Title:

An Equity research report on Sun

Pharmaceutical Industries

Sun Pharmaceutical Name: Chirag Borkar

Roll No: 2016079

Industries Company: Sun pharmaceuticals ltd.

Date: 20/08/2017
College: Goa institute of management
Course: Valuation
Professor: Dr. Amiya Sahu

Sun pharmaceutical industries

Valuation summary Info Value
The Indian economy is expected to grow at 7% in the FY18. Company chairman
Beta 0.48814226
Sanghvi expects the company to grow at subdued rate of 9% due to pricing
pressure. The US pharma market is expected to grow at a CAGR of 5-9% from WACC 9.95%
2016-2020. Around 1/3rd of the i.e. 100 million of synergy benefits arising from the Shares 2399.3 mil
Ranbaxy merger will be realised according to the con call reports. Thus, the sales outstanding
growth rate is assumed to be at 9% for FY18. The raw material expense of the
company is expected to increase by 18.30% of sales in FY18.compensation of Source: my analysis
employees is expected to increase to 16.32% of sales. The NPM of the company
is expected to increase from -0.42% in 2016 to 7.27% in 2017. This is due to the
increase in EBT as the company has serviced most of its short-term liabilities in INDIA GDP
2017.The company share is trading at 14.47 current P/E. Gross fixed assets of 10.00%
the company are expected to grow at 14.5% which is the average of the GFA 8.00%
growth from 2012-2017. The cost of capital for the company is 9.95%. A 5%

GDP %
6.00%
terminal growth rate was assumed be 5%. The true value of the share was
calculated to be 447 INR. The relative valuation model was also makes us of the 4.00%
P/E and EV/EBITDA multiple. Current EPS is 32.505 while the P/E multiple is 2.00%
14.47. EV/EBITDA compares the enterprise value of the company before the 0.00%
deduction of the depreciation tax and interest paid by the company. It compares

2012
2013
2014
2015
2016
2017
2018
2019
2020
the companys enterprise value with its actual cash. P/E on the other hand
provides how much market has priced the share for the given earnings. The target Year
price at mean P/E is 524.35 INR whereas the target price at mean EV/EBITDA is
INR 1159.21.While calculating the final Intrinsic value 40% weight was assigned
to DCF ,40% to P/E and 20% to EV/EBITDA.

Source :IMF
Outlook and Recommendation:
At the CMP 463, Sunpharma trades at 13.37 its FY18E EPS. I like Sunpharama Sun pharma price chart
Inorganic growth capabilities and its growth in the speciality segment over the last
few years. The acquisition of FDA approved Odomzo and ocular technologies and 1200
a strong pipeline of products for the US market (around 149 ANDAs) is expected 1000
to fuel growth. I rate Sun pharma Buy with a price target of 661. The target 800
price is for the next 6 months and the investor is not advised to stay for a long 600
time. 400
200
0
Valuation Premise:

Summary of past performance:

The company Net income been growing at a CAGR of 31.42% from 2012 to 2017
due to the merger with Ranbaxy. The company has registered a negative Net profit
for three successive years due to short term debt payments made by the
company. Sun pharma has a steady operating margin of 13%. The ROE of sum
pharma stands at -0.14% in the FY16 and 4.4% in FY15.

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 The DOL of the company is expected
to be negative from FY18 due to
DOl vs DFL increasing deprecation and increasing
fixed cost example the employee
6
compensation and Raw material cost
4 is expected to increase FY18 (con
call).
2

0 The financial leverage of the company

FY15 FY16 FY17 FY18E FY19E FY20E is stable during FY16 and FY17. It is
-2
expected to improve in FY18 due to
-4 reduction in interest payment of the
company. This clearly shows the
-6 company has been able to pay its debt
DOL financical leverage very easily over the years and is very
liquid.

