Sun Pharma - Lipodox, Taro effect wearing off ? - HDFC Securities

Sun Pharma has been on a roll for the last six quarters reporting +40% EBITDA margin on the back of (a) INR depreciation, (b) price hikes and strong rebound in Taro's performance (+45% EBITDA margins), (c) benefits from Lipodox supplies (last 2-3 quarters). While we continue to remain positive on Sun's US business on its strong pipeline of 150 ANDAs pending USFDA approval, Taro has been cautioning investors on the sustainability of its performance on account of increased competition.

Sun also gained from J&J's Doxil shortage (J&J's sole supplier, Ben View Labs ran into manufacturing issues and subsequently halted production) as the USFDA allowed import of Sun's Lipodox as alternative to J&J's Doxil until supply issues were sorted out. Sun reported EBITDA margins of +45% in the last 2-3 quarters largely driven by Lipodox supplies to the US markets. We estimate sales of ~US$ 100 mn from Lipodox in 9MFY13 with gross margins + 90%. This translates to 5.1% contribution to sales but 11% contribution to EBITDA for FY13E.

J&J announced full resumption of Doxil (doxorubicin HCL liposome injection) in its press release on Oct 2012. J&J is expected to release supplies from reserves and would eventually shift to a new supplier in mid-longer term. This does not impact our numbers for Sun (marginally pruned our sales estimates by US$ 10 mn) as we had expected J&J to resume Doxil supplies by December 2012. Excluding Lipodox, we expect Sun's sustainable EBITDA margins to be 36% - 38%. In FY14E we expect Sun to report EBITDA margins of ~37.5% (as have not penned in any upsides from Lipodox or price hikes at Taro) which translates to PAT of Rs 30.5 bn (slightly below FY13E PAT of Rs 30.6 bn).

Further, the huge cash reserves of Sun could come down from ~ US$ 1.1 bn to ~US$ 200 mn if it pursues 100% stake in Taro (currently has 66% economic interest, would cost Sun ~ US$ 600 mn), US$ 230 mn for acquisition of DUSA and we believe that Sun could be acquiring URL Pharma(non colcrys business) at 1.0x CY13 sales which translates to company would spend ~ US$ 200 mn. We have not included impact of any acquisitions into our FY14E numbers. Our FY14E numbers includes interest income of Rs 4.2 bn on its cash reserves; until the transactions come to a close it would be difficult to gauge the profitability of the acquired businesses.

At CMP, the stock trades at 25.3x FY14E EPS of Rs 29.5/sh. While Sun's strong presence in chronic space for domestic business and +136 ANDAs pending USFDA approval puts it in a different league, slower PAT growth (albeit on a superlative FY13E performance) would limit upsides in the short term. We maintain OPF with TP of Rs 787/sh (24x FY14E core EPS + upsides from pipeline).

Source : Equity Bulls

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