Recommendation: Buy
Price target: Rs1,287
Current market price: Rs1,042

Result highlights

• Sun Pharma reported a strong top line growth of 24.6% year on year (yoy) in Q2FY2008 to Rs667.9 crore. The top line was significantly higher than our estimate of Rs632 crore. The strong growth was driven by an increase of 26.3% in its domestic business and a 19.2% growth in its exports.

• The domestic formulation business grew by 31.2% to Rs372.0 crore. This quarter was phenomenal for this business, which saw the highest ever revenues and growth rates. Going forward, the company expects the growth to moderate to more sustainable levels. We believe Sun Pharma’s domestic formulation business will continue to outpace the industry and grow at a compounded annual growth rate (CAGR) of 20% over FY2007-09.

• Caraco Pharma, Sun Pharma’s US subsidiary, continued with its impressive performance by registering a 46% growth in the revenue to $41.4 million (against our estimate of $37 million) and a 100% jump in the net profit to $4.6 million in the quarter. 

• Sun Pharma demonstrated excellent cost control during the quarter, with margins expanding by 420 basis points to 36.1%, the highest operating profit margin (OPM) reported by the company so far. The sharp margin improvement was driven by a broad-based cost reduction: a 260-basis-point reduction in the raw material cost due to an improved product mix; a 30-basis-point decline in the staff cost; and a 240-basis-point dip in the other expenditure. The margin expansion caused the operating profit (OP) to grow by a robust 41.0% to Rs240.9 crore in Q2FY2008. 

• Despite a robust operating performance, Sun Pharma’s net profit growth was restricted to just 17.2% at Rs218.6 crore during the quarter. The profit was in line with our estimate of Rs213 crore. The profit growth slowed down due to the sharp 72% reduction yoy in the other income. 

• Sun Pharma’s recent wins in the Para IV patent challenges indicate the future potential of its US business. The company has recently announced favourable outcomes on four Para IV challenges, generic Protonix, generic Trileptal, generic Effexor XR and generic Exelon, thus winning a 180-day exclusivity (in certain cases, the same is shared with a few other players) for supplying these products in the USA. While the company is still evaluating its launch options for generic Protonix and generic Exelon, it has already launched generic Trileptal and is awaiting the US Food and Drug Administration’s (US FDA) approval for generic Effexor XR. Upon receiving the approval it will evaluate the latter’s launch and/or settlement options.

• Taro has further pushed its shareholders’ meet until after the announcement of its audited results for 2006 and H1CY2007. There is no clarity on the timeline of the result announcements. With a 25% stake in Taro, Sun Pharma’s management remains confident of closing the transaction after the shareholders’ meeting.

• At the current market price of Rs1,042, Sun Pharma is valued at 23.3x FY2008E and 19.6x FY2009E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,287.