Stock Review: Sun Pharma

 

Given Sun Pharma's steady growth and dividend paying record, the stock is not overpriced. Investors can consider buying it

   IT APPEARS to be the right time to invest in Sun Pharma, the most valuable pharma company on the Indian bourses. The company is back on the growth path. After winning the full control over Taro Pharma, it is on track to get its US subsidiary Caraco back in action.

BUSINESS:

The company earns nearly half of its revenues from the domestic market. Of this, 70% is earned from sale of products in the five segments of cardiology, psychiatry, neurology, diabetology and gastroentrology. It enjoys a market leadership in each of these segments. It has around 3.7% share in the domestic pharma market. After India, the US is the largest market for the company, where it earns 28% of the consolidated revenues. At 13% of the total sales, branded generic sales across 40 markets is another promising area for the company. Sun also manufactures bulk drugs (active pharmaceutical ingredients) for captive consumption and for outside sale. This segment typically contributes 10-11% to the company's total turnover.

   The consolidation of Taro is a high point for Sun Pharma during this fiscal. Sun Pharma is also planning to delist Caraco to wield more control and achieve better integration of its business in the US.

GROWTH STRATEGY:

Taro Pharma, which was integrated with Sun in September 2010, is an EPS accretive acquisition. For Sun, Taro brings established branded US generics in dermatology and pediatric segments. It has 150 abbreviated new drug applications (ANDAs) filed with the US FDA and two manufacturing sites in Israel and Canada. Further, Taro is also likely to consolidate Sun's position in these therapeutic areas.

   After facing a regulatory clamp by US FDA in 2009, Caraco had to close down its manufacturing. It is now selling distributed products. As part of the remediation process, Caraco expects to manufacture two products by the end of the fiscal and add another 2-3 products by the next fiscal. As Caraco's sales recover, the company's US business is set to pick up gradually.

   Sun has built a strong pipeline of generic products to be introduced in the US. Together with Taro, the company has 363 products filed with the US FDA, of which, 146 are awaiting approval. The company has 257 pending patents — 84 of which have been granted. The company typically spends around 6% of its revenues on research and development.

FINANCIALS :

In the past five fiscals, Sun Pharma's consolidated net sales have increased at a compound annual growth rate of 26% to 4,103 crore in FY10. Its consolidated net profit has increased at a CAGR of 24% to 1,351 crore during the same period. Sun is a dividend-paying company with an average payout of 26% of its profits.
   For the 12 months ended September 2010, the company has posted a 22% increase in consolidated revenues and a 27% rise in net earnings. In view of Taro's consolidation, Sun has revised its growth guidance for FY11 to 35% increase in net sales.

   Sun Pharma has infused around $170 million (around 765 crore) for a 53% stake in Taro. The management intends to achieve benchmark return of 20-25% on its investment.

VALUATIONS & CONCERNS:

Trading at a trailing price-earnings multiple of 28, Sun Pharma is not overvalued compared to its peers. The frontline pharma companies such as Cipla, Lupin and Cadila Healthcare are also trading at similar valuations. Most of the developments impacting the company in the short and medium term though have been factored into the current valuations. The stock is being recommended as a classic buy in the pharma sector as the company is steadily growing and paying dividends too.
   However, while investing in the company,

   one should be aware of the factors that could threaten its growth trajectory. There could be one-time inventory or debtors write-off in case of Taro Pharma. Caraco is still in the process of resolving its compliance-related issue with US FDA. Improving the performances of its subsidiaries — Taro and Caraco — therefore, remains one of the major priorities for the company. Consolidating and increasing its share in the domestic market is also an important area of work for the company. Any execution lapse may hamper the company's growth prospects.