Sun Pharmaceuticals (SUNPHA) 568 - …content.icicidirect.com/mailimages/IDirect_SunPharma_Q3FY18.pdf · gross margins and adverse product mix Employee Expenses ... from Novartis

February 15, 2018

ICICI Securities Ltd | Retail Equity Research

Result Update

Taro drags Q3 but ex-Taro margins improve…

Revenues declined 16% YoY to | 6653 crore (I-direct estimate:

| 6907 crore) due to 38% YoY decline in the US to | 2125 crore (I-

direct estimate: | 2189 crore) due to the high base of gGleevec and

gBenicar and dismal performance of Taro’s sales. India sales grew

6% YoY to | 2125 crore (I-direct estimate: | 2189 crore)

EBITDA margins declined to 21.8% (I-direct estimate: 21.5%) against

31.0% in Q3FY17, due to high base, pricing pressure in the US and

decline in Taro’s margins (42.5% vs. 60.2% in Q3FY17)

Adjusted net profit declined 75% to | 364 crore (I-direct estimate:

| 957 crore). Change vis-à-vis EBITDA was owing to lower other

income and | 513 crore of one-off tax expenses due to re-

measurement of group deferred tax assets

US business still key lever for growth but environment challenging

The US business, which constitutes ~45% of turnover, has grown at 8%

CAGR in FY13-17, on the back of acquisitions like Caraco, Taro, Dusa, URL

and timely product launches. US product basket remains robust - 418

ANDAs filed and 126 pending approvals. Some niche launches include

Lipodox (Doxil), Doxycycline, Nystatin, etc, besides complex/limited

competition products and plain vanilla generics. US growth has also been

backed by extensive infrastructure with 41 global manufacturing facilities.

Ranbaxy Acquisition Synergy - Ranbaxy’s stronghold in fast growing

emerging markets (50% of Ranbaxy's sales) is likely to complement Sun’s

presence in this space. Regarding US, Sun is looking for a leadership

position in the niche generic derma space and also to enter branded and

OTC segments. In the domestic space, the acquisition is likely to provide

more therapeutic diversification and improve its market share in key

segments. Domestic market share has substantially improved to 8.9%

from 5.5% with leadership in as many as 11 therapies. The management

has maintained the synergy guidance of US$300 million by FY18.

However, warning letters to Karkhadi, Halol and acute pricing pressure in

the US base business are major challenges. Due to a challenging

environment in the generics front the management plans to diversify into

specialty products such as Tildrakizumab (dermatology), BromSite,

Seciera (both ophthalmic) and Odomzo (oncology), etc.

We expect the US business to decline at a CAGR of 12% to | 9529 crore

in FY17-20E due to high base and sharp price erosion in base business

besides delay in Halol resolution. Indian formulations will likely grow at a

CAGR of 11% to | 10684 crore in FY17-20E backed by new launches and

price hikes.

Progress of speciality pipeline likely to be key driver

Q3 was impacted by the sharp fall in Taro’s financials. However, ex Taro’s

base business, margins improved mainly due to cost rationalisation and

forex elements. The management has maintained its guidance of 20-22%

EBITDA margins. However, as per their own assertion (and going by the

run rate of 9M), guidance for single digit revenue decline is most likely to

be missed. Broadly, the challenges persist on the generics pricing front in

the base business. Unlike other generic players, the approval momentum

is slightly slow in Sun’s case, mainly due to pending Halol resolution.

However, progress in the speciality portfolio is promising, which is the

key differentiator vis-à-vis peers. We maintain HOLD rating with a new

target price of | 530 based on 22x FY20E EPS of | 22.4 and | 38 NPV for

Tildrakizumab.

Rating matrix

Rating : Hold

Target : | 530

Target Period : 12-15 months

Potential Upside : -7%

What’s Changed?

Target Changed from | 445 to | 530

EPS FY18E Changed from | 15.2 to | 12.2



Rating Unchanged

Quarterly Performance

Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%)

Revenue 6,653.2 7,912.7 -15.9 6,650.3 0.0

EBITDA 1,453.4 2,453.1 -40.8 1,375.6 5.7

EBITDA (%) 21.8 31.0 -916 bps 20.7 116 bps

Adj. Net Profit 364.4 1,471.8 -75.2 912.1 -60.0

Key Financials

(| Crore) FY17 FY18E FY19E FY20E

Net Sales 31578.4 26265.2 28841.7 31729.2

EBITDA 10089.3 5444.0 6460.9 7380.9

Adj. Profit 6964.4 2925.8 4472.3 5376.8

Adj. EPS (|) 29.0 12.2 18.6 22.4

Valuation summary

FY17 FY16 FY19E FY20E

PE (x) 19.6 27.6 30.5 25.3

EV to EBITDA (x) 13.0 15.0 19.6 16.8

Price to book (x) 3.7 4.4 3.2 2.9

RoNW (%) 19.0 18.0 10.7 11.6

RoCE (%) 20.3 18.6 12.4 13.7

Stock data

Particular

Market Capitalisation

Debt (FY17)

Cash & Cash Equivalents (FY17)

EV (| Cr)

52 week H/L (|) 729/433

Equity capital

Face value | 1

| 129564 crore

| 239.9 crore

Amount

| 136278 crore

| 9828 crore

| 16542 crore

Price performance (%)

