Sun Pharmaceutical Industries

(SUNP IN)
Rating: REDUCE | CMP: Rs418 | TP: Rs396

February 4, 2020 Taro Q3FY20: Disappointment on all fronts

Event Update Quick Pointers:

 Change in Estimates |  Target |  Reco  Lowest sales in last 22 quarters

Change in Estimates
 Strong value erosion in derma portfolio drives decline in sales, margin
Current Previous
FY21E FY22E FY21E FY22E
Rating REDUCE REDUCE
Taro had weakest sales in 22 quarters with 16% YoY (and 8% QoQ) decline to
Target Price 396 396 US$148m in Q3FY20. Higher intensity of competitive pricing and lack of
Sales (Rs. m) 3,21,814 3,43,170 3,21,814 3,43,170
% Chng. - -
volume growth in derma portfolio were key reasons for strong erosion in
EBITDA (Rs. m) 70,638 75,326 70,638 75,326 sales. Gross profit was US$94m, declined by 20% YoY and 8% QoQ, while
% Chng. - -
EPS (Rs.) 19.8 21.7 19.8 21.7 gross margin was 63.7% compared to 66.6% in Q3FY19 and 63.1% in Q2FY20.
% Chng. - - EBITDA declined by 24% YoY (and 14% QoQ) to $63.6mn, while EBITDA
margin contracted by 440bps YoY (and 260bps QoQ) to 43%. With benefit of
Key Financials - Consolidated lower tax rate of 4% (vs. 29% in Q3FY19 and 26% in Q2FY20), adj. PAT
Y/e Mar FY19 FY20E FY21E FY22E increased by 2% YoY and 10% QoQ as tax expense reduced by 89% YoY and
Sales (Rs. bn) 281 305 322 343
EBITDA (Rs. bn) 60 67 71 75 86% QoQ due to lower forex gain. Taro contributes 45-50% to the overall US
Margin (%) 21.5 22.0 22.0 22.0 business of SUNP. We remain concerned over Taro’s crown jewel portfolio in
PAT (Rs. bn) 30 45 48 52
derma as new generics from Aurobindo (ARBP) and Lupin (LPC) are likely to
EPS (Rs.) 12.4 18.9 19.8 21.7
Gr. (%) 59.3 52.3 4.6 9.4 increase competition further. We maintain ‘Reduce’ and retain TP at Rs396
DPS (Rs.) 2.2 2.2 2.2 2.2 for SUNP.
Yield (%) 0.5 0.5 0.5 0.5
RoE (%) 7.5 11.3 11.7 11.5
RoCE (%) 8.8 9.2 9.6 9.7 Key highlights:
EV/Sales (x) 3.5 3.3 3.0 2.7
EV/EBITDA (x) 16.4 14.9 13.6 12.2  Received one ANDA approval received in Q3FY20 while there are 23 ANDAs
PE (x) 33.6 22.0 21.1 19.3
P/BV (x) 2.4 2.6 2.3 2.1
are pending for approval with US FDA. Its focus of R&D to remain on topical
products in US.

Key Data SUN.BO | SUNP IN  DSO (receivables) declined to 118 days during the 9MFY20 compared to 130
52-W High / Low Rs.484 / Rs.345
Sensex / Nifty 39,872 / 11,708
days in FY19 leading to reduction in working capital cycle to 180 days from 191
Market Cap Rs.1,002bn/ $ 14,024m days.
Shares Outstanding 2,399m
3M Avg. Daily Value Rs.5134.74m
 R&D expenses remained similar at $15mn.

Shareholding Pattern (%)  Status of price-fixing allegations remains unchanged; the Department of
Promoter’s 54.55
Justice is still investigating the case.
Foreign 14.70
Domestic Institution 18.21
Public & Others 12.23  Cash and marketable securities at 9MFY20 were US$1,531m vs US$1,354m
Promoter Pledge (Rs bn) 60.01
in Q4FY19.

