Sun Pharmaceuticals Industries Equity Research

Date of Research – 21 January 2016

Price – Rs. 784.25

About the Company

Sun Pharmaceuticals Industries Limited (“Sun Pharma” or the “Company”) manufactures and markets a large basket of pharmaceutical formulations as branded generics as well as generics in India, U.S. and several other markets across the world with over 72% sales from global markets.

STRENGTH

[1] Low Cost Advantage

Enjoys low manufacturing and employee costs at its primary manufacturing base in India, and a vertically integrated API division which generates cheap raw materials. The Ranbaxy acquisition will further help Sun Pharma in generating higher margins.

[2] Strong Product Presence

Manufactures a few complex products which contribute significantly to both the company’s top and bottom lines. Strategically identifying and entering limited competition segments offers great opportunities for growth. For example: Sun Pharma is one of the few approved manufacturers of Doxil, an injection for ovarian cancer. Until more and more players enter in this segment, Doxil will continue to be a highly profitable drug for Sun Pharma.

CHALLENGES

[1] Intense Competition

Competes with various pharmaceutical companies that have similar products in the same market but manufactured at facilities which have been approved by the highest regulatory authorities in the United States and Europe.

[2] Regulatory Environment

Risk due to adverse developments in regulatory environment and statutory provisions. National Pharmaceutical Pricing Authority (NPPA) controls and regulates the prices of pharmaceutical drugs in India. Price controls imposed by the authority are unpredictable and have a negative impact on company’s profitability margins.

*Sun Pharma issued bonus share in the ratio of 1:1 on 29 July 2013. EPS and P/E numbers are adjusted to reflect the effect of issue.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations11,299.8616,080.3627,433.4428,269.71 31,578.44 
Expenses6,332.598,884.7819,369.8019,788.09 21,489.17  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)4,967.277,195.588,063.648,481.62 10,089.27  
Depreciation336.17409.371,294.831,013.52 1,264.75  
Finance Costs44.3444.19578.99476.89 399.80  
Other income311.71508.09452.05459.24 623.15  
Exceptional items583.582,517.41237.75685.17 
PBT4,314.894,732.706,404.126,765.28 9,047.87  
Tax820.55790.76914.69934.90 1,211.57  
PAT (before Minority Interest and share of Associates)3,494.343,941.945,489.435,830.38 7,836.30  
Profit/ (loss) attributable to Minority Interest486.28737.5312.561,112.60 – 
Share of profit / (loss) of Associates936.271.87 (9.93) 
Consolidated Profit / (Loss) for the year3,008.063,204.414,540.604,715.91 7,846.23  

Profitability Analysis

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio43.9644.7529.3930.00 31.95 
Net Profit Margin Ratio30.9224.5120.0120.62 24.82 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Share Capital103.56103.56207.12207.12240.66 
Reserves & Surplus12,062.7914,886.1718,317.8325,430.9731,163.56 
Share Application Money Pending Allotment0.67
Net worth (shareholders funds)12,166.3514,989.7318,524.9525,638.0931,404.89 
Minority Interest1,161.451,635.081,921.182,851.194,085.25 
Long term borrowings155.42115.2648.671,368.423,116.73 
Current liabilities1,730.882,465.883,139.795,989.5913,247.66 
Other long term liabilities and provisions147.66796.002,610.762,718.682,303.41 
Deferred Tax Liabilities163.63205.35275.6798.5261.61 
Total Liabilities16,260.3920,881.2129,370.8249,027.9054,219.55 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Fixed Assets3,274.195,077.135,824.2011,020.1213,360.60 
Noncurrent Investments588.961,106.35787.56598.87593.32 
Current assets10,140.7611,801.5718,686.4629,121.9430,864.57 
Long term advances and other noncurrent assets551.16845.621,051.292,735.853,032.43 
Deferred Tax Assets683.51917.591,186.691,850.162,187.52 
Goodwill on consolidation (net)1,021.811,132.951,834.623,700.964,181.11 
Total assets16,260.3920,881.2129,370.8249,027.9054,219.55 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
ROCE24.2129.6735.1127.0121.97 
ROE / RONW21.2720.0717.3017.7118.57 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)11,299.8616,080.3627,433.4428,269.71 31,578.44 
Growth (%)40.90 %42.31 %70.60 %3.05 % 11.70 % 
PAT (Rs. Cr.)3,494.343,941.945,489.435,830.38 7,836.30
Growth (%)17.55 %12.81 %39.26 %6.21 % 34.40 % 
Earnings Per Share – Basic (Rs. )14.5015.5018.8719.60 29.00 
Earning Per Share – Diluted (Rs. )14.5015.5018.8619.60 29.00 
Price to Earnings28.2238.6651.2141.81 17.53 

Dividend History

The Company has maintained an average dividend yield of 0.73 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Sun Pharma’s average current ratio over the last 5 financial years has been 4.38 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Sun Pharma’s average long term debt to equity ratio over the last 5 financial years has been 0.02 times which indicates that the Company is operating with a very low level of debt and is well placed to meet its obligations.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Sun Pharma’s average interest coverage ratio over the last 5 financial years has been 77.98 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Sun Pharma reported a promoter holding of 54.39 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 35.61 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.