Sun Pharmaceutical Industries CMP Rs. 779 Target Rs. 796 Rating REDUCE Page 1 Stock performance 1m 3m 12m SUNP -1% 5% -14% Sensex 2% 6% 9% BSETHC 3% 11% -5% Financial Summary (Consolidated) Year Revenues (Rs. mn) EBITDA margin % PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE FY16 282,697 29.4% 54,011 22.4 34.7 22.0 18.9% 17.2% FY17E 319,190 32.9% 68,087 28.4 27.5 17.4 20.5% 18.2% FY18E 364,594 31.4% 75,669 31.5 24.7 16.0 19.8% 17.8% FY19E 403,527 32.1% 86,665 36.1 21.6 14.1 19.2% 17.7% Date 21 Sep 2016 Market Data SENSEX 28523 Nifty 8776 Bloomberg SUNP IN Shares o/s 2,407mn Market Cap Rs. 1,874bn 52-wk High-Low Rs. 934-704 3m Avg. Daily Vol Rs. 2,724mn Index member BSE Sensex Latest shareholding % Promoters 55.0 Institutions 35.4 Public 9.7 Company Update Dr HARITH AHAMED [email protected]+91 44 4344 0052 KRISHNA KIRAN KONDURI [email protected]+91 44 4344 0037 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Pricing concerns at Taro; downgrade to REDUCE Taro’s rising contribution to SUNP’s profitability: Taro Pharmaceuticals, SUNP’s 72%-owned subsidiary in the US, has been a key contributor to SUNP’s performance in recent years. In FY16, Taro accounted for 45% of SUNP’s consolidated PAT, up from 7% in FY11 Generic derma – strong growth despite muted volumes: Taro operates primarily in the US generic dermatology segment, which accounted for ~2/3 rd of its FY16 sales. Taro is among the largest players in the segment with a ~15% share of the market. The US generic derma market, currently estimated at ~$6bn, has grown at a CAGR of 19% in the last 3 years, despite a volume decline of 2%. The market has witnessed significant price increases across products in the last 3-4 years, with Taro leading price increases for many drugs. Entry barriers from longer development timelines and higher costs have meant more gradual entry of new players when compared to other generic segments Significant price increases across Taro’s portfolio: Price increases across its derma portfolio has been a key driver for Taro’s strong performance in recent years. For instance, clobetasol propionate, Taro’s top product, accounting for ~11% of sales in FY16, has witnessed price increases of >12x between 2013 and 2015. Sustainability of Taro’s price increase-driven performance has been a key concern for investors in SUNP ANDA approvals picking up, to impact pricing negatively: Our analysis shows a significant pick up in generic derma ANDA approvals in the past ~12 months. With several players ramping up ANDA filings in the segment over the past few years, we expect approval trends to pick up further from current levels. Taro’s Rx shares across top products have shown a flat-to-declining trend in recent months Recent DoJ subpoena adds to Taro’s pricing concerns: We observe negative yoy and sequential pricing trends for Taro’s key derma products. The recent subpoena from US DoJ Antitrust Division to Taro seeking details related to drug pricing has added to our concerns on sustainability of Taro’s price increases. We believe the heightened scrutiny will make it difficult for Taro to implement further price hikes. Taro’s significantly superior margins (vs. generic peers) are unlikely to sustain in a tougher generic derma pricing environment Valuation: We lower our PAT estimates for Taro by 1%/3% for FY17/FY18, while leaving our estimates for Sun ex Taro unchanged. For Sun ex Taro, we continue to factor 2HFY17 resolution of Halol Warning Letter and significant margin improvement in FY16-18 from Ranbaxy synergies, in-line with consensus. Our revised target price of Rs. 796 is 24x FY18E EPS of Rs. 31.5 plus Rs. 40 per share for tildrakizumab opportunity. Downgrade to REDUCE Rating: ▼ Target price: ▼ EPS: ▼
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Sun Pharmaceutical Industries CMP
Rs. 779
Target
Rs. 796
Rating
REDUCE
Page 1
Stock performance
1m 3m 12m
SUNP -1% 5% -14%
Sensex 2% 6% 9%
BSETHC 3% 11% -5%
Financial Summary (Consolidated)
Year Revenues (Rs. mn) EBITDA margin % PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
Adj. PAT 18,193 47,771 54,011 68,087 75,669 86,665 101,047
Adj. EPS 8.8 19.9 22.4 28.4 31.5 36.1 42.1
Revenues and Adj.
PAT to grow at a
CAGR of 12% and
17% respectively, in
FY16-20E
Expect multiple to
sustain on healthy
earnings growth
FY11-16 CAGR %
Revenue EBITDA Adj. PAT Price
38% 34% 24% 36%
Trading History – % of times stock traded
PE range<20x 20x-22x 22x-24x 24x-26x >26x
14% 39% 21% 17% 9%
Sun Pharmaceutical Industries CMP
Rs. 779
Target
Rs. 796
Rating
REDUCE
Page 9
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Absolute Rating Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon
REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon
SELL Stock expected to fall >10% over a 1-year horizon
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Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16
Rs.
Price Target
Sun Pharma – 3 Year Price and Rating History Report Date Price Target Reco.
16/Aug/16 801 817 Add
01/Jun/16 763 792 Add
28/Mar/16 846 911 Add
15/Feb/16 847 944 Buy
04/Jan/16 816 910 Buy
12/Aug/15 840 915 Add
15/Jun/15 814 901 Add
14/Aug/14 803 830 Add
27/Jun/14 628 693 Add
02/Jun/14 587 670 Buy
08/Apr/14 572 681 Buy
17/Feb/14 609 700 Buy
06/Jan/14 580 673 Buy
Sun Pharmaceutical Industries CMP
Rs. 779
Target
Rs. 796
Rating
REDUCE
Page 10
Disclaimer (Cont’d)
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incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:
Disclosure of Interest Statement SUNP
Analyst financial interest in the company No
Group/directors ownership of the subject company covered Yes
Investment banking relationship with the company covered No
Spark Capital’s ownership/any other financial interest in the company covered No
Associates of Spark Capital’s ownership more than 1% in the company covered No
Any other material conflict of interest at the time of publishing the research report No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:
Managing/co-managing public offering of securities
Whether Research Analyst has served as an officer, director or employee of the subject company covered No
Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No
Analyst Certification of Independence
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s
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