1M 3M 6M 1Y

Aurobindo Pharma -8.8 -13.1 -14.7 -7.2

Sun Pharma -0.5 10.3 23.8 -10.0

Lupin -9.5 -0.4 -13.9 -41.5

Dr Reddy's -10.3 -5.4 9.6 -24.8

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah

[email protected]

Harshal Mehta

[email protected]

Sun Pharmaceuticals (SUNPHA) | 568

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis

Q3FY18 Q3FY18E Q3FY17 Q2FY18 YoY (%) QoQ (%) Comments

Revenue 6,653.2 6,907.6 7,912.7 6,650.3 -15.9 0.0

YoY decline mainly due to 38% YoY decline in the US to | 2125 crore (I-direct

estimate: | 2189 crore) led by high base of gGleevec, gBenicar and weak Taro

sales

Raw Material Expenses 2,099.7 1,934.1 2,248.7 1,877.5 -6.6 11.8 314 bps decline in gross margins to 68.4% mainly due to sharp decline in Taro's

gross margins and adverse product mix

Employee Expenses

1,372.6 1,347.0 1,215.1 1,323.3 13.0 3.7 YoY increase mainly due to expansion of specialty team in the US and

consolidation of Biosintez in Russia

Other Expenditure 1,727.5 2,141.4 1,995.8 2,073.9 -13.4 -16.7 YoY decline mainly due to forex elements and rationalisation of cost

Total Expenditure 5,199.9 5,422.5 5,459.5 5,274.7 -4.8 -1.4

EBITDA 1,453.4 1,485.1 2,453.1 1,375.6 -40.8 5.7

EBITDA (%)

21.8 21.5 31.0 20.7 -916 bps 116 bps YoY decline mainly due to a high base, pricing pressure in the US and decline in

Taro’s margins. Taro Pharma’s EBITDA margins declined to 42.5% from 60.2% in

Q3FY17

Interest 95.3 157.4 166.5 157.4 -42.7 -39.4 Volatility mainly due to forex element

Depreciation 339.3 358.7 306.8 358.7 10.6 -5.4

Other income 129.2 264.7 122.2 254.8 5.8 -49.3 Volatility mainly due to forex element

EO 0.0 0.0 0.0 0.0 NA NA

PBT 1,147.9 1,233.7 2,102.0 1,114.3 -45.4 3.0

Tax 748.7 123.4 372.9 111.4 100.8 572.1

MI 34.8 93.1 250.0 89.7 -86.1 -61.2

Net Profit 365.4 1,027.3 1,471.8 912.1 -75.2 -59.9

Adj. Net Profit 364.4 1,017.3 1,471.8 912.1 -75.2 -60.0 Change vis-à-vis EBITDA and I-direct estimates owing to lower other income and

| 513 crore of one-off tax expenses due to re-measurement of group deferred tax

assets

Key Metrics

India formulations 2,085.0 2,264.8 1,969.4 2,221.0 5.9 -6.1 Miss vis-à-vis I-direct estimates was mainly due to lower-than expected

restocking post GST implementation

US formulations 2,124.2 2,189.3 3,419.3 1,986.2 -37.9 6.9 YoY sharp decline mainly due to high base of gGleevec and gBenicar, price

erosion in base business and sharp decline in Taro's sales

Emerging Markets 1,221.2 1,272.9 1,159.9 1,258.2 5.3 -2.9 Included consolidation of JSC Biosintez acquisition in Russia

RoW 776.6 745.0 760.3 711.3 2.2 9.2 Included consolidation of acquisition in Japan

APIs 391.3 373.0 365.7 413.4 7.0 -5.4

Source: Company, ICICIdirect.com Research

Change in estimates

(| Crore) Old New % Change Old New % Change

Total Operating Income 26,650.3 26,265.2 -1.4 29,378.8 28,841.7 -1.8

EBITDA 5,643.1 5,444.0 -3.5 6,521.5 6,460.9 -0.9

EBITDA Margin (%) 21.2 20.7 -47 bps 22.2 22.4 20 bps

Adjusted PAT 3,647.1 2,925.8 -19.8 4,425.6 4,472.3 1.1 Decline in FY18 mainly due to | 513 crore of one-off tax expenses due to

re-measurement of group deferred tax assets

EPS (Adjusted) 15.2 12.2 -19.8 18.4 18.6 1.3

FY18E FY19E


Assumptions

| crore FY16 FY17 FY18E FY19E FY18E FY19E

Indian Formulations 7,299.2 7,749.1 8,174.7 9,539.3 8,450.4 9,848.0

US Formulations 13,516.9 13,758.8 8,476.9 8,757.1 8,619.7 9,056.4

RoW markets 5,746.1 7,128.0 7,854.5 8,639.9 7,830.6 8,613.6

APIs 1,475.2 1,634.5 1,540.5 1,665.3 1,522.3 1,610.1

Current Earlier



Company Analysis

Established in 1983, Sun Pharma is the largest Indian pharmaceutical

company both in terms of market capitalisation and turnover (FY17).

The company manufactures and markets a large basket of pharmaceutical

formulations in India, the US and several other markets across the world.

