Sun Pharmaceutical Industries

Sun’s EPS may take a hit if co stops cancer drug sale

Stock Falls For The Fourth Day Following Legal Tussle

THE stock of Sun Pharmaceutical Industries fell for a fourth day in a row, as investors are worried about the company’s legal tussle with Sanofi-Aventis over cancer drug oxaliplatin.

Sanofi, the innovator of oxaliplatin wants Sun Pharma to stop selling oxaliplatin from June 30 this year. But so far, Sun Pharma has not indicated if it will comply with Sanofi’s demand. Analysts estimate that Sun Pharma could lose as much as Rs 20 earning per share (EPS) this year, if it stops selling the cancer drug. However, the company could net huge gains if it defies Sanofi and later wins the legal battle with the multinational firm.

Some analysts have trimmed their full-year EPS forecast for Sun Pharma, expecting the firm to capitulate shortly. The Sun Pharma stock closed at Rs 1,770.25 on Friday, down marginally. In the past four sessions, the stock has shed nearly 4%. Sanofi had recently cut a deal with six rival firms, to stop them from selling the drug from June 30 to August 9, 2012. Sun Pharm had signed a settlement with Sanofi-Aventis in May 2009, and subsequently, launched a generic version of the drug in early 2010. Sanofi says its agreement with Sun Pharma was that the latter must stop distributing the drug, if all other generic makers withdrew.

Sanofi has asked the court to enforce restriction on Sun Pharma as part of the patent litigation. The court’s decision to accept all the outof-court agreements, along with a final verdict, is awaited.

If Sun Pharma pushes ahead with oxaliplatin sales after June 30, and the court verdict goes against it, the company will be liable for damages with retrospective effect. It is the penalty that investors are worried of, though the gains could be huge if the court decides in Sun Pharma’s favour.

Also, if Sun Pharma sells the drug after June 30, it will be the only generic in the market, giving it pricing power, said an analyst with a domestic broking firm.

Ms Kour does not see much upside for the stock which, she says, is fairly valued at 22 times one-year forward earnings. In 2009, Sanofi’s sales from Eloxatin (the branded oxaliplatin product) was 957 million euro. In 2008, before the launch of generic versions, the sales were 1,345 million euro. Broking firm Karvy estimates Sun Pharma’s sales from oxaliplatin at $39 million this financial year and $31 million next year, assuming at least three competitors. However, with other generic competition out of the market, Sun Pharma’s oxaliplatin sales could be much higher, said an analyst who did not want to be named.

Ms Kour estimates oxaliplatin to contribute Rs 50 to Sun Pharma’s EPS this year, assuming the Indian company is the only generic player in the market till August 2012. The contribution for the following year would be Rs 47, she said. The consensus estimates for Sun Pharma’s earnings from oxaliplatin, prior to Sanofi’s deal with other players, was Rs 26 for this year and Rs 14 next year.

Cipla

CIPLA, the second-most valuable pharmaceutical company in India, is showing signs of stress on its financials. Its free cash flow – or the cash it generates after providing the money required to maintain and expand its asset base – is getting deeper and deeper into the negative territory.

The company recently announced its intention to raise Rs 1,500 crore by selling securities in the domestic and international markets, to meet its capital expenditure requirements. With no noteworthy returns generated on the investments it made in the last four years, Cipla will become a riskier bet for investors unless it sets its books right and starts generating positive free cash flows.

Deteriorating Financials:

The company has been on a capital expenditure spree since the last five years. It invested Rs 1,854 crore in fixed assets between FY04 and FY08. Against this, it has generated cashflows of Rs 1,443 crore from its operations during the same period. The surplus has been financed through net longterm borrowings to the tune of Rs 386 crore. An excess of investment over cash generation has resulted in negative free cash flows. The net cash flow from operating and investing activities has been negative and getting worse from Rs 112 crore in FY06 to Rs 151 crore in FY07 to Rs 307 crore in FY08.

Unlike its industry peers like Sun Pharmaceutical Industries and GlaxoSmithKline Pharmaceuticals, Cipla has negligible cash and investments of Rs 174 crore (as on March 31, 2008 as per the latest available data). Sun Pharma’s cash and investments stood at Rs 1,995 crore (on March 31, 2008) and Glaxosmithkline Pharma’s at Rs 1,686 crore (on December 31, 2008). Despite its precarious cash position and aggressive capex, Cipla has been generous in distributing dividends to its shareholders. At an average payout of 24%, the company has disbursed dividend of nearly Rs 466 crore in three fiscals years ending FY08. With a 39% promoter shareholding in the company, the dividends rewarded to the promoters have been to the tune of Rs 186 crore over the same three-year period.

