Sun Pharma
BSE SENSEX
29,443
S&P CNX
9,087
14 March 2017
Update
| Sector:
Healthcare
CMP: INR708
TP: INR850(+20%)
Buy
Mohali plant out of woods; Halol resolution is key
Sun Pharma (SUNP) announced that the US FDA has decided to lift the import alert
status on its Mohali-based formulations plant. The plant was inspected by the US
FDA from 7-16 November 2016, post which seven observations were issued (none
were repeat observations).
This new plant was put under import alert and consent decree in 2013 after the US
FDA inspection in September 2012 (11 observations) and December 2012 (3
observations). Although resolution of the US FDA issues at Mohali will be a sentiment
positive and should help create excess capacity, we do not expect any meaningful
change to our near-term estimates. The Halol resolution remains the key near-term
catalyst, in our view.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
SUNP IN
2,399
876 / 572
4/-13/-37
1,699.3
25.8
2,906
45.6
Financials Snapshot (INR b)
Y/E Mar
2017E 2018E 2019E
Net Sales
309.3 334.0 373.5
EBITDA
97.6 111.7 130.8
PAT
65.9
84.5 101.6
EPS (INR)
27.4
35.1
42.2
Gr. (%)
54.3
16.3
20.3
BV/Sh (INR)
143.1 171.2 206.4
RoE (%)
20.0
22.3
22.4
RoCE (%)
22.0
23.6
24.0
P/E (x)
23.3
18.2
15.1
P/BV (x)
4.5
3.7
3.1
Shareholding pattern (%)
As On
Dec-16 Sep-16 Dec-15
Promoter
54.4
55.0
55.0
DII
12.2
10.9
9.2
FII
21.8
22.4
26.1
Others
11.7
11.7
9.8
FII Includes depository receipts
Stock Performance (1-year)
Sun Pharma.Inds.
Sensex - Rebased
1,100
950
800
650
500
Resolution of FDA issues at Mohali to de-risk future fillings from India:
There
were ~30 pending ANDAs from this facility. Atorvastatin remains one of the key
fillings from this plant. Given that the pending ANDAs are at least 3-4 years old,
we do not expect any meaningful contribution to sales. Having said that, the
resolution of the US FDA issue is key for SUNP. Currently, the company has four
oral solids facilities in India supplying to the US market (apart from Halol, other
three facilities are running closer to full capacity). With Mohali becoming
CGMP-compliant, we believe SUNP will be able to expand capacity and de-risk
future fillings.
Halol resolution is key:
For SUNP, Halol is one of the largest facilities
contributing to US sales. In FY16, Halol contributed ~7-9% of total sales and
>15% of US sales for SUNP. Apart from key oral solid fillings (including SPARC
products), almost all the injectable fillings are from this facility.
Major initiatives over last two years to bring Halol back on track:
Over the
past two years, SUNP has taken multiple measures, including 1) hiring of third-
party foreign consultants; 2) hiring of senior employees from big pharma
companies in the quality and compliance team (Hired Jila Breeze in early 2015
as head of global quality and compliance. She has more than 25 years of
experience with companies like Novartis and Apotex); and 3) heavy investment
in technology and remediation (one of the primary reasons for significant
increase in legal cost over last two years).
Still the best play in specialty pharma space:
SUNP has been able to build a
rich specialty business portfolio. Its key products include Siciera and
Tildrakizumab (positive phase 3 data out). It has also acquired InSite, partnered
with Moebius Medical, and bought rights to market SPARC products.
Investment in specialty franchise to create value in long term:
We believe the
current stock price does not reflect key positives like RBXY integration benefits,
Halol/Mohali plant resolution and investments in specialty business. We see
the current weakness in the stock price as an opportunity to buy the stock.
SUNP remains an attractive Indian play on specialty business in the US. We
maintain our
Buy
rating with a target price of INR850, based on 22x 1HFY19E.
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Sun Pharma
Exhibit 1: Key operating metrics
3QFY14 4QFY14 1QFY15 2QFY15 3QFY15
Revenue Mix (%)
India
USA
RoW
API
Revenue Growth (%)
India
USA
RoW
API
Cost of sales (%)
Raw material
Staff cost
R&D cost
Other expenses
Tax Rate
Margins (%)
Gross Margins
EBITDA Margins
EBIT Margins
PAT margins
21.9
61.8
12.0
4.3
49.8
20.1
79.2
32.1
53.9
18.3
12.0
7.1
16.5
12.0
81.7
46.1
47.4
41.5
23.1
60.6
10.8
5.5
31.5
21.4
39.1
12.9
55.8
16.6
13.0
7.6
18.7
6.4
83.4
44.2
46.7
43.6
25.2
47.4
24.0
3.2
81.1
16.9
48.8
239.3
30.5
69.7
26.1
17.4
5.5
20.9
11.9
73.9
30.6
29.9
20.5
22.4
52.9
20.8
3.5
89.9
89.7
64.7
240.9
76.0
62.3
22.8
14.0
5.2
20.4
10.7
77.2
38.1
34.7
29.1
25.1
48.7
22.5
3.6
61.0
84.3
26.4
200.3
83.0
69.2
24.9
15.9
6.8
21.7
60.2
75.1
31.2
27.1
9.9
4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17
25.3
49.1
20.9
4.6
51.4
65.8
22.6
191.2
66.2
85.7
26.0
18.4
8.9
32.4
(101.8)
74.0
14.5
11.6
19.4
26.4
47.4
21.8
4.2
2.3
7.3
2.2
(7.2)
73.2
76.5
25.9
18.9
7.7
24.0
7.2
74.1
26.1
25.9
11.6
26.4
48.3
20.5
4.6
(14.9)
0.4
(22.2)
(16.2)
45.2
72.9
21.8
17.7
7.0
26.4
18.7
78.2
27.2
25.2
18.6
26.6
45.1
21.8
6.2
2.1
8.3
(5.5)
(0.8)
176.6
69.7
24.9
16.3
8.2
20.3
10.0
75.1
30.6
30.3
25.8
24.2
52.3
18.3
5.0
20.4
15.1
28.3
5.8
88.2
69.0
19.6
15.9
9.1
24.4
8.0
80.4
33.0
30.0
26.5
23.2
50.8
19.9
5.9
22.7
7.6
31.7
12.3
168.2
66.5
23.1
15.5
6.5
21.5
13.4
76.9
35.4
34.5
28.4
25.9
47.8
21.5
4.7
13.2
11.1
12.0
18.7
53.9
65.7
23.7
15.4
7.1
19.4
15.1
76.3
38.3
38.4
32.0
25.6
44.5
25.0
4.8
8.2
4.2
4.0
33.0
14.1
71.1
29.3
15.8
8.0
18.0
17.7
70.7
31.0
29.5
22.5
Source: Company, MOSL
14 March 2017
2