However, US and Indian formulations are by far the core strengths and

growth drivers for the company. The company has ~50 manufacturing

sites across the world. The US business has been built mostly on

acquisitions and generic focus. It owns the largest product basket among

Indian players with as many as 558 product (ANDA) filings. In Indian

formulations, the company is a leader in niche therapy areas of

psychiatry, gastroenterology, neurology, cardiology, nephrology,

orthopaedics and ophthalmology.

The company completed the $3.2 billion acquisition of Ranbaxy

Laboratories after almost a year of navigating the regulatory gauntlet to

create the world’s fifth-largest generic pharmaceutical company by

revenue. The company has planned a capex of US$250 million for

Tildrakizumab, the IL-23 monoclonal anti-body in-licensed from MSD (US)

over four or five years to be utilised for its psoriasis trials. The company

has guided for filing of Investigational IL-23p19 inhibitor, Tildrakizumab, in

FY19.

Sun acquired Odomzo (oncology) from Novartis in December, 2016, for

$175 million and additional milestones payments. USFDA approved this

in July, 2015 for treatment of locally advanced basal cell cancer and is the

first branded oncology product for Sun Pharma in the US. Total 70% who

prescribe are dermatologists while the rest are oncologists for this drug.

Seciera (for dry eyes disease), which was acquired from Ocular

Technologies, has shown promising phase III results. The company will

enter into dialogue with FDA regarding further course of action for the

product.

A snapshot of the galloping performance in the last four years - sales

grew at ~41% CAGR to | 31578 crore, EBIDTA grew at CAGR of ~39% to

| 10089 crore. Adjusted PAT grew at a CAGR of ~33% to | 10089 crore.

Going ahead, we expect revenues to remain flat in FY17-20E to | 31729

crore after considering the Ranbaxy acquisition.

Exhibit 1: Revenues to remain flat in FY17-20E

8,011.6

11,299.9

16,080.4

28,563.0

31,578.4

26,265.2

28,841.7

31,729.2

0

5000

10000

15000

20000

25000

30000

35000

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

(| crore)

Total Operating Income


40.9% CAGR 0.2% CAGR


The US business, which constituted ~45% of the turnover (FY17), has

grown at a CAGR of 8% in FY13-17 on the back of successful acquisitions

such as Caraco and Taro (recently Dusa, URL) and timely product

launches (recent gGleevec launch under exclusivity). The US product

basket remains robust - 558 ANDAs filed, 422 approvals received, some

niche launches include Lipodox/Doxil (~US$150 million), Doxycycline

(~US$100 million), Nystatin (~US$90 million), etc, besides

complex/limited competition products and plain vanilla generics. US

growth is also being backed by extensive infrastructure. Out of the ~50

global manufacturing facilities, ~20 have been approved by the USFDA.

The only blot in an otherwise smooth journey is the warning letter to the

Halol plant. We expect the US business to decline at a CAGR of 12% to

| 9529 crore in FY17-20E due to high base and sharp price erosion in

base business.

Exhibit 2: US business to decline at CAGR of 15% in FY17-20E

10,054.9

13,324.2 13,719.6 13,516.9 13,758.8

8,476.9 8,757.1

9,528.6

0

2000

4000

6000

8000

10000

12000

14000

16000


(| c

rore

)

US


Indian formulations, which form 26% of the turnover (FY17), have grown

at a CAGR of 27% in FY13-17. With a market share of 8.5%, the company

is ranked No. 1 in domestic formulations. The acute, chronic and sub-

chronic segments were at 41%, 46% and 14% of revenues, respectively.

It is a leader in three therapeutic categories. Indian formulation growth

was unaffected despite NLEM 2011 implementation vagaries and channel

disturbances due to trade margin issues with wholesalers/distributors. We

expect Indian formulations to grow at a CAGR of 11% to | 10684 crore in

FY17-20E backed by new launches and price hikes.

8.2% CAGR -11.5% CAGR


Exhibit 3: India sales to grow at CAGR of 11% in FY17-20E

2,965.7

3,691.8

6,716.6

7,299.27,749.1

8,174.7

9,539.3

10,684.0

0

2000

4000

6000

8000

10000

12000

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E(|

crore)

Domestic


Exhibit 4: Sales from RoW markets to grow at CAGR of 10% in FY17-20E

1,527.11,908.4

6,064.65,746.1

7,128.0

7,854.5

8,639.9

9,503.9

0

2000

4000

6000

8000

10000


(|

crore)

ROW


27.1% CAGR

11.3% CAGR

47.0% CAGR

10.1% CAGR


Exhibit 5: Sales from API business to remain flat in FY17-20E

754.9801.0

1,070.2

1,475.2

1,634.5

1,540.5

1,665.3

1,748.6

0

200

400

600

800

1000

1200

1400

1600

1800

2000

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E(|

crore)

API & Others


Exhibit 6: EBITDA to decline at CAGR of 10% in FY17-20E

3258.0

4967.2

7195.6

8724.3

10089.3

5444.0

6460.9

7380.9

40.7

44.0 44.7

30.5

31.9 20.7

22.4 23.3

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

0

2000

4000

6000

8000

10000

12000


(| c

rore

)

EBITDA EBITDA margins (%)


Exhibit 7: Net profit to decline at CAGR of 8% in FY17-20E

2,587.3

3,008.1 3,204.4

4,967.5

6,964.4

1,975.3

4,472.3

5,376.8

32.3

26.6

19.9

17.4

22.1

7.5

15.5 16.9

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0

1000

2000

3000

4000

5000

6000

7000

8000


(| c

rore

)

