Sun Pharma: Buy

With robust growth drivers in place, the stock of Sun Pharma looks interesting at present given the 11 per cent correction in the price over the last two months. Healthy growth in key markets – the US and India – should continue to drive the company’s revenue and profit growth.

At the current market price of Rs 582, the stock trades at 21 times its 2014-15 earnings, implying a 15 per cent premium to the BSE Healthcare Index. Historically, the stock has traded 22-24 times its one year forward expected earnings. Given the strong growth prospects, investors with a one-to-two year time horizon can accumulate the stock.

The US is a critical market for Sun Pharma. It accounted for almost 60 per cent of the company’s consolidated revenues during the first half of the fiscal. Revenues in this region have grown over five fold in the last four years driven by niche launches and acquisition of Taro Pharma. A healthy pipeline of over 130 products pending approval by the US Food and Drug Administration (FDA) should help the company sustain growth in the US.

Niche opportunities such as the anti-cancer drug Lipidox, where the innovator Johnson & Johnson has withdrawn completely from the market due to manufacturing issues, may add to Sun’s revenues and profits. With no other generic player in the market currently, further price increases by Sun cannot be ruled out. This may aid margins. Other exclusive launches such as the generic version of the oral anti-diabetic drug Prandin, launched in July 2013, may also add to profits in the forthcoming quarters.

The spectacular turnaround in operations at Taro Pharma, since its acquisition in 2010, also helped growth acceleration in the US. Taro’s revenues have doubled in the last three years. Sun currently holds 66 per cent stake in the company.

Cost optimisation efforts after the acquisition led to a remarkable scale up in Taro’s operating margin from 28 per cent in September 2010 quarter to 60.6 per cent in the same period this year. This led to a five fold jump in Taro’s profits in the last two years. In response to the spectacular financial performance, Taro’s stock price has risen five fold since September 2010.

Supply shortages in key drugs have helped Taro take price increases in those products in the last few quarters. This more than compensated for the flattish volumes and aided margin expansion.

Despite a high base, Taro managed to grow revenues 16 per cent in the September quarter to $205 million (Rs 1,282 crore), compared to a year ago. Net profit rose over 47 per cent to $96 million (Rs 600 crore). With 19 products pending approval by the US FDA, new launches may help Taro sustain growth momentum in the forthcoming quarters.

Sun Pharma’s recent acquisitions – the generic business of URL Pharma and DUSA have also begun to contribute to the consolidated performance. Sharp price increases and volume growth at URL Pharma bolstered Sun’s US sales. The synergies between Sun and URL may help the latter sustain healthy performance.

A weak rupee further boosted Sun’s revenues and profits over the last few quarters. Should the rupee remain weak rupee against US dollar, it will further help Sun’s profitability.

Sun Pharma is the second largest player in the domestic market and holds leadership position in chronic therapy areas such as neuropsychiatry, anti-diabetes and cardiovascular.

These three segments constitute almost 57 per cent of the company’s domestic revenues. Thanks to the high focus on chronic therapies, the company enjoys the highest field force productivity, in excess of Rs 80 lakh per medical representative, compared to an average of less than Rs 40 lakh for peers such as Dr Reddy’s, Cipla, Cadila and Ranbaxy.

Sun has been a consistent out-performer in the domestic market growing ahead of the industry. Even as the industry continues to grapple with price cuts mandated by the new pricing policy and supply disruptions due to strike by drug dealers, the company’s performance in the domestic market has remained resilient.

The recent September quarter saw domestic drug sales stagnate for most players. However, Sun managed to buck the weakness in the industry, posting 17 per cent growth during the quarter, compared to a year ago. A niche product basket and focussed brand building efforts have helped the company.

Sun’s niche product pipeline which includes Latanoprost eye drops and anti-cancer drug paclitaxel coupled with innovative marketing and brand building efforts should help the company sustain healthy growth in India.

Sun posted revenue growth in excess of 44 per cent in the first half of 2013-14, compared to a year ago.

Operating margin remained healthy at 44 per cent during the same period. Though the benefit from rupee weakness may not sustain in the subsequent quarters, strong growth in the US and stable performance in the domestic market should hold Sun in good stead.