Impressive Performance:

Cipla posted a 73% increase in its net profits for the quarter ended June 2009, while its sales rose 13%. It will, however, face severe cash flow issues in case of a poor show in the coming quarters. The company has seen its stock prices rise 43% since the start of this year although it could not match the 57% jump achieved by the Sensex.

In a recent filing to stock exchanges, Cipla said it plans to mop up Rs 1,500 crore through issue of various instruments including warrants, debentures, institutional placement, foreign currency bonds or global depository receipts.

The company, which is quite under-leveraged, may benefit more from raising funds through debt than issuing additional shares. For a company with a debt-equity ratio of 0.1, an additional debt of Rs 1,500 crore would increase the ratio to 0.5. Given its current market capitalisation, tapping equity market for Rs 1,500 crore will reduce Cipla’s earnings per share (EPS) by around 10%. The EPS currently stands at Rs 11.2. This will depress the share price even if the market cap doesn’t decline.

Poor Defence Technique:

Despite having a very small pool of cash in hand, Cipla has been aggressive on its capital expenditure. This is quite unlike the common strategy in a defensive sector like pharma. To justify its current valuations, Cipla must improve its cash-flow and maintain a continuous streak of outstanding performance over the forthcoming quarters. Investors, on their part, can book their profits on the stock, before any dilution in EPS or before the company’s cash flow problems start getting reflected in its stock price.

Stock Views on Sun Pharmaceutical Industries, Lupin, HDIL

Prabhudas Lilladher on HDIL - Target Rs 280

Prabhudas Lilladher has maintained its accumulate rating on Housing Development and Infrastructure (HDIL) with a target of Rs 280 in its research report.

"HDIL reported revenues to the tune of Rs 2,954 million, a decline of 48% YoY. Revenues were largely led by sales of TDRs. The company sold 1.8 million TDRs during the quarter at an average rate of Rs 1,500/sq.ft. HDIL generated approximately 2 million sq.ft of TDRs during the quarter and currently has 0.5 million sq.ft of TDRs in its inventory. The company reported strong EBITDA margins of 83% due to the large proportion of TDR sales which led to profits increasing by 73.6% QoQ. We have estimated HDIL’s NAV at Rs 312/share. We are valuing the company at 10% discount to NAV which translates to Rs 280. We maintain ‘Accumulate’ rating on the stock," says Prabhudas Lilladher's research report.


Sharekhan on Lupin - Target Rs 978

Sharekhan has recommended a buy rating on Lupin with a target price of Rs 978 in its research report.

"Lupin’s performance in Q1FY2010 was ahead of our expectations. The consolidated revenues grew by a healthy 25.9% to Rs 1,085.6 crore in Q1FY2010. The revenue growth was driven by a strong traction across advanced formulation sales (up 40.4%), a healthy growth in the domestic formulation business (up 21.5%) and higher revenues from the Japanese market (up 42.1%). We maintain our 'Buy' recommendation on the stock with a price target of Rs 978," says Sharekhan's research report.

Sharekhan on Sun Pharma - Target Rs 1217

Sharekhan has maintained its buy rating on Sun Pharmaceutical Industries with a target price of Rs 1217 in its research report.

"Sun Pharmaceutical Industries (Sun Pharma)’ Q1FY2010 performance is well below our expectations. The revenues for the quarter declined due to lower sales in the US market (as against the high base of the non-recurring sales of Pantaprazole in Q1FY2009), a decline in Caraco Pharmaceutical (Caraco)’s revenues due to seizure of inventory by the US Food and Drug Administration (USFDA) and a staggered domestic performance. We maintain our 'Buy' recommendation on the stock with a price target of Rs 1,217 (14x its FY2011 earnings)," says Sharekhan's research report.

Stock Views on Uflex, Orient Paper & Industries, Sun Pharmaceutical Industries

Sharekhan on Sun Pharma - Target Rs 1498

Sharekhan has maintained its buy rating on Sun Pharmaceutical Industries with a price target of Rs 1498 in its report.


