SUN PHARMACEUTICAL

Sun Pharma has achieved a very good trade-off between its risks and returns. It is a safe bet for investors looking for the right mix of risk, growth and dividends
Beta: 0.29
Institutional Holding: 25.3%
Dividend Yield: 0.97%
P/E: 10.7
M-Cap: Rs 22,874 cr

SUN PHARMACEUTICAL — the largest and currently the most valuable domestic pharma company on the bourses — is a safe bet for investors looking for the right mix of risk, growth and dividends. The stock has depreciated by 9% during the year till date, compared to a 55% fall in the BSE Sensex.

BUSINESS:

Sun Pharma has established itself as a niche player in the chronic super-specialty therapeutic segments with a focus on the US and Indian generics market. Nearly 40% of the company’s total revenues are contributed by the US generics market and a similar proportion is accounted for by the domestic market.

The company has always followed a strategy of differentiation, which has paid rich dividends in the past. Be it venturing into neuro-psychiatry, acquiring US companies with manufacturing facilities, staying out of European markets or hiving off innovative research & development (R&D) into a separate company, Sun Pharma’s business model has proved to be superior to that of its peers.

The company earns around 55% of its revenues from its international businesses, with the US being its largest market. In the US, it is an integrated generic manufacturer with flexibility to manufacture onshore/offshore. The company’s strategy is to manufacture technically complex generics and it attempts to be the first to market these products. Taking calculated risks, the company has made several ‘at risk’ launches in the US market. As of end of September ’08, it had abbreviated new drug applications (ANDAs) for 96 products pending.

The company has a dominant presence in the domestic branded generics market. It is among the top three players for nearly half of the branded generics products in India. Despite this, Sun Pharma’s top 10 brands in the domestic market account for a modest 21% of its domestic sales.

GROWTH STRATEGY:

The company has largely grown organically, making 11 acquisitions till date, five of them being cross-border. It intends to achieve cost leadership through vertical integration from manufacturing active pharmaceutical ingredients (APIs) and finished dosages to marketing them. Sun Pharma’s acquisitions have been made to further this objective. It has been quite successful in turning around loss-making companies — be it US-based Caraco or yet-to-be-acquired Israeli company Taro.

Sun Pharma is now eyeing the key generic markets in Europe and is working on complex generic products, including injectibles. Its strategy is to use India as a manufacturing base for drugs approved in Europe.

The company is also developing strength in yet another niche area of controlled substances. In ’05, Sun Pharma acquired a facility in Hungary authorised to make controlled substance APIs, starting from the initial stage, i.e. poppy farming. In the same year, the company acquired a brand new manufacturing site in New Jersey, equipped with special suites for the manufacture of controlled substances finished dosages.

Last week, the company acquired a US-based registered narcotic API importer and producer. All these acquired units together will help the company to increase its presence in controlled substances due to vertical integration and help it to become an active player in the pain management segment in the US.

FINANCIALS:

The company’s net sales and profits have tripled in the past four years since FY05. Net sales have witnessed a compound annual growth rate (CAGR) of 27% to Rs 3,356.5 crore during the past five years. Likewise, the company’s profit has recorded a much faster CAGR of 43%.

The company, on an average, has distributed around 23% of its net profits as dividends in the past five years. The 36% growth in dividends has been lower than the growth in profits since FY03. Sun Pharma is in a growth phase and hence, prefers to maintain its payout ratio at around 25% of its profits.

While most pharma companies have been reeling under the pressure of foreign exchange losses on account of their forex borrowings in recent quarters, Sun Pharma has minimal exposure to forex derivatives and does not have any forex borrowings. Hence, it has managed to keep such extraordinary items out of its books. Rather, the company has been enjoying super-normal profits and profit margins of more than 40% since the past year due to 180-day marketing exclusivities on its products in the US.

VALUATIONS:

On a consolidated basis, the company is trading at a priceearnings (P/E) multiple of 10.7. This is attractive considering the valuations of its peers and the company’s historical growth in revenues and profits. Sun Pharma has achieved a very good tradeoff between its risks and returns. Even if the company registers normal growth in profit for FY09, it is still a safe and attractive bet for investors, who can consider picking up this stock on dips.

WELLNESS QUOTIENT

Sun Pharma has established itself as a niche player in the chronic super-specialty therapeutic segments with a focus on the US and Indian generics market The company has always followed a strategy of differentiation, which has paid rich dividends in the past It earns around 55% of its revenues from its international businesses, with the US being its largest market The company’s strategy is to manufacture technically complex generics and it attempts to be the first to market these products Sun Pharma is among the top three players for nearly half of the branded generics products in India It is now eyeing the key generic markets in Europe and is working on complex generic products, including injectibles The company is also developing strength in yet another niche area of controlled substances Its net sales and profits have tripled in the past four years since FY05