PAT Net Profit Margins (%)


21.3% CAGR

2.3% CAGR


Exhibit 8: Trends in return ratios

27.8

34.3 34.3

18.8 18.6 20.3

10.5 12.4 21.3 21.3

17.0 18.6 18.0

19.0

7.6

10.7

0

5

10

15

20

25

30

35

40


(| crore)

RoCE(%) RoNW (%)


SWOT Analysis

Strengths - Above average profitability margins, healthy return ratios

despite higher cash component, one of the first companies to identify

potential of innovative R&D and generic R&D, robust infrastructure to

scale up US business, India business built around chronic focus, one of

the few companies defying the slowdown in Indian formulations.

Weakness - Pending Ranbaxy compliance issues.

Opportunities - The US generics space, the biosimilars space where Sun

is yet to make meaningful foray.

Industry specific threats - Increased USFDA scrutiny across the globe

regarding cGMP issues, pricing pressure due to client consolidation in the

US, pricing probe by the Department of Justice (DoJ) in the US.

Company specific threats - The Halol facility has received a warning letter

from the USFDA, which is yet to be resolved. A relatively smaller Karkhadi

facility also received a warning letter (and import alert), which is also

pending for resolution.


Exhibit 9: Trends in quarterly financials

(| Crore) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 YoY (%) QoQ (%)

Total Operating Income 7122.3 7654.3 8256.3 8265.1 7912.7 7137.0 6208.8 6650.3 6653.2 -15.9 0.0

Raw Material Expenses 1732.8 1408.6 1847.0 1839.9 2248.7 2195.2 1677.4 1877.5 2099.7 -6.6 11.8

Gross Profit Margin (%) 75.7 81.6 77.6 77.7 71.6 69.2 73.0 71.8 68.4

Employee Expenses 1137.7 1187.0 1239.3 1199.1 1215.1 1248.8 1329.9 1323.3 1372.6 13.0 3.7

% of Revenue 16.0 15.5 15.0 14.5 15.4 17.5 21.4 19.9 20.6

Other Expenditure 2006.2 2786.8 2249.0 2058.4 1995.8 2145.5 2105.9 2073.9 1727.5 -13.4 -16.7

% of Revenue 28.2 36.4 27.2 24.9 25.2 30.1 33.9 31.2 26.0

Total Expenditure 4876.7 5382.4 5335.3 5097.4 5459.5 5589.5 5113.1 5274.7 5199.9 -4.8 -1.4

% of Revenue 68.5 70.3 64.6 61.7 69.0 78.3 82.4 79.3 78.2

EBITDA 2245.6 2271.9 2921.0 3167.7 2453.1 1547.5 1095.7 1375.6 1453.4 -40.8 5.7

EBITDA Margin (%) 31.5 29.7 35.4 38.3 31.0 21.7 17.6 20.7 21.8

Depreciation 250.9 288.0 316.0 303.8 306.8 338.2 346.6 358.7 339.3 10.6 -5.4

Other Income 172.9 206.0 157.1 119.4 122.2 224.5 152.0 254.8 129.2 5.8 -49.3

Profit before Interest & Tax 2167.7 2189.9 2762.1 2983.3 2268.5 1433.8 901.0 1271.8 1243.3 -45.2 -2.2

Interest 127.6 103.0 134.6 53.7 166.5 45.0 109.4 157.4 95.3 -42.7 -39.4

Less: Exceptional Items 0.0 0.0 0.0 0.0 0.0 0.0 950.5 0.0 0.0 NA NA

PBT 2040.1 2086.9 2627.5 2929.5 2102.0 1388.8 -158.9 1114.3 1147.9 -45.4 3.0

Total Tax 88.8 417.6 352.7 441.7 372.9 44.3 161.8 111.4 748.7 100.8 572.1

PAT 1951.3 1669.3 2274.8 2487.9 1729.1 1344.5 -320.7 1002.9 399.2 -76.9 -60.2

Minority Interest 394.8 246.7 234.0 236.0 250.0 161.9 102.3 89.7 34.8 -86.1 -61.2

PAT after MI 1556.4 1422.7 2040.8 2251.9 1479.1 1182.7 -423.0 913.2 364.4 -75.4 -60.1

