COMPANY UPDATE

RETAIL EQUITY RESEARCH

Sun Pharmaceutical Industries Ltd.
Pharmaceuticals
BSE CODE: 524715
Bloomberg CODE: SUNP:IN
HOLD
Rating as per Large Cap 12 months investment period
NSE CODE: SUNPHARMA
CMP Rs. 571 TARGET Rs. 597 RETURN 5%
SENSEX: 35,548

19th June, 2018

Company Data
Halol facility clearance: A big boost
Sun Pharma is India’s top drug maker and world's fifth largest specialty generic Market Cap (Rs. cr) 136,964
pharmaceutical company by revenue with 41 manufacturing facilities spread across Enterprise Value (Rs. cr) 129944
6 continents. Outstanding Shares (cr) 239.9
• Revenue fell 2% YoY in Q4FY18 due to lower US and less than expected India sales. Free Float 46%
• US sales declined 7% YoY mainly on account of sharp fall in Taro sales (down 11% Dividend Yield 0.4%
YoY) due to continued pricing pressure in the US and lack of significant approvals.
52 week high Rs. 608
• EBITDA margin expanded by 340 bps YoY to 25.1% led by improved gross margin.
52 week low Rs.433
• We expect revenue/Adj.PAT to grow at 14%/42% CAGR over FY18-20E driven by
6m average volume (cr) 0.1
expected pick-up in US sales and key speciality & generic launches.
Beta 0.8
• Given improved visibility for key drug launches in the US post Halol plant
resolution, increased spend on specialty business and expected recovery in India Face value Rs. 1
business, we change our rating to ‘HOLD’ from ‘SELL’. Shareholding (%) Q2FY18 Q3FY18 Q4FY18
• Our revised target price stands at Rs597 based on 23x FY20E PE. Promoters 54.4 54.4 54.4
FII’s 18.2 17.2 16.3
Weak US and subdued India sales drags revenue
Sun Pharma reported 2% YoY decline in net revenue in Q4FY18 due to weak US sales which declined by MFs/Insti 13.9 14.9 16.3
7% YoY impacted by pricing pressure, lack of significant approvals and lower generic sales (Imatinib). Public 7.6 7.5 7.3
Further, lower Absorica sales due to change in co-pay program, which resulted in sharp decline in
prescriptions, impacted the sales. However, with changes in the rebate system, we expect improvement Others 5.9 6.0 5.7
from Absorica prescription. Further, Taro sales declined by 11% YoY in Q4FY18. We expect US sales to Total 100.0 100.0 100.0
register 17% CAGR over FY18-20 on the back of ramp-up in specialty portfolio coupled with strong
product pipeline in the US market which includes 139 ANDAs and 3 NDAs awaiting approval with the Price Performance 3 Month 6 Month 1 Year
USFDA. Further, clearance of Halol plant, which is Sun pharma’s largest facility catering to the US market Absolute Return 10% 10% 5%
is a key positive. The company is planning to commercialize key products in specialty dermatology
Absolute Sensex 5% 7% 14%
portfolio including Ilumya, Yonsa, OTX-101, tildrakizumab and Seceria in the US market in FY19. The
company has already launched Bromsite and Odomzo in the US. It has already received the approval for Relative Return* 5% 3% (9%)
Yonsa, a product for treating prostate cancer and is targeting to launch the product in this quarter *over or under performance to benchmark index
followed by Ilumya in Q2FY19. During the quarter, the company filed 19 ANDAs and received 5
approvals. On the R&D front, the company expects R&D investments to be in the range of 8-9% of FY19
sales, majority of which will be on specialty. India sales grew by just 2% YoY in Q4FY18 impacted by GST
and weak performance of key brands like Volini and Revital due to intense competition. Further,
