to ensure conformity with the regulatory
provisions applicable to the listed entity.
The panel of whole-time members of SEBI approved the recommendation and the entities remitted their
respective settlement amounts in January 2021, Sebi noted in separate settlement orders. According to
separate settlement orders, Sun Pharmaceutical paid over Rs 56.11 lakh towards settlement charges and
Shanghvi paid Rs 62.35 lakh. Besides, the firm's whole-time directors -Sudhir V Valia and Sailesh T Desai- paid
Rs 37.41 lakh each, and Kalyanasundaram Subramanian had to remit a settlement amount of Rs 36.97 lakh.
In addition, Chief Financial Officer Uday Baldota and compliance officers -Sunil Ajmera and Ashok I Bhuta-
paid their respective settlement amounts which were in the range of Rs 18.48 lakh to Rs 24.65 lakh.
The most important Factor here is AML’s Director, Mr. Bhushan Prakash Mehta was director in Suraksha
Realty Ltd. (where Mr. Sudhir Valia was the director) for just 7 days starting from 24th June 2015 to 30th June
2015 and in Vijay Suraksha Realty Ltd. for 8 months.
For the complete penalty imposed by the SEBI, refer this link given below:
Total of Rs 14073.80 (millions) is pending against the Income tax dues, Sales tax dues, Excise duty, interest
charged on them and penalty imposed on them. Major amount is from 2006-07 to 2011-12 from Income tax.
The matter is pending in ITAT.
FINANCIALS
Ritik Gupta | Pee Aar Securities Ltd. 22
Ritik Gupta | Pee Aar Securities Ltd. 23
Ritik Gupta | Pee Aar Securities Ltd. 24
Ritik Gupta | Pee Aar Securities Ltd. 25
Key Highlights:
1. From the above given data we can clearly see that Gross margin has fallen by 2% i.e., from 73% of sales to 71% of the sales. It is mainly due to the increase in the cost of direct cost. Sun's overall material cost is up by 2% as compared to the previous year. Therefore, increase in cost of its materials has directly shown impact on gross margin.
2. EBITDA has fallen by 1% from the previous year but overall fall in EBITDA is much more than 1% if we compare it from the past 5-year data. Company is able to generate 10% less EBITDA now as compared to 2015, 2016.
3. Fall in EBITDA is clear indication of fall in net margin and obviously EPS.
4. Net margin and ROE is all time low. It is constant from past 3 years i.e., 13% and 9% respectively.
5. Although company's Sales CAGR is 25% and NP CAGR is 17% but it is only the increase on amount not the growth factor. Market price does not justify the increase because of the static growth.
6. CAGR of Operating cash flow of the company is 21% but there is an outlier (FY 2018-19) where operating cash flows are very less. Almost 75% low as compared to the previous year.
7. CAGR of Free Cash Flow of the company is 23% but there is an outlier (FY 2018-19) where free cash flows are in negative which means extensive Capital Expenditure (CAPEX) is done by the company in FY 2018-2019. Its clear outcome can be seen in year 2020 where Free Cash Flow are skyrocketing.
8. CAGR of EPS is 17% but rolling return on the EPS from past 11 years is close to 3% which is very low. Money invested in the FD would have given the higher rolling return.
9. ROE, ROA, ROCE of the company is all time low. Company is not able to employ its capital effectively. It is able to generate 8% of the sales even after the accusation of Ranbaxy and Taro.
Ritik Gupta | Pee Aar Securities Ltd. 26
12.10
15.70
11.108.70
29.00
18.9018.90
15.20
28.80
25.70
17.50
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
2010 2012 2014 2016 2018 2020 2022
PR
ICE
YEARS
EPS TREND
Ritik Gupta | Pee Aar Securities Ltd. 27
INCOME STATEMENT (31.03.2021)
Sun Pharmaceutical Industries Limited
Registered Office: Sun Pharma Advanced Research Centre, Tandalja, Vadodara - 390012.
Corporate Office: Sun House, CTS No. 201 B/1, Western Express Highway, Goregaon (E),
• After 3 years company has start showing revival in terms of EPS. In 2021 EPS of the company was Rs 12.1 same as it’s previous TTM. It shows company has maintained its EPS in the stringent times of COVID.
• BVPS of the company is increasing constantly from year 2011. It is good for calculating intrinsic value for determining the stock actual valuation. But the rate it is increasing is constantly decreasing from double digit growth to single digit. There could be three possible reasons for it that is the stock splits, bonus given and accusations made by the company in the recent years.