EPS (|) 6.5 5.9 8.5 9.4 6.2 4.9 -1.8 3.8 1.5 -75.4 -60.1

Share Capital (cr) 239.9 239.9 239.9 239.9 239.9 239.9 239.9 239.9 239.9



Conference call highlights

The management has reiterated its EBITDA guidance of 20-22%

for FY18. However, it expects revenue guidance of high single

digit in FY18 to be missed marginally

The company has launched gCoreg CR (CVS) in the US. As of

now, it is the only generic approved for this product

USFDA accepted the company’s NDA for dry eye candidate, OTX-

101

The management does not see any improvement in pricing

scenario in the US generic space. It expects pricing pressure in

the US generics space is product specific and not for the entire

segment

The company has recovered most of the deferred US sales of Q3

during the quarter

For Tildrakizumab, it continues to expect the BLA approval in US

in FY19. PADUFA date for this is end of March 2018

US Filing for Tildrakizumab will be done by Merck. The initial

supplies for market also will come from the Merck, till Sun

relocates manufacturing to another supplier. However, post

approval it will be Sun’s product. The field force Recruitments for

this product is also going on

As per IMS, Absorica prescriptions have declined mainly due to

significant correction in co-pay programme

Major chunk of Odomzo sales is emanating from oncologists. The

company is trying to leverage its derma field force to improve

coverage in the prescriptions it will get from the dermatologist

Taro’s results highlight

Taro’s revenues declined 30% YoY to US$156 million in the

backdrop of persistent competition and a challenging pricing

environment despite an increase in overall volumes. EBITDA

margins contracted to 42.5% from 60.2% in Q3FY17

Taro’s net profit declined 87% YoY to US$18. Excluding the

impact of the aforementioned one-time tax re-measurement, net

profit was at US$54.8 million

Forex gain was US$3.7 million due to strengthening of the

Canadian dollar versus the US dollar


Exhibit 10: Trends in return ratios

Location Segmant Regulatory Approvals

Samba J&K Formulations

Jammu, J&K Formulations

Baddi Himachal Prdesh Formulations

Batamandi, Himachal Pradesh Formulations

Mohali, Punjab Formulations

Paonta Sahib, Himachal Pradesh Formulations

Taonsa, Punjab API

Sikkim Formulations

Guwahati, Assam Formulations

Malanpur, Madhya Pradesh API

Dewas, Madhya Pradesh Formulations

Halol, Gujarat Formulations USFDA, UKMHRA

Baska, Gujrat Formulations

Karkhadi, Gujrat Formulations, API USFDA, EU GMP

Ankleshwar, Gujrat API ISO 9002, WHO GMP

Panoli, Gujarat API USFDA, TGA, EU GMP, DKMA

Ahmadnagar, Maharashtra API USFDA, EU GMP

Dadra, Dadra & Nagar Haveli Formulations USFDA

Silvassa, Dadra & Nagar Haveli Formulations

Goa Formulations

Madhuramthakam, Tamil Nadu API ISO 9002, WHO GMP

Sungai Patani, Malasia Formulations

Dhaka, Bangladesh Formulations

Be-Tabs, South Africa Formulations

Lagos, Nigeria Formulations

Morocco, Africa Formulations

Egypt, Africa Formulations

Haifa, Isreal Formulations USFDA

Terapia S.A., Cluj, Romania Formulations

Tiszavasvari, Hungary Formulations USFDA, EU GMP

Cashel, Isreal Formulations

Jardin Pompeia, Brazil Formulations

Soa Paolo, Brazil Formulations

Del. Iztapalapa, Mexico Formulations

Chattanooga, TN, USA API USFDA

Philladelphia, PA, USA Formulations USFDA

Wilmington, MA, USA Formulations USFDA

Cranbery, New Jersey, USA Formulations USFDA

New Brunwick, NJ, USA Formulations

North Brunswick, NJ, USA Formulations

Brampton, Canada Formulations USFDA

Detriot, MI, USA Formulations USFDA

Chicago, IL, USA Formulations USFDA



Valuation

Q3 was impacted by the sharp fall in Taro’s financials. However, ex Taro’s

base business, margins improved mainly due to cost rationalisations and

forex elements. The management has maintained guidance for 20-22%

EBITDA margins. However, as per their own assertion (and going by the

run rate of 9M), guidance for single digit revenue decline is most likely to

be missed. Broadly, the challenges persist on the generics pricing front in

the base business. Unlike other generic players, the approval momentum

is slightly slow in Sun’s case, mainly due to pending Halol resolution.

However, progress in the speciality portfolio is promising, which is the

key differentiator vis-à-vis peers. We maintain HOLD with a new target

price of | 530 based on 22x FY20E EPS of | 22.4 and | 38 NPV for

Tildrakizumab.

Exhibit 11: One year forward PE

0.0

500.0

1000.0

1500.0

2000.02/14/201

1

8/14/201

1

2/14/201

2

8/14/201

2

2/14/201

3

8/14/201

3

2/14/201

4

8/14/201

4

2/14/201

5

8/14/201

5

2/14/201

6

8/14/201

6

2/14/201

7

8/14/201

7

2/14/201

8

(|)

Sun Pharma 60.9x 54.2x 42.9x 33.9x 29.4x[

Source: Bloomberg, ICICIdirect.com Research

Exhibit 12: One year forward PE of company vs. CNX Pharma

0.00

20.00

40.00

60.00

80.00

100.00

2/14/201

1

8/14/201

1

2/14/201

2

8/14/201

2

2/14/201

3

8/14/201

3

2/14/201

4

8/14/201

4

2/14/201

5

8/14/201

5

2/14/201

6

8/14/201

6

2/14/201

7

8/14/201

7

2/14/201

8

(x)

Sun Pharma CNX Pharma

19% Premium

Source: Bloomberg, ICICIdirect.com Research

Exhibit 13: Valuation

Revenues Growth EPS Growth P/E EV/EBITDA RoE RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY17 31578 10.6 29.0 23.2 19.6 13.0 19.0 20.3