formulation sales in Emerging markets rose 5% YoY supported by broad-based growth across key
markets such as Romania, Eastern Europe, Middle East and North Africa.
Expect 579 bps expansion in EBITDA margin over FY18-20E
Despite challenging US generic pricing environment, EBITDA margin expanded by 340 bps YoY during
the quarter to 25.1% led by higher gross margin mainly due to better product mix as well as lower COGS
for Taro. With improved EBITDA performance, Adj.PAT rose by 14% YoY. Going ahead, we factor in
530bps expansion in EBITDA margin to 26.5% in FY20E on the back of launch of limited competition
generic drugs and company’s increasing focus on speciality business where it continues to invest to Standalone (Rs. cr) FY18 FY19E FY20E
enhance its global specialty and complex generics pipeline. Further, company’s focus on cost control,
Sales 26,489 29,836 34,541
R&D rationalization and exclusive launches will support margin expansion.
Halol Plant resolution; a key trigger Growth (%) -16.1% 12.6% 15.8%
Sun Pharma has received the clearance for its Halol plant from the USFDA for the inspection conducted EBITDA 5,608 6,821 9,163
at its facility in Gujarat during the period February 12-23, 2018. This facility had been under FDA scanner
since September 2014 which restricted any product approval from this facility. This clearance is a big Margin(%) 21.2 22.9 26.5
boost for the company as this facility caters to the US market and it will pave the way for getting new PAT Adj 3,112 4,255 6,233
product approvals. The US business accounts for 35-40% of the revenue for Sun Pharmaceutical.
Outlook & Valuation Growth (%) -55.3% 36.7% 46.5%
Clearance of Halol facility, ramp up of generics and speciality business driven by increased investments Adj.EPS 13.0 17.7 26.0
augurs well for the company as it improves the launch visibility. Sun Pharma has been investing heavily
Growth (%) -55.3% 36.7% 46.5%
to build a pipeline of specialty products for the US market. Moreover, expectation of further market share
gains in Odomzo and BromSite (launched in FY17) and recovery in India business will support growth. P/E 44.0 32.2 22.0
Hence, we change our rating to ‘HOLD’ from ‘SELL’ with a revised target price of Rs 597 based on 23x
P/B 3.6 3.3 2.9
FY20E EPS. We increase our target multiple to factor in improved launch visibility and key speciality &
generic launches. EV/EBITDA 25.1 20.3 14.6
RoE (%) 7.6 9.7 12.7
D/E 0.2 0.2 0.2
Quarterly Financials (Consolidated)
Profit & Loss Account
YoY QoQ
Particulars (Rs cr) Q4FY18 Q4FY17 Growth % Q3FY18 Growth %
Sales 6,977 7,137 (2.2) 6,653 4.9
EBITDA 1,683 1,548 8.8 1,453 15.8
Margin (%) 24.1 21.7 245 21.8 228
Depreciation 455 338 34.6 339 34.2
EBIT 1,228 1,209 1.6 1,114 10.2
Interest 155 45 245.4 95 63.0
Other Income 303 225 34.9 129 134.3
Exceptional Items - - - - -
PBT 1,376 1,389 (1.0) 1,148 19.8
Tax (177) 44 (498.8) 749 (123.6)
PAT 1,552 1,345 15.4 399 288.8
Minority Interest (243) (121) 101.4 (34) 619.3
Reported PAT 1,309 1,224 7.0 365 258.2
Adjustment - - - - -
Adj PAT 1,309 1,224 7.0 365 258.2
No. of shares (cr) 239.9 239.9 - 239.9 -
EPS (Rs) 5.5 5.1 7.0 1.5 258.2

Source: Company, Geojit Research

Business performance
YoY QoQ
(Rs cr) Q4FY18 Q4FY17 Q3FY17
Growth % Growth %
US 2,372 2,554 (7.2) 2,124 11.6
India 1,963 1,916 2.4 2.085 (5.9)
Emerging Market (EM) 1,279 1,213 5.5 1,221 4.8
RoW 744 732 1.5 777 (4.2)
Total Formulations 6,357 6,416 (0.9) 6,207 2.4
APIs 332 395 15.9 370 (10.1)
Others 21 14 54.3 21 (0.7)
Total sales 6,711 6,825 (1.7) 6,598 1.7