• Free cash flow in year in 2019 is in negative because of the CAPEX. Now in 2021 we can see the impact of that CAPEX. Sun is able to generate all time high free cash flows.
• TTM ROE of the company is in very low because company’s in not able to generate sufficient net profits in the recent years.
• Although we can see the TTM Operating Margin at 27.84% and 2020 Operating Margin at 23.22% which is a good sign. Sun pharma has successfully maintained its Operating margin ratio above 25%.
Ritik Gupta | Pee Aar Securities Ltd. 36
• Net Margin of the company is very stringent from past 12 months but if we look at the annual data it is acceptable.
• Company is not able to utilize its assets optimally. It is only generating returns less than 5% from past 5 years.
• Sun’s Debt Equity is all time low from past 12 months. It is lowest amongst its competitors. There is very less debt obligation in the company as compared to the equity.
• Current ratio of the company is on the higher side but still a little improvement can be seen from 2020 and past 12 months data. It shows either the current liabilities have gone down or the current assets have been increased. Both the situation of the company is favorable from the investor’s point of view.
• Quick ratio eliminating the effect of funds blocked in the inventories is also on the favorable side.
• After attaining the all-time low Debt Equity ratio, it was obvious that debt obligation of the company would have definitely gone down. Interest coverage ratio is on the best side from 6 years. Interest obligations can be covered 20.79 times.
• Overall efficiency of generating cash from the sales has drastically gone up by approximately 70%. Now the money will be received after adding 70% delay i.e., 42 days form the usual conversion time.
• There is no change in inventory holding period which procuring inventories are smooth.
• These is a fall in conversion of debtors into sales and rise in average collection period.
• 20% faster payments have been realized by the company as compared to the previous payable period.
• TTM P/E of the company is all time high. It is even Higher from the industry average i.e., 45. I have done intrinsic value analysis and as per my understanding and best judgement I could say that stock price of the Sun Pharma is a little overvalued but it is also justified by its strong financials.
• TTM P/B ratio is more than 1, even more than 2 which clearly shows stock is overvalued as compared to its intrinsic value. CMP is 3.48 times of its Book Value per Share (BVPS).
• Dividend yield of the company is 1.14% in 2020, which was all time high in 10 years.
Ratios and Formulae (Declared by the Company) As at
31.03.2021 As at
31.03.2020
(i) Debt equity ratio = (Long-term borrowings + Short-term borrowings + Current maturities of long-term borrowings and lease liabilities) / (Total equity)
0.27 0.26
(ii) Debt service coverage ratio = Profit after tax but before finance costs, depreciation and exceptional item / (Finance costs + Short-term borrowings + Current maturities of long-term borrowings and lease liabilities)
1.45 0.75
(iii) Interest service coverage ratio = Profit before finance costs, exceptional item and tax / Finance costs
9.73 8.97
(iv) Asset cover = (Total assets - Intangible assets - Current liabilities excluding Short-term borrowings and Current maturities of long-term borrowings and lease liabilities) / (Long-term borrowings + Short-term borrowings + Current maturities of long-term borrowings and lease liabilities)
4.76 4.97
Ritik Gupta | Pee Aar Securities Ltd. 38
Fund houses invested in the stock Fund Mar-21 Dec-20 Sep-20 Jun-20 Mar-20
ICICI Prudential Mutual Fund 3.338 3.142 3.202 3.208 3.484
SBI Mutual Fund 2.000 1.974 1.898 1.658 1.151
Nippon India Mutual Fund 1.489 1.414 1.382 1.493 1.297
HDFC Mutual Fund 1.387 1.148 0.780 0.608 1.021
UTI Mutual Fund 0.673 0.816 0.947 0.895 0.911
Aditya Birla Sun Life Mutual Fund 0.612 0.661 0.587 0.763 0.893
Mirae Asset Mutual Fund 0.542 0.335 0.344 0.435 0.430
Kotak Mahindra Mutual Fund 0.299 0.336 0.248 0.113 0.440
L&T Mutual Fund 0.282 0.280 0.349 0.417 0.278
IDFC Mutual Fund 0.210 0.259 0.206 0.242 0.320
DSP Mutual Fund 0.202 0.175 0.107 0.086 0.074
Invesco Mutual Fund 0.183 0.159 0.190 0.208 0.192
Tata Mutual Fund 0.163 0.127 0.073 0.066 0.042
Canara Robeco Mutual Fund 0.139 0.105 0.131 0.040 -
Franklin Templeton Mutual Fund 0.128 0.128 0.128 0.103 0.170
Edelweiss Mutual Fund 0.089 0.122 0.034 0.038 0.093
Sundaram Mutual Fund 0.069 0.072 0.094 0.094 0.031
PPFAS Mutual Fund 0.058 0.050 0.050 0.041 0.014
Baroda Mutual Fund 0.047 0.034 0.012 0.005 0.011
HSBC Mutual Fund 0.036 0.036 0.054 0.041 0.013 Figures given above are % of equity capital
Given below are the charts showing Peer Comparison more efficiently and effectively. Kindly refer these charts for better understanding of the performance and financial position of the Sun Pharma as compared to the other industry leading companies.