FY17E 26265 -16.8 12.2 -58.0 69.0 23.6 7.6 10.5

FY19E 28842 9.8 18.6 52.9 30.5 19.6 10.7 12.4

FY20E 31729 10.0 22.4 20.2 25.3 16.8 11.6 13.7



Recommendation history vs. Consensus

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0

200

400

600

800

1,000

1,200

1,400

Feb-18Dec-17Sep-17Jul-17Apr-17Feb-17Dec-16Sep-16Jul-16Apr-16Feb-16Nov-15Sep-15Jul-15Apr-15Feb-15

(%

)(|)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, Company, ICICIdirect.com Research

Key events

Date Event

Jun-09 USFDA seizes more than 33 generic drugs from Caraco for failing to meet FDA cGMP requirements

Aug-10 Manufacturing facility in Cranbury, New Jersey receives warning letter from USFDA

Sep-10 Increases stake in Taro Pharma to 48.7% with voting rights of 65.8%

Apr-11 Forms joint venture with Merck & Co Inc to develop, manufacture and commercialise new combinations, novel formulations and branded generics in emerging

markets

Sep-11 Receives establishment inspection report (EIR) from USFDA for its Cranbury, New Jersey facility

Feb-12 USFDA grants special approval to Sun Pharma to supply short supply oncology product Doxil to the US market

Aug-12 USFDA gives approval to Caraco Pharma’s manufacturing facility & packaging sites to resume production for two drugs

Nov-12 Acquires US based dermatology company Dusa Pharma, which was marketing innovative drug & device Levulan (aminolevulinic acid HCl)

Dec-12 Acquires generic business of URL Pharma from Takeda Pharmaceuticals

Feb-13 Receives final approval for Doxorubicin Hcl Liposome injection (Doxil)

May-14 Karkhadi unit receives warning letter from the USFDA

Sep-14 Halol unit receives Form 483 observation letter from the USFDA

Mar-15 Sun Pharma acquires GSK's Opiates Business in Australia with two Opiates manufacturing facilities in Port Fairy & Latrobe

Apr-15 Completes Ranbaxy merger

Dec-15 Receives warning letter from the USFDA for its Halol manufacturing facility

Feb-16 Launches generic version of Gleevec (Imatinib Mesylate Tablets) in the US. The company has sole 180 days exclusivity for this product

Mar-16 Acquires14 established prescription brands in Japan from Novartis for a cash consideration of US$ 293 million

Dec-16 Halol unit receives Form 483 observations from the USFDA post re-inspection of the plant

May-17 Sun Pharma announces USFDA filing acceptance of biologics license application (BLA) For Tildrakizumab


Top 10 Shareholders Shareholding Pattern

Rank Investor Name Latest Filing Date % O/S PositionPosition Change

1 Shanghvi (Dilip Shantilal) 30-Sep-17 0.10 230.29m 0.00m

2 Viditi Investment Pvt. Ltd. 30-Sep-17 0.08 200.85m 0.00m

3 Tejaskiran Pharmachem Industries Pvt. Ltd. 30-Sep-17 0.08 194.82m 0.00m

4 Family Investment Pvt. Ltd. 30-Sep-17 0.08 182.44m 0.00m

5 Quality Investment Pvt. Ltd. 30-Sep-17 0.08 182.38m 0.00m

6 Life Insurance Corporation of India 30-Sep-17 0.04 104.52m 6.00m

7 Virtuous Finance, Ltd. 30-Sep-17 0.04 96.85m 0.00m

8 Virtuous Share Investment Pvt. Ltd. 30-Sep-17 0.03 83.75m 0.00m

9 ICICI Prudential Asset Management Co. Ltd. 31-Dec-17 0.03 63.58m (1.92)m

10 Aditya Medisales, Ltd. 30-Sep-17 0.02 40.15m 0.00m

(in %) Dec-16 Mar-17 Jun-17 Sep-17 Sep-17

Promoter 54.4 55.0 54.4 54.4 54.4

Others 45.6 45.0 45.6 45.6 45.6

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor name Value ($) Shares Investor name Value ($) Shares

Shanghvi (Vidhi D) 68.1m 8.8m Harding Loevner LP -39.9m -5.2m

SBI Funds Management Pvt. Ltd. 54.2m 6.1m Franklin Advisers, Inc. -44.0m -4.9m

Life Insurance Corporation of India 46.3m 6.0m ICICI Prudential Asset Management Co. Ltd. -17.1m -1.9m

Desai (Sailesh T) 28.1m 3.7m GIC Private Limited -9.4m -1.2m

Axis Asset Management Company Limited 26.7m 3.0m Fidelity Management & Research (Hong Kong) Limited -9.4m -1.2m

Buys Sells

Source: Reuters, ICICIdirect.com Research


.

