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The Taro advantage

Sun Pharma reported net profit of Rs 4.4 bn, up 42% on an adjusted basis, which is higher than our estimate of Rs 3.5 bn, essentially due to improvement in overall margins on stronger performance of Taro.

Sun Pharma reported net profit of Rs 4.4 bn, up 42% on an adjusted basis, which is higher than our estimate of Rs 3.5 bn, essentially due to improvement in overall margins on stronger performance of Taro. At Rs 14.6 bn, sales were up 45%, but 8% lower than our estimate. However, the real surprise was Taro, which showed sequential improvement in the operating margin, to 30% from 18%.

The raw material to sales ratio, at 21.4%, was exceptionally low due to a one-time material cost benefit, excluding which material costs were 24%, still lower than our estimate. Other costs were largely in line. Overall, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin, at 30.3%, was marginally lower YoY but 600 bp (basis point) higher than our estimate. Net profit was also high on account of lower tax and higher other income.

Domestic formulations grew 20%, in line with our estimate. The company expects sales to grow 28-30% in FY12, which we think implies a strong outlook both on the domestic and the US market. We believe guidance could include the potential for upside from one-off opportunities in gemcitabine, repaglinide and tiagabine. In addition, the company has launched its two-vial docetaxel in the US, which has yet to contribute to sales.

R&D expense was R990m for Q4 at 6.7% to net sales. The company filed 8 ANDAs (abbreviated new drug applications) in the quarter, for a total of 25 in FY11, including filings from Caraco and Taro. Two ANDAs were approved in the quarter. Cumulative filings stand at 377, of which 152 are pending approval.

A joint venture with MSD (Merck) could benefit the company in India and other emerging markets. Emerging markets grew 7% on a constant dollar basis for the full year and 42% in the quarter.

We have marginally changed our estimates post-results, incorporating improvement in Taro, while at the same time maintaining a 30%-odd base Ebitda margin estimate. We roll our TP (target price) over to March ’12 while continuing to value the base business at 24x (times) our 12-month forward EPS (earnings per share) estimate of R22.3. We add R10 for para-IV value. We value the base business at a 20% premium to the five-year historical average for the sector (22x), given higher growth than peers in the domestic market.

Our TP remains unchanged at R545, suggesting a potential return of 23%, which implies an overweight rating per HSBC?s rating model. Since January, the stock has corrected 5% (Sensex down 4%). We believe that earnings growth could move the stock into positive territory. Cumulative 152 ANDAs are pending approval from FDA, which could include some limited competition opportunities. The key risks remain delays in US product approvals, deterioration in Taro operating performance, and protonix-related damages.

?HSBC Securities

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First published on: 06-06-2011 at 03:10 IST
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