0 10 20 30 40 50 60 70
Sun Pharma.Inds.
Dr Reddy's Labs
Cipla
Cadila Health.
Aurobindo Pharma
Torrent Pharma.
Biocon
55.69
44.79
31.74
28.42
10.53
38
63.15
P/E COMPARISON
Ritik Gupta | Pee Aar Securities Ltd. 40
0 1 2 3 4 5 6 7 8 9
Sun Pharma.Inds.
Dr Reddy's Labs
Cipla
Cadila Health.
Aurobindo Pharma
Torrent Pharma.
Biocon
3.48
4.95
4.16
5.02
2.56
8.15
6.06
P/B COMPARISON
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Sun Pharma.Inds.
Dr Reddy's Labs
Cipla
Cadila Health.
Aurobindo Pharma
Torrent Pharma.
Biocon
0.07
0.17
0.08
0.28
0.24
0.62
0.48
D/E COMPARISON
Ritik Gupta | Pee Aar Securities Ltd. 41
-26.02
-3.88
55.560.24
88.45
24.96
4.77
-40
-20
0
20
40
60
80
100
PROFIT GROWTH % COMPARISON
Sun Pharma.Inds.
Dr Reddy's Labs
Cipla
Cadila Health.
Aurobindo Pharma
Torrent Pharma.
Biocon
0.82
0.48
0.32
0.55
0.42
1.24
0
0.2
0.4
0.6
0.8
1
1.2
1.4
DIVIDEND YIELD % COMPARISON
Sun Pharma.Inds.
Dr Reddy's Labs
Cipla
Cadila Health.
Aurobindo Pharma
Torrent Pharma.
Biocon
Ritik Gupta | Pee Aar Securities Ltd. 42
14.02
15.48
17.83
15.14
18.49 18.7
10.74
0
2
4
6
8
10
12
14
16
18
20
ROCE % COMPARISON
Sun Pharma.Inds.
Dr Reddy's Labs
Cipla
Cadila Health.
Aurobindo Pharma
Torrent Pharma.
Biocon
25.35
20.3222.19 22.12
21.3
31.04
22.14
0
5
10
15
20
25
30
35
OPERATING PROFIT MARGIN % COMPARISON
Sun Pharma.Inds.
Dr Reddy's Labs
Cipla
Cadila Health.
Aurobindo Pharma
Torrent Pharma.
Biocon
Ritik Gupta | Pee Aar Securities Ltd. 43
6.33
11.71
14.11
19.63
27.54
23.49
10.21
0
5
10
15
20
25
30
ROE % COMPARISON
Sun Pharma.Inds.
Dr Reddy's Labs
Cipla
Cadila Health.
Aurobindo Pharma
Torrent Pharma.
Biocon
Sun Pharma.Inds.17%
Dr Reddy's Labs12%
Cipla14%
Cadila Health.14%
Aurobindo Pharma32%
Torrent Pharma.7%
Biocon4%
PAT 12M (Rs.Cr.)
Ritik Gupta | Pee Aar Securities Ltd. 44
Sun Pharma.Inds.3%
Dr Reddy's Labs33%
Cipla9%Cadila Health.
6%
Aurobindo Pharma26%
Torrent Pharma.21%
Biocon2%
EPS 12M (Rs.)
Sun Pharma.Inds.30%
Dr Reddy's Labs16%
Cipla14%
Cadila Health.12%
Aurobindo Pharma10%
Torrent Pharma.9%
Biocon9%
Mkt Cap (Rs.Cr.)
Ritik Gupta | Pee Aar Securities Ltd. 45
Ritik Gupta | Pee Aar Securities Ltd. 46
Ritik Gupta | Pee Aar Securities Ltd. 47
Ritik Gupta | Pee Aar Securities Ltd. 48
NOTES AND FEEDBACK FORM ………………………………………………………………………………………………………………………………………………………………………