Financial summary

Profit and loss statement | Crore

(Year-end March) FY17 FY18E FY19E FY20E

Revenues 31,578.4 26,265.2 28,841.7 31,729.2

Growth (%) 10.6 -16.8 9.8 10.0

Raw Material Expenses 8,130.7 7,748.0 8,652.5 9,201.5

Employee Expenses 4,902.3 5,410.1 5,941.0 6,580.0

Other Expenditure 8,456.1 7,663.1 7,787.3 8,566.9

Total Operating Expenditure 21,489.2 20,821.2 22,380.8 24,348.3

EBITDA 10,089.3 5,444.0 6,460.9 7,380.9

Growth (%) 15.6 -46.0 18.7 14.2

Depreciation 1,264.8 1,383.9 1,473.3 1,416.5

Interest 399.8 457.5 399.1 349.7

Other Income 623.2 794.8 1,106.0 1,216.8

PBT 9,047.9 4,397.3 5,694.6 6,831.5

Less: Exceptional Items 0.0 950.5 0.0 0.0

Total Tax 1,211.6 1,156.2 854.2 1,024.7

PAT 6,964.4 1,975.3 4,472.3 5,376.8

Minority Interest 881.9 314.1 371.9 433.7

Adjusted PAT 6,964.4 2,925.8 4,472.3 5,376.8

Growth (%) 23.2 -58.0 52.9 20.2

EPS (Adjusted) 29.0 12.2 18.6 22.4


Cash flow statement | Crore


Profit/(Loss) after taxation 6964.4 1975.3 4472.3 5376.8

Depreciation 1264.8 1383.9 1473.3 1416.5

(Inc)/Dec in Current Assets -1421.9 2395.2 -1385.1 -1539.1

(Inc)/Dec in Current Liabilities 453.3 -876.0 768.1 837.8

Others -178.3 457.5 399.1 349.7

CF from operation 7082.2 5336.0 5727.6 6441.7

Purchase of Fixed Assets -3590.4 -1200.0 -1200.0 -1200.0

(Inc)/Dec in Investments -843.7 -2305.4 -2305.4 -2305.4

Others 7044.9 -7.2 -100.4 -71.7

CF from Investing Activities 2610.8 -3512.6 -3605.8 -3577.1

Inc / (Dec) in Loan Funds 837.1 -2000.0 -1000.0 -1000.0

Inc / (Dec) in Equity Capital -2730.8 0.0 0.0 0.0

Dividend and dividend tax -289.7 -337.7 -764.5 -919.1

Other Financial Activities -400.5 -457.5 -399.1 -349.7

CF from Financing Activities -2583.9 -2795.2 -2163.6 -2268.8

Cash generation during the year 7109.2 -971.8 -41.8 595.8

Op bal Cash & Cash equivalents 8031.7 15140.8 14169.1 14127.3

Closing Cash/ Cash Equivalent 15140.8 14169.1 14127.3 14723.1

Free Cash Flow 3491.8 4136.0 4527.6 5241.7


Balance sheet | Crore


Equity Capital 239.9 239.9 239.9 239.9

Reserve and Surplus 36,399.7 38,037.4 41,745.2 46,203.0

Total Shareholders funds 36,639.7 38,277.3 41,985.1 46,442.9

Total Debt 9,827.8 7,827.8 6,827.8 5,827.8

Deferred Tax Liability 461.9 485.0 519.0 555.3

Minority Interest 3,790.9 4,105.0 4,476.9 4,910.6

Other LT Liabitlies & LT Provision 1,341.8 1,408.9 1,507.5 1,613.1

Total Liabilities 52,062.1 52,104.0 55,316.3 59,349.7

Gross Block - Fixed Assets 22,154.5 23,354.5 24,554.5 25,754.5

Accumulated Depreciation 10,015.5 11,399.4 12,872.7 14,289.2

Net Block 12,138.9 11,955.0 11,681.8 11,465.3

Capital WIP 2,801.4 2,801.4 2,801.4 2,801.4

Total Fixed Assets 14,940.3 14,756.4 14,483.1 14,266.6

Investments 1,191.9 3,497.3 5,802.7 8,108.1

Deferred tax assets 5,617.8 5,898.7 6,311.6 6,753.4

Goodwill on Consolidation 5,536.2 5,536.2 5,536.2 5,536.2

LT Loans & Advances & Assets 1,401.2 1,471.3 1,574.3 1,684.5

Cash 15,140.8 14,169.1 14,127.3 14,723.1

Debtors 7,202.6 5,708.8 6,268.9 6,896.4

Loans and Advances 1,019.1 1,070.0 1,144.9 1,225.1

Inventory 6,832.8 5,754.0 6,318.5 6,951.0

Other current assets 2,527.4 2,653.8 2,839.6 3,038.3

Total Current Assets 32,722.8 29,355.8 30,699.1 32,834.0

Creditors 4,395.4 3,211.2 3,526.2 3,879.3

Provisions & other current liability 4,952.8 5,200.4 5,564.4 5,953.9

Total Current Liabilities 9,348.2 8,411.6 9,090.7 9,833.2

Net Current Assets 23,374.6 20,944.1 21,608.4 23,000.8

Application of Funds 52,062.1 52,104.0 55,316.3 59,349.7


Key ratios


Per share data (|)

Adjusted EPS 29.0 12.2 18.6 22.4

BV per share 152.7 159.5 175.0 193.6

Dividend per share 1.2 1.4 3.2 3.8

Cash Per Share 63.1 59.1 58.9 61.4

Operating Ratios (%)

Gross Margin 74.3 70.5 70.0 71.0

EBITDA Margin 31.9 20.7 22.4 23.3

PAT Margin 22.1 11.1 15.5 16.9

Inventory days 79.0 80.0 80.0 80.0

Debtor days 83.3 79.3 79.3 79.3

Creditor days 50.8 44.6 44.6 44.6

Asset Turnover 0.7 0.6 0.6 0.6

EBITDA Conversion rate 70.2 98.0 88.6 87.3

Return Ratios (%)