Stock Performance (%)  Effective tax rate (ETR) was 6% in 9MFY20 and 4% in Q3FY20.
1M 6M 12M
Absolute (6.1) (0.7) (1.3)
Relative (2.3) (7.6) (9.8)

Surajit Pal
[email protected] | 91-22-66322259
Tausif Shaikh
[email protected] | 91-22-66322246

February 4, 2020 1
 Sun Pharmaceutical Industries

Taro – Q3FY20 Result Overview (US$ mn)

Y/e March Q3FY20 Q3FY19 YoY gr. (%) Q2FY20 9MFY20 9MFY19 YoY gr. (%)
Net Sales 148 176 (16.3) 161 470 490 (4.1)
Raw Material 54 59 (9.0) 59 172 164 5.2
% of Net Sales 36.3 33.4 36.8 36.7 33.4
SG&A costs 15 19 (18.3) 18 48 53 (8.9)
% of Net Sales 10.5 10.7 11.2 10.3 10.8
R&D exps 15 15 1.8 16 44 43 2.9
% of Net Sales 10.2 8.3 9.7 9.4 8.7
Total Expenditure 84 93 (9.2) 93 265 259 2.0
EBITDA 64 84 (24.1) 68 205 231 (11.0)
Margin (%) 43.1 47.5 42.3 43.7 47.1
Depreciation 5 5 10.7 6 16 14 17.2
EBIT 58 79 (26.3) 62 189 217 (12.7)
Other Income 0.5 1.4 1.1 2.2 1.9 15.6
Interest (8.5) (8.4) 1.7 (8.9) (27.0) (25.3) 6.8
PBT 67 89 (24.2) 72 218 244 (10.5)
Extra-Ord. Inc./Exps. 3 31 0 11 38
Total Taxes 3 26 (88.7) 16 40 59 (33.0)
ETR (%) 4.3 29.0 22.5 18.1 24.2
Reported PAT 68 94 (27.7) 56 190 223 (14.9)
Source: Company, PL

February 4, 2020 2
 Sun Pharmaceutical Industries

Financials
Income Statement (Rs m) Balance Sheet Abstract (Rs m)
Y/e Mar FY19 FY20E FY21E FY22E Y/e Mar FY19 FY20E FY21E FY22E

Net Revenues 2,81,075 3,04,675 3,21,814 3,43,170 Non-Current Assets

YoY gr. (%) 7.8 8.4 5.6 6.6
Cost of Goods Sold 78,701 80,739 85,603 91,283 Gross Block 2,46,259 2,58,259 2,71,259 2,84,259
Gross Profit 2,02,374 2,23,936 2,36,211 2,51,887 Tangibles 1,62,426 1,69,426 1,77,426 1,85,426
Margin (%) 72.0 73.5 73.4 73.4 Intangibles 83,834 88,834 93,834 98,834
Employee Cost 56,215 59,412 61,788 65,889
Other Expenses 21,081 25,897 27,354 29,169 Acc: Dep / Amortization 87,451 1,08,149 1,30,039 1,52,614
Tangibles 62,151 75,860 90,364 1,04,657
EBITDA 60,431 67,029 70,638 75,326 Intangibles 25,300 32,289 39,674 47,956
YoY gr. (%) 16.6 10.9 5.4 6.6
Margin (%) 21.5 22.0 22.0 22.0 Net fixed assets 1,58,808 1,50,110 1,41,221 1,31,645
Tangibles 1,00,274 93,565 87,061 80,768
Depreciation and Amortization 16,578 20,698 21,890 22,575 Intangibles 58,534 56,545 54,159 50,877

EBIT 43,853 46,331 48,749 52,751 Capital Work In Progress 14,112 11,289 11,708 12,143
Margin (%) 15.6 15.2 15.1 15.4 Goodwill 59,558 50,624 50,624 50,624
Non-Current Investments 40,476 41,001 41,678 42,380
Net Interest 3,932 3,029 3,808 3,427 Net Deferred tax assets 24,506 25,078 25,674 26,320
Other Income 13,254 13,917 14,612 15,343 Other Non-Current Assets 37,744 32,953 33,897 34,888