Source: Company, Geojit Research

Change in estimates
Old estimates New estimates Change %

Year / Rs cr FY19E FY19E FY20E FY19E

Revenue 32,193 29,836 34,541 (7.3)
EBITDA 7,855 6,821 9,163 (13.2)

Margins (%) 24.4 22.9 26.5 (150bps)

PAT 4,957 4,255 6,233 (14.2)

EPS 20.7 17.7 26.0 (14.3)

 Consolidated Financials

Profit & Loss Account Balance Sheet

Y.E March (Rs cr) FY16 FY17 FY18 FY19E FY20E Y.E March (Rs cr) FY16 FY17 FY18 FY19E FY20E
Sales 28,270 31,578 26,489 29,836 34,541 Cash 13,989 15,141 9,929 11,302 15,717
% change 2.5% 11.7% -16.1% 12.6% 15.8% Accounts Receivable 6,796 7,203 7,815 8,809 10,208
EBITDA 8,324 10,089 5,608 6,821 9,163 Inventories 6,424 6,833 6,881 7,615 7,951
% change 3.9% 21.2% -44.4% 21.6% 34.3% Other Cur. Assets 2,941 3,547 2,920 3,179 3,519
Depreciation 1,014 1,265 1,500 1,604 1,703 Investments 1,309 1,192 7,143 7,143 7,143
EBIT 7,310 8,825 4,108 5,217 7,461 Gross Fixed Assets 19,571 22,142 24,748 25,414 27,814
Interest 477 400 518 508 479 Net Fixed Assets 10,833 12,139 13,246 12,307 13,004
Other Income 617 623 839 972 1,062 CWIP 2,527 2,801 2,465 4,200 3,800
PBT 7,450 9,048 4,429 5,681 8,044 Intangible Assets 4,181 5,536 5,607 5,607 5,607
% change 10.3% 21.4% -51.0% 28.3% 41.6% Def. Tax (Net) 2,126 2,178 1,975 1,975 1,975
Tax 935 1,212 845 1,023 1,448 Other Assets 3,032 4,526 6,103 6,103 6,103
Tax Rate (%) 12.5% 13.4% 19.1% 18.0% 18.0% Total Assets 54,158 61,095 64,084 68,239 75,026
Reported PAT 4,716 6,964 2,162 4,255 6,233 Current Liabilities 8,026 11,232 11,885 12,957 14,224
Adj* 685 - 951 - - Provisions - - - - -
Adj PAT 5,401 6,964 3,112 4,255 6,233 Debt Funds 8,338 8,091 9,752 8,752 8,252
% change 10.4% 28.9% -55.3% 36.7% 46.5% Other Liabilities 2,303 1,342 463 463 463
No. of shares (cr) 241 240 240 240 240 Equity Capital 241 240 240 240 240
Adj EPS (Rs) 22.4 29.0 13.0 17.7 26.0 Reserves & Surplus 31,164 36,400 37,861 41,540 47,197
% change 10.3% 29.3% -55.3% 36.7% 46.5% Shareholder’s Fund 31,405 36,640 38,101 41,780 47,437
DPS (Rs) 1.0 3.5 2.0 2.0 2.0 Minority Interest 4,085 3,791 3,884 4,288 4,651
Total Liabilities 54,158 61,095 64,084 68,239 75,026
BVPS (Rs) 130.5 152.7 158.8 174.1 197.7