RoE 19.0 7.6 10.7 11.6

RoCE 20.3 10.5 12.4 13.7

RoIC 31.2 14.5 16.7 18.7

Valuation Ratios (x)

P/E 19.6 69.0 30.5 25.3

EV / EBITDA 13.0 23.6 19.6 16.8

EV / Net Sales 4.1 4.9 4.4 3.9

Market Cap / Sales 4.3 5.2 4.7 4.3

Price to Book Value 3.7 3.6 3.2 2.9

Solvency Ratios

Debt / EBITDA 1.0 1.4 1.1 0.8

Debt / Equity 0.3 0.2 0.2 0.1

Current Ratio 1.9 1.8 1.8 1.8



ICICIdirect.com coverage universe (Healthcare)

Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Ajanta Pharma AJAPHA 1441 1,515 Hold 12680.2 57.4 57.0 63.5 75.7 25.1 25.3 22.7 19.0 42.3 34.6 31.5 30.2 33.7 26.8 24.4 23.9

Alembic Pharma ALEMPHA 555 570 Hold 10459.8 21.2 23.7 23.0 28.6 26.2 23.5 24.1 19.4 25.3 19.6 17.6 19.7 21.0 19.9 16.8 18.0

Apollo Hospitals APOHOS 1136 1,060 Hold 15810.9 15.9 13.4 24.2 34.4 71.6 84.5 46.9 33.1 6.1 7.5 9.9 12.1 6.0 4.9 8.2 10.7

Aurobindo Pharma AURPHA 609 665 Hold 35683.2 38.8 42.6 38.0 41.5 15.7 14.3 16.0 14.7 24.4 23.5 18.4 17.9 24.2 21.3 16.1 15.2

Biocon BIOCON 615 680 Buy 36870.0 8.5 8.4 11.9 16.9 72.5 73.5 51.8 36.3 9.6 10.2 13.9 17.1 10.5 9.6 12.3 15.4

Cadila Healthcare CADHEA 426 405 Hold 43637.0 14.5 16.6 18.1 20.3 29.3 25.6 23.6 21.0 13.1 17.6 16.7 17.3 21.4 20.7 19.2 18.6

Cipla CIPLA 629 640 Hold 50638.2 12.5 19.6 26.8 32.1 50.2 32.2 23.5 19.6 7.7 9.7 14.5 16.0 8.0 11.4 13.9 14.7

Divi's Lab DIVLAB 1027 1,070 Hold 27257.0 39.9 32.7 40.7 48.7 25.7 31.4 25.2 21.1 25.3 19.3 21.2 22.2 19.8 14.7 16.2 16.9

Dr Reddy's Labs DRREDD 2224 2,520 Hold 36887.7 78.0 59.4 93.4 140.2 28.5 37.4 23.8 15.9 7.3 6.8 9.5 12.1 10.5 7.5 10.8 14.2

Glenmark Pharma GLEPHA 539 535 Hold 15217.3 42.2 33.4 31.5 38.2 12.8 16.1 17.1 14.1 19.5 16.2 14.3 15.5 26.5 17.5 14.3 14.9

Indoco Remedies INDREM 277 280 Hold 2553.5 8.4 4.8 12.2 15.4 33.1 57.4 22.7 18.0 8.7 5.4 11.2 13.8 11.8 6.5 14.5 16.0

Ipca Laboratories IPCLAB 626 715 Buy 8116.0 15.4 21.4 37.6 44.7 40.6 29.2 16.7 14.0 8.7 9.6 15.5 16.7 7.9 10.1 15.4 15.9

Jubilant Life JUBLIF 940 1,090 Buy 14966.1 36.1 46.9 68.0 85.3 26.0 20.0 13.8 11.0 13.8 14.7 18.4 20.4 16.8 18.1 21.0 21.0

Lupin LUPIN 840 850 Hold 37950.2 56.7 30.2 35.1 45.2 14.8 27.8 23.9 18.6 16.6 10.0 10.9 13.7 19.0 9.3 10.0 11.6

Narayana Hrudalaya NARHRU 314 360 Buy 6415.9 4.1 3.8 6.4 9.7 76.0 83.0 48.8 32.3 12.5 10.5 14.1 18.4 8.8 7.4 11.2 14.5

Natco Pharma NATPHA 827 910 Hold 15257.6 26.3 34.8 41.5 26.7 31.4 23.8 19.9 30.9 33.6 26.7 28.1 16.7 29.5 21.4 21.9 12.9

Sun Pharma SUNPHA 568 530 Hold 136278.0 29.0 12.2 18.6 22.4 19.6 46.6 30.5 25.3 20.3 10.5 12.4 13.7 19.0 7.6 10.7 11.6

Syngene Int. SYNINT 598 680 Buy 11960.0 14.4 13.6 19.0 22.7 41.6 41.6 31.4 26.3 16.8 16.2 20.3 21.7 20.3 16.4 18.8 18.5

Torrent Pharma TORPHA 1420 1,390 Hold 24030.2 55.2 38.8 51.1 69.6 25.7 36.6 27.8 20.4 18.9 12.6 14.2 17.4 21.5 13.6 15.7 18.5

RoE (%)EPS (|) PE(x) RoCE (%)



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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

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