The second chart show the NPM vs

NPM and PAT the PAT. The NPM has decreased
from 18.519% in Mar 13 to a -0.420%
10,000.00 40.000% in Mar 17. The company is inefficient
5,000.00 in converting sales into the profit. The
18.519% 20.000%
Dip in NPM from 18.59% in 2013 to -
0.00 89.125% in mar14 was due to the
0.000%
-0.420%
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 merger. The NPM has been improving
-5,000.00 -12.923%
-17.370% -20.000% indicating and improvement in
-10,000.00
-40.000%
profitability of the company. The
-15,000.00 company has repaid most of its short-
-60.000% term debts.
-20,000.00
-25,000.00 -80.000%
-89.125%
The 3rd depicts the line items
-30,000.00 -100.000% contributing to highest expenses they
are:
PAT NPM 1. Compensation to employees has
been increasing as the company
acquired more specialty
companies in the US
2. The financial services expense
forms a large part of the expense
Earnings vs assets list of the company. The company
has incurred a net loss of 2331.2
50 24.500%
million INR on foreign currency
24.000% transaction.
0 3. The Earnings of the company are
23.500%
FY15 FY16 FY17 increasing every year while the
-50 23.000% P/E is stagnant. The asset
22.500% utilization is expected to increase
-100 from 23% to 25.6% in 2019. With
22.000%
the NPM. The negative earrings in
21.500% the year 2015 and 2016 the the
-150
21.000% company has a good operational
efficiency and utilisation of assets.
-200 20.500%
The hence the negative profit is of
EPS P/E asset utilization no worry as the.
 Expected Future Performance: Info FY18E FY19E FY20E
EPS 35.186 37.801 40.351
The growth in revenues will be driven by the increased spending in speciality
segments in the US. As the revenue streams from the acquired companies start fair 12.713 11.8331 11.0846
realizing topline will increase. I expect the company to grow at 9% in FY18. p/E
Riding on the large pipeline of drugs awaiting FDA approval and Indian pharma Total 91642.8 93696.8 102129.5
market is expected to grow at CAGR of 6-9%. With 48% of sun pharma business income
being generated from the US and the US Pharma industry expected to grow at a
CAGR of 5-9% 2016-2020 provides a great opportunity for growth. The company Source: My analysis
is yet to achieve 1/3rd of synergies valuing at 100 million$ from the Ranbaxy
merger.

I expect the profitability of the company to

profitability decrease over from FY18 to FY20.This is
due to the increasing interest payments.
20000.00 7.40%

7.20% The OPM is expected to remain constant

15000.00 at 16.28%. the profitability takes a hit
7.00% because of the increase in interest
10000.00 payment by the company.
6.80%
5000.00 What is positive here is that the company
6.60%
can maintain its operating margin at a
0.00 6.40% constant level.
FY18E FY19E FY20E

EBITDA PAT NPM

The company has astable asset utilization ratio. The Asset utilization efficiency is
expected to increase to FY19 by 150 Bps. Info FY15 FY16 FY17
asset 21.77% 23.28% 23.94%
utilization
Info FY18E FY19E FY20E
asset 23.86% 25.29% 26.78%
Risk utilization
Market Risks Source : My analysis
1. Government losing the upcoming 2019 elections. (low probability, high
impact) The current government is pro capitalist and it has put India back
on the growth trajectory.
2. Trump(High probability, high impact): The trump administration
focussing on the America first can pose a huge threat to Indian generics

Financial Risks
1. Forex risk (medium probability, high impact): The company doing most
of its business in USD it faces a huge foreign exchange risk with the
appreciation of rupee
2. Credit availability (medium probability, medium impact): low interest
rate prevalent in japan and qualitative easing followed by the USA has
filled the market with excess liquidity. Reduction in the qualitative easing
might increase the borrowing cost of the company which hay make
inorganic growth difficult.

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Business and Operational Risks
Cost of Equity 0.103223
1.Black Swan Event (low probability, high impact) Black swan events are
unpredictable. Their occurrence is low but the impact is high. Last time it occurred Market return 0.143691
in 2008 when the housing demand fell off the roof and financial organizations Risk free rate 0.06463
became bankrupt.
2.FDA regulations (high probability, high impact): FDA regulations act as barrier
Beta 0.488142
for companies from doing their day to day business. Cost of debt 0.12
Post-tax cost of 0.084
Weighted average cost of capital debt
It was calculated using the cost of equity and after-tax cost of debt. Cost of equity WACC 0.0995
was calculated through the Capital Asset Pricing Model. The 10- years INR Indian
Government bond rate was used as risk-free rate, estimated at 6.46%. I have
Source : My analysis
determined sunpharma beta by using 10-year monthly prices vs Nifty 50 index in
a regression analysis, resulting in a 0.488 beta; The expected market risk premium
was computed to be 7.91% using monthly return data of Sensex and 10 Year
Government bond yield of India, which lead us to a 10.32% cost of equity.
The after-tax cost of debt was calculated using the pre-tax cost of debt of 12%
which was multiplied by 0.7 to arrive at a post-tax cost of debt of 8.4%.