"Caraco Pharmaceuticals (Caraco), Sun Pharmaceuticals (Sun)’s US subsidiary, reported its FY2009 results on June 15, 2009. Caraco’s FY2009 sales declined by 3.8% to USD 337.2 million largely due to a 10.8% decline in its manufactured product (manufactured and sold by Caraco) segment and a flattish performance by its distributed product (manufactured by Sun and distributed by Caraco) segment. On Caraco’s present status with the US Food and Drug Administration (USFDA), the Veterans Administration (an agency to US government) has not renewed the contracts for the products sourced from Sun. At the current market price of Rs 1,297, Sun is valued at 14.5x FY2010E and 13.8x FY2011E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs 1,498," says Sharekhan's report.


Emkay Global on Orient Paper - Target Rs 66

Emkay Global Financial Services is bullish on Orient Paper & Industries (OPIL) and has recommended a buy rating on the stock with a target price of Rs 66 in its June 16, 2009 report. Orient Paper Q4FY09 pre exceptional net profit of Rs 629 million is above our estimates (Rs 500 million) driven by better than expected cement realizations. Net revenues grew by 23.3% yoy to Rs 4.67 billion driven by 20.9% revenue growth for cement division while the same for Paper division grewby 51.4% yoy."

"We expect OPIL cost structure to witness significant transition with company expected to commission 50 MW of thermal captive power plant. Volume boost from cement capacity expansion to 5 mtpa by Q2FY2010 shall further fuel operating performance and improve cost structure with operating leverage coming in to play. We are upgrading our earnings estimate for FY10E by 12.4% to Rs 13.5 and are introducing our FY11E earnings at Rs14.4. At the CMP, the stock is trading at undemanding 4.1x FY10E earnings. We continue to remain bullish on OPIL transition to mid size efficient cement player. Value of non cement business (Rs 6/share) and investments (Rs 2.2/share) provide significant margin of safety. Maintain our 'BUY' rating on the stock with a revised price target of Rs 66," says Emkay Global Financial Services' research report.


Sunidhi Securities on Uflex - Target Rs 100

Sunidhi Securities & Finance has recommended a buy rating on Uflex, with a price target of Rs 100, in its report dated.


"In-spite of the rapid growth achieved by the Indian packaging industry in the past few years, the per capita consumption of packaging paper/board and plastics packaging in India is still very low at around USD 15 against the world average of around USD 100. It provides the real 'opportunity factor' available in the Indian market. At the CMP of Rs 76, the share is trading at a P/E of 2.6 on FY09E and 2.4 on FY10E. We recommend 'BUY' with a target of Rs 100 in the medium term," says Sunidhi Securities & Finance's report

Stock views on Texmaco, GMR Infrastructure, Sun Pharma

KRChoksey on Sun Pharma - Target Rs 1260
KRChoksey Research has maintained its buy rating on Sun Pharmaceutical Industries with a target price of Rs 1260 in its research report. "In Q3FY09, the company’s sales have increased marginally by 14.2% on a Y-o-Y basis to Rs 918.3 crore on the back of decline in the Caraco, the US subsidiary sales by 32%. We maintained our BUY rating to the stock with a target price of Rs 1260.0, implying an upside potential of 19.0%. At the target price, the stock would be valued at 15.5x FY09E EPS of Rs 81.4," says KRChoksey's research report


Prabhudas Lilladher on GMR Infrastructure - Target Rs 81

Prabhudas Lilladher has recommended an accumulate rating on GMR Infrastructure with a target price of Rs 81 in its research report. "We initiate coverage on GMR Infrastructure with an Accumulate rating and a SOTP-based one year target price of Rs 81. Over the past few years, this company has emerged as one of the leading infrastructure developers with key interest in airports, power and road assets. We believe that GMR, though on a learning curve, will be a major beneficiary from the huge investments committed in the 11th plan, and growing aviation sector," says Prabhudas Lilladher's research report.


SKP Securities on Texmaco - Target Rs 117

SKP Securities has maintained its buy rating on Texmaco with a target price of Rs 117 in its research report. "Net sales were up by 3.7% to Rs. 166.5 crores in Q3FY09 over Q3FY08. For nine months, sales were up by 18.2% to Rs. 568.7 crores. Contribution of heavy engineering division in revenues moved up marginally to 81.7%. Results are in line with our expectations and we maintain our BUY recommendation on the stock with a target price of Rs 117 in 12 months," says SKP Securities' research report.