90% Rise in Q2 Net; it’s Time to Invest in Sun Pharma

Healthcare major Sun Pharmaceutical Industries’ consolidated profit increased 90.2% year-on-year to Rs 2,471 crore in the quarter ended September 2016, driven by operating income and lower finance cost.

Revenue during the quarter rose by 20.2% to Rs 8,265.1 crore against Rs 6,873.3 crore in same quarter last financial year and revenue, excluding other operating income, went up by 13.2% to Rs 7,764 crore.

Numbers were supported by other operating income that was valued at Rs 501 crore in Q2FY17 against Rs 15.13 crore in Q2FY16. It integrated USD 45 million of a milestone payment from Almirall SA (Spain) as a component of the licensing agreement for the development and commercialization of Tildrakizumab for psoriasis in Europe.

Dilip Shanghvi, Managing Director, said that the synergies from the Ranbaxy acquisition are gaining impetus and they are on track to achieve the targeted profits. These collaborations will continue to help in funding their growing specialty businesses.

Top-line without milestone payment was in line with outlook while bottom-line was far ahead of estimates. Profit was expected at Rs 1,685 crore on revenue of Rs 7,772.8 crore for the quarter.

EBITDA surged 69.1% year-on-year to Rs 3,167.7 crore and margin stretched sharply by 1110 basis points to 38.3 percent in Q2, which were far ahead of estimates of Rs 2,487 crore and 32%, respectively. EBITDA, excluding milestone payment, increased 43.5% to Rs 2,667 crore and margin grew by 730 bps to 34.3% in Q2.

Finance cost during the quarter declined 66% year-on-year to Rs 53.7 crore while tax expenses went up by 50% to Rs 441.6 crore. Research and development expenses as a percentage of revenue remained steady at 7.3% amounting Rs 570 crore against Rs 498 crore on a yearly basis.

Revenue from US formulations, which accounted for 48% of total income, soared 9% YoY to USD 555 million, including sales of Gleevec generic till July 2016 while India business grew by 11% YoY to Rs 2,009 crore in the quarter ended September 2016. Emerging markets sales during the quarter rose 22% YoY to USD 170 million and the Rest of World business increased by 3 percent to USD 79 million. Active pharmaceutical ingredients business demonstrated a 17 percent growth at Rs 367 crore for the quarter.

Declaring a strong second quarter performance backed by the exclusivity sales from generic Gleevec and non-recurring sales of $25 million, Sun Pharma reported 13% in net sales and an EBITDA margin of 40%.

Given that the annual revenue growth guidance has been upheld at 8-10%, the second half performance in the financial year is likely to be subdued -especially after the Gleevec exclusivity sales, supply disruption and lack of new product approvals this year.

However, the company’s performance on the bourses in the recent months has been more miserable than its ground performance. The Street has factored in most of the negatives or risks that have affected or could impact the company’s business. These include reasonable performance expected for the financial year, Halol plant under FDA import alert, chances of punitive action by the US Department of Justice and threat of a Clinton Presidency. The Sun Pharma share price has slipped 44% from its record high of Rs 1,200 hit in April 2015. With most of the negatives being cut in, there is restricted room for the stock price to sustain a major drop.

In contrast, there are many causes which could provide upside to the stock. A clearance from USFDA on re-inspection of Halol facility, enhancement in base business in the US, and intensification of its complex and limited competition specialty product pipeline. These should aid the company to perform strongly in spite of the challenges of pricing pressure and regulatory risks.

A Cautionary tone of the management in the earnings call indicates that a recovery in the company’s performance may not be immediate. It is also likely to be the case with the stock price on the bourses.