TERMINAL GROWTH VALUE

The terminal growth rate of 5% is used and using a terminal cost of capital using
a mature economy data.

Summary of Forecasted Financials and Key Ratios

(Tabular)

Key Ratios
Info FY15 FY16 FY17 FY18E FY19E FY20E
operating cost/sales% 100.149 101.942 91.356 0.886 0.886 0.886
rawmaterial cost /sales% 23.828 22.702 20.345 0.183 0.183 0.183
ebitda margins% 0.024 0.034 0.134 0.169 0.169 0.169
Net income margin % -0.174 -0.129 -0.004 0.073 0.070 0.067
ROCE -2.410 -1.249 2.477 3.950 4.131 4.300
ROE -7.117 -4.460 -0.146 2.775 2.912 3.044
EPS (INR) -6.144 -4.474 -0.146 35.187 37.802 40.357
P/E current and forward -0.032 -0.044 -1.345 11.658 11.658 11.658
BV/share 94.679 89.311 85.990 85.990 85.990 85.990
P/BV 4.964 5.262 5.466 5.472 5.472 5.472
asset untilization 0.212 0.220 0.234 0.238 0.252 0.268
D/E 5.650 8.017 7.592 6.837 6.837 6.837
inventory turnover 3.876 3.896 3.639 3.364 3.364 3.364

Source: My analysis
Balance Sheet (Forecasted)

- Mar-18 Mar-19 Mar-20

Total liabilities 386954.1 399837.1 412949.2

Total Capital 2399.3 2399.3 2399.3

Reserves and funds 214319.6 231818.3 249464.7
Specific reserves 54447.55 54447.55 54447.55
Long term borrowings excl 16403.78 16403.78 16403.78
current portion
Deferred tax liability
Other long term liabilities 105.3307 101.8808 87.94107 Source: My analysis
Long term provisions 25094.97 24311.87 23429.18
Current liabilities & provisions 76582.92 72753.77 69116.09
Total assets 384950.5 395626.8 406307.8

Net fixed assets 42684.4 46099.15 48865.1

Long term investments 239410.8 239410.8 239410.8
Long term investments in 237586.4 237586.4 237586.4
group cos
Long term investments in non 1824.395 1824.395 1824.395
group cos
Long term loans & advances 22171.57 22171.57 22171.57
Current assets and loans & 80683.72 87945.26 95860.33
advances
Inventories 25555.36 27855.34 30362.32
Trade & bills receivables 25403.9 27690.25 30182.37
Cash & bank balance 5427.57 5916.052 6448.496
Short term investments 14393.24 15688.63 17100.6
Short term loans & advances 9903.663 10794.99 11766.54

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Income statement (Forecasted)
Mar-18 Mar-19 Mar-20
Total income 91642.81 99890.66 108880.8
Sales 85960.41 93696.85 102129.6
Total expenses 82131.45 89909.25 98448.82
Operating expenses 76187.72 83044.61 90518.63
Raw materials, stores & spares 15730.76 17146.52 18689.71
Purchase of finished goods 9257.936 10091.15 10999.35
Packaging and packing expenses 4040.139 4403.752 4800.089
Power, fuel & water charges 3318.34 3616.991 3942.52
Compensation to employees 13935.95 15190.18 16557.3
Indirect taxes 2604.2 2838.578 3094.05
Royalties, technical know-how fees, etc
Source: My analysis