Profit Before Tax 53,175 57,218 59,553 64,666 Current Assets

Margin (%) 18.9 18.8 18.5 18.8 Investments 39,507 41,483 46,460 52,036
Inventories 78,860 81,907 85,125 88,556
Total Tax 7,444 8,011 8,337 9,053 Trade receivables 88,842 96,828 1,05,802 1,12,823
Effective tax rate (%) 14.0 14.0 14.0 14.0 Cash & Bank Balance 72,756 70,444 88,727 1,16,760
Other Current Assets 23,149 24,306 25,521 26,797
Profit after tax 45,730 49,208 51,215 55,613 Total Assets 6,46,938 6,34,451 6,65,041 7,03,810
Minority interest 3,738 3,744 3,657 3,587
Share Profit from Associate - - - - Equity
Equity Share Capital 2,399 2,399 2,399 2,399
Adjusted PAT 29,848 45,464 47,558 52,026 Other Equity 4,11,691 3,84,975 4,26,475 4,72,443
YoY gr. (%) 59.3 52.3 4.6 9.4 Total Networth 4,14,091 3,87,375 4,28,874 4,74,842
Margin (%) 10.6 14.9 14.8 15.2
Extra Ord. Income / (Exp) - - - - Non-Current Liabilities
Long Term borrowings 15,226 13,703 12,333 11,100
Reported PAT 29,848 45,464 47,558 52,026 Provisions 4,304 4,476 4,655 4,841
YoY gr. (%) 59.3 52.3 4.6 9.4 Other non current liabilities 5,713 5,827 5,943 6,062
Margin (%) 10.6 14.9 14.8 15.2
Current Liabilities
Other Comprehensive Income - - - - ST Debt / Current of LT Debt 83,708 92,078 82,871 74,583
Total Comprehensive Income 29,848 45,464 47,558 52,026 Trade payables 41,479 47,579 48,493 51,711
Equity Shares O/s (m) 2,399 2,399 2,399 2,399 Other current liabilities 48,210 46,031 41,428 37,286
EPS (Rs) 12.4 18.9 19.8 21.7 Total Equity & Liabilities 6,46,938 6,34,451 6,65,041 7,03,810
Source: Company Data, PL Research Source: Company Data, PL Research

February 4, 2020 3
 Sun Pharmaceutical Industries

Cash Flow (Rs m) Key Financial Metrics

Y/e Mar FY19 FY20E FY21E FY22E Year
Y/e Mar FY19 FY20E FY21E FY22E

PBT 41,031 57,218 59,553 64,666 Per Share(Rs)

Add. Depreciation 16,578 20,698 21,890 22,575 EPS 12.4 18.9 19.8 21.7
Add. Interest 3,932 3,029 3,808 3,427 CEPS 19.4 27.6 28.9 31.1
Less Financial Other Income 13,254 13,917 14,612 15,343 BVPS 172.6 161.5 178.7 197.9
Add. Other (8,799) (58,159) (76,739) (14,492) FCF (13.0) (3.0) (14.5) 15.5
Op. profit before WC changes 52,742 22,786 8,512 76,177 DPS 2.2 2.2 2.2 2.2
Net Changes-WC (51,427) (8,647) (17,868) (13,532) Return Ratio(%)
Direct tax (12,077) (12,077) (12,077) (12,077) RoCE 8.8 9.2 9.6 9.7
Net cash from Op. activities (10,763) 2,062 (21,434) 50,567 ROIC 9.8 10.2 11.2 12.1
Capital expenditures (20,349) (9,178) (13,419) (13,435) RoE 7.5 11.3 11.7 11.5
Interest / Dividend Income - - - - Balance Sheet
Others - - 16,062 - Net Debt : Equity (x) 0.0 0.0 (0.1) (0.2)
Net Cash from Invt. activities (20,349) (9,178) 2,643 (13,435) Net Working Capital (Days) 164 157 162 159
Issue of share cap. / premium - - - - Valuation(x)
Debt changes 14,564 11,651 46,604 - PER 33.6 22.0 21.1 19.3
Dividend paid (6,058) (6,058) (6,058) (6,058) P/B 2.4 2.6 2.3 2.1
Interest paid (3,932) (3,029) (3,808) (3,427) P/CEPS 18.3 26.1 27.4 29.5
Others - - - - EV/EBITDA 16.4 14.9 13.6 12.2
Net cash from Fin. activities 4,573 2,564 36,738 (9,485) EV/Sales 3.5 3.3 3.0 2.7
Net change in cash (26,538) (4,552) 17,948 27,647 Dividend Yield (%) 0.5 0.5 0.5 0.5
Free Cash Flow (31,111) (7,116) (34,852) 37,132 Source: Company Data, PL Research
Source: Company Data, PL Research