Cash flow Ratios

Y.E March (Rs cr) FY16 FY17 FY18 FY19E FY20E Y.E March FY16 FY17 FY18 FY19E FY20E
Pre-tax profit 6,571 9,048 4,429 5,681 8,044 Profitab. & Return
Depreciation 1,730 1,285 1,500 1,604 1,703 EBITDA margin (%) 29.4 31.9 21.2 22.9 26.5
Changes in W.C 247 (409) (1,634) (914) (808) EBIT margin (%) 28.0 29.9 18.7 20.7 24.7
Others 127 (784) (321) (464) (583) Net profit mgn.(%) 19.1 22.1 11.7 14.3 18.0
Tax paid (1,988) (2,057) (845) (1,023) (1,448) ROE (%) 16.9 18.3 7.6 9.7 12.7
C.F.O 6,686 7,082 3,129 4,885 6,907 ROCE (%) 19.5 20.5 9.9 11.6 14.8
Capital exp. (3,404) (3,693) (2,271) (2,400) (2,000) W.C & Liquidity
Change in inv. 1,520 363 (5,951) - - Receivables (days) 89 87 109 109 109
Other invest.CF (2,488) (892) 839 972 1,062 Inventory (days) 362 307 338 338 338
C.F - investing (4,372) (4,222) (7,383) (1,428) (938) Payables (days) 64 75 83 83 83
Issue of equity 9 2 (125) - - Current ratio (x) 3.8 2.9 2.3 2.4 2.6
Issue/repay debt (829) (1,897) 1,661 (1,000) (500) Quick ratio (x) 3.0 2.3 1.7 1.8 2.1
Dividends paid (871) (292) (576) (576) (576) Turnover &Levg.
Other finance.CF (198) (99) (518) (508) (479) Gross asset T.O (x) 1.5 1.5 1.1 1.2 1.3
C.F - Financing (1,889) (2,285) 443 (2,084) (1,555) Total asset T.O (x) 0.5 0.5 0.4 0.4 0.5
Chg. in cash 426 575 (3,812) 1,373 4,414 Int. covge. ratio (x) 15.3 22.1 7.9 10.3 15.6
Closing cash 13,989 15,141 9,929 11,302 15,717 Adj. debt/equity (x) 0.2 0.2 0.2 0.2 0.2
Valuation ratios
EV/Sales (x) 4.9 4.4 5.4 4.7 3.9
EV/EBITDA (x) 16.3 13.3 25.1 20.3 14.6
P/E (x) 25.4 19.7 44.0 32.2 22.0
P/BV (x) 4.4 3.7 3.6 3.3 2.9
 Recommendation Summary (last 3 years) Dates Rating Target
25-April-16 BUY 970
06-June-17 BUY 823
23-February-17 BUY 741
12-September-17 SELL 413
19-June-18 HOLD 597

Source: Bloomberg, Geojit Research

Investment Rating Criteria

Large Cap Stocks; Mid Cap and Small Cap;
Buy - Upside is above 10%. Buy - Upside is above 15%.
Hold - Upside is between 0% - 10%. Accumulate - Upside is between 10% - 15%.
Reduce - Downside is more than 0%. Hold - Upside is between 0% - 10%.
Neutral - Not Applicable Reduce/Sell - Downside is more than 0%.
Neutral - Not Applicable

To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell. The recommendations are based on 12 month horizon, unless
otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to
medium term, there could be a temporary mismatch to rating.
For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being
upgraded to BUY or downgraded to a HOLD, REDUCE or SELL.
Neutral - The analyst has no investment opinion on the stock under review.

Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are
available hereunder. However, Geojit's research desk have reviewed this report for any untrue statement of material fact or any false or misleading
information.

General Disclosures and Disclaimers

CERTIFICATION
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expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities.

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Digitally signed by
ABHISHEK ABHISHEK KUMAR DAS
KUMAR DAS Date: 2018.06.19
13:28:24 +05'30'

Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom,
Kochi-682024, Kerala, India. Phone: +91 484-2901000, Website: www.geojit.com. For investor queries: customercare@geojit.com, For grievances:
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