Rent & lease rent 233.1288 254.1104 276.9804

Repairs & maintenance 1889.381 2059.425 2244.773
Insurance premium paid 325.6539 354.9627 386.9094
Outsourced manufacturing jobs 1974.298 2151.984 2345.663
Outsourced professional jobs 4686.779 5108.589 5568.363
Non-executive directors' fees 3.645613 3.973719 4.331353
Selling & distribution expenses 3412.558 3719.688 4054.46
Travel expenses 4495.729 4900.345 5341.376
Communications expenses 260.7831 284.2535 309.8364
Printing & stationery expenses 132.9988 144.9686 158.0158
Miscellaneous expenditure 9885.447 10775.14 11744.9
Other operational exp of industrial ent
Other operational exp of non-fin services ent
Share of loss in other enterprises
Financial services expenses 429.8021 468.4842 510.6478
Fee based financial services expenses
Fund based financial services expenses
Non-cash charges
Depreciation 5513.927 6396.156 7419.54
Amortisation
Write-offs 107.7357 107.9189 108.1023
Provisions 1598.031 2688.811 4524.134

Prior period and extraordinary expenses

Provision for direct tax 2853.408 2994.422 3129.601

tac rate
Profit after tax 6657.952 6986.985 7302.402
NPM 0.072651 0.069946 0.067068
Computation of Value

DCF Value

PV of FCFF 1,33,359 The present value of FCFF was calculated using the future cash
Terminal Value 990063.3496 flows That is cash flow from FY18 discounted using the WACC to
arrive at a value of 1,33,359.02
Firm Value 1123422.371
The terminal value was calculated using the PV of the terminal
Value of Debt 50,129.73 cashflow in the last predicted year discounted at WACC.
Value of Equity 10,73,292.64 Firm value was calculated to be FV FCFF + Terminal value
N = outstanding shares
N 2399.3
The intrinsic value is given by the formula value of equity/ N
Intrinsic Val 447.3357406
CMP 470.5

Source: My analysis
Sensitivity analysis

Sensitivity Analysis

Cost of Capital

447.392 8.45% 8.95% 9.45% 9.95% 10.45% 10.95% 11.45% 11.95%

3.500% 460.205 415.498 378.31 346.893 320 296.724 276.378 258.444

4.00% 385.55 353.521 326.106 302.376 281.63 263.353 247.117 232.603

4.500% 356.904 329.221 305.26 284.317 265.86 249.464 234.809 221.631

Growth Rate

5% 356.904 329.221 305.26 284.317 265.86 249.464 234.809 221.631

5.500% 385.55 353.521 326.106 302.376 281.63 263.353 247.117 232.603

6.000% 460.205 415.498 378.31 346.893 320 296.724 276.378 258.444

6.500% 653.333 567.301 500.608 447.395 403.95 367.812 337.281 311.147

Source: My analysis

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 Relative Value
1. P/E multiple
Mar-18
EPS Estimates 35.18656078
(my estimates)
Trading at Forward PE 13.37158249
Mean PE 14.8184106
Standard Dev of PE 14.11108336
Target price at Mean PE 521.4089053
target price at Mean
+2SD 1514.44989
Target price at 1+ SD 1017.929398

Source: My analysis

Forward P/E was calculated to arrive at target price for the stock. EPS *P/E gives the target price of share. The target price at
Mean +2SD gives the Values of share twice standard deviation. In relative valuation P/E was given a weightage of 20% to
calculate the final intrinsic value of the stock. Since earnings figures are easy to manipulate as it takes into consideration non-
cash items has I have taken Ev/EBITDA as the secondary relative valuation multiple. The target price at mean P/E is 521.4089

2. EV/EBITDA Multiple

Mar-18
EBITDA ESTIMATES 90402.12
(my estimates)
Trading at Forward EV/EBITDA 14.03855038
Mean EV/EBITDA 30.64451613
Standard Dev of EV/EBITDA 7.285843735
Target price at Mean EV/EBITDA 1159.215308
target price at Mean +2SD 1685.049095
Target price at +1sd 1410.529157
CASH 5427.570193
DEBT 50,129.73
Source: My analysis

Enterprise values is calculated as market capitalisation + debt -cash. Forward and mean EBITDA were calculated and target
price at mean , mean +2SD and mean +1SD was found out. The targer price at mean EV/EBITDA is 1159.215

I Chirag Borkar hereby certify that the report written above is my original work.