Quarterly Financials (Rs m)

Key Operating Metrics
Y/e Mar Q4FY19 Q1FY20 Q2FY20 Q3FY20E
Y/e Mar FY19 FY20E FY21E FY22E
Net Revenue 70,443 82,593 79,492 80,819
Formulations 2,63,902 2,85,772 3,04,098 3,24,156
YoY gr. (%) 5.0 15.7 16.1 5.6
India Formulations 85,914 93,646 1,01,138 1,09,229
Raw Material Expenses 18,388 24,578 22,679 22,387
US Formulations 95,248 1,00,821 1,04,150 1,07,982
Gross Profit 52,055 58,015 56,813 58,432
ROW Formulations 82,741 91,305 98,810 1,06,945
Margin (%) 73.9 70.2 71.5 72.3
APIs 16,322 18,010 19,388 20,874
EBITDA 8,971 18,132 16,071 16,522
Source: Company Data, PL Research
YoY gr. (%) (36.7) 12.5 11.6 (20.2)
Margin (%) 12.7 22.0 20.2 20.4
Depreciation / Depletion 4,541 4,571 4,733 4,780
EBIT 4,431 13,560 11,338 11,741
Margin (%) 6.3 16.4 14.3 14.5
Net Interest 1,500 1,041 839 814
Other Income 4,012 3,281 3,750 3,563
Profit before Tax 6,942 15,801 14,249 14,490
Margin (%) 9.9 19.1 17.9 17.9
Total Tax (288) 1,461 2,660 2,029
Effective tax rate (%) (4.1) 9.2 18.7 14.0
Profit after Tax 7,231 14,340 11,589 12,461
Minority interest 872 1,139 1,033 774
Share Profit from Associates - - - -
Adjusted PAT 6,359 13,875 10,641 11,687
YoY gr. (%) (52.6) 31.2 (586.3) (5.9)
Margin (%) 9.0 16.8 13.4 14.5
Extra Ord. Income / (Exp) - - - -
Reported PAT 6,359 13,875 10,641 11,687
YoY gr. (%) (52.6) 31.2 (586.3) (5.9)
Margin (%) 9.0 16.8 13.4 14.5
Other Comprehensive Income - - - -
Total Comprehensive Income 6,359 13,875 10,641 11,687
Avg. Shares O/s (m) - - - -
EPS (Rs) 2.7 5.5 4.4 4.9
Source: Company Data, PL Research

February 4, 2020 4
 Sun Pharmaceutical Industries

Price Chart Recommendation History

(Rs)
No. Date Rating TP (Rs.) Share Price (Rs.)
725
1 09-Jan-20 Reduce 396 439
2 03-Jan-20 Reduce 396 445
635
3 21-Dec-19 Reduce 396 430
546 4 07-Nov-19 Reduce 396 441
5 05-Nov-19 Reduce 396 430
456
6 03-Oct-19 Reduce 396 388
367 7 14-Aug-19 Reduce 396 439

Jul - 19
Aug - 17

Aug - 18
Feb - 17

Feb - 18

Jan - 19

Jan - 20
8 04-Jul-19 Reduce 396 392
9 05-Apr-19 Reduce 427 463
10 13-Feb-19 Reduce 427 442

Analyst Coverage Universe

Sr. No. Company Name Rating TP (Rs) Share Price (Rs)
1 Aurobindo Pharma Hold 412 460
2 Cadila Healthcare Hold 220 260
3 Cipla Reduce 439 470
4 Dr. Lal PathLabs Hold 1,797 1,741
5 Dr. Reddy's Laboratories Accumulate 3,331 3,200
6 Eris Lifesciences Accumulate 459 490
7 Glenmark Pharmaceuticals Reduce 335 352
8 Indoco Remedies Hold 198 234
9 Ipca Laboratories Accumulate 1,238 1,139
10 Jubilant Life Sciences Reduce 488 583
11 Lupin Hold 760 777
12 Sun Pharmaceutical Industries Reduce 396 439
13 Thyrocare Technologies BUY 724 603

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly

February 4, 2020 5
 Sun Pharmaceutical Industries

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