Sun Pharma
Story in charts
Exhibit 2: Revenues grew 12% YoY in 3QFY17
82
58
50
32
7
42 43 40 63 80 69 62 68
-15
Sales (INR b)
92
62
52
69
71
24
22
2
Growth YoY (%)
69 56
12
Exhibit 3: US business grew 5% YoY
US sales (USD m)
119
20
61
22
26 22
-19
-44
18 25
9
Growth YoY (%)
-11
5
76 82 83 79
414 432 402 601 906 546 492 487 511 486 580 608 555 511
Source: Company, MOSL
Source: Company, MOSL
Exhibit 4: India sales remain same in 3QFY17
Domestic formulations (INR b)
89 89 84
66
17
17 20 21
9.5 9.5 9.5 16 18 17 16
8
20
18 19 18 19
8
15
8
11
20
Growth YoY (%)
Exhibit 5: R&D expense stood at 8% of sales in 3QFY17
R&D cost (INR b)
7.1 7.6
5.0
5.5 5.2
8.9
6.8
7.7
7.0
% of sales
9.1
8.2
6.5
7.1
8.0
1
4
2.1 3.1 3.1 3.5 4.2 4.7 5.5 5.0 4.8 5.8
6.75.2 5.5 6.1
Source: Company, MOSL
Source: Company, MOSL
Exhibit 6: Revenues to exhibit 10% CAGR over FY16-19E
Formulations (INR b)
API (INR b)
23
11
6
75
8
154
265
265
292
314
350
15
17
20
Exhibit 7: US generic sales to be driven by new launches
110.8
US Sales (USD m)
Growth YoY (%)
47.5
55.0
42.9
2,080
39.3
-7.5
2,196
2,135
2,349
5
53
8
106
5.6
-2.8
10.0
494
729
1,130 1,615 2,249
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Company, MOSL
Source: Company, MOSL
14 March 2017
3

Sun Pharma
Exhibit 8: Domestic business to exhibit robust growth
India sales (INR b)
82%
Growth YoY (%)
34.2
39.9
Exhibit 9: RBXY synergy benefits to drive margin expansion
EBITDA (INR m)
43.7
43.3
28.3
28.7
31.5
33.5
131
EBITDA Margin (%)
101
73
8%
80
10%
91
22%
29
30
2%
24%
37
67
13%
12%
32
FY12
49
FY13
69
77
80
98
112
FY14
FY15
FY16
FY17E FY18E FY19E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 10: Earnings to exhibit 28% CAGR (on fav. base)
Exhibit 11: Margin expansion to yield superior return ratios
RoE (%)
33.4
31.5
24.0
25.6
21.5
22.7
22.0
20.0
23.6
22.3
24.0
22.4
RoCE (%)
22.2
21.0
6
8
11
12
13
19
20
30
35
42
FY11
26.9
28.8
18.7
16.5
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Company, MOSL
FY12
FY13
FY14
FY15
FY16 FY17E FY18E FY19E
Source: Company, MOSL
14 March 2017
4

Sun Pharma
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2012
80,098
40.0
31,947
39.9
2,912
29,035
282
4,856
-11
33,598
3,826
11.4
3,855
25,917
25,926
42.6
2013
112,388
40.3
49,063
43.7
3,362
45,701
443
3,727
-5,836
43,148
8,456
19.6
4,863
29,830
34,791
34.2
2014
160,044
42.4
69,257
43.3
4,092
65,165
442
6,282
-25,174
45,831
7,022
15.3
7,375
31,434
52,813
51.8
2015
272,865
70.5
77,198
28.3
11,947
65,250
5,790
6,946
-2,378
64,029
9,147
14.3
9,488
45,394
47,415
-10.2
2016
277,442
1.7
79,561
28.7
10,135
69,426
4,769
9,848
-6,852
67,653
9,349
13.8
11,145
47,159
47,069
-0.7
2017E
309,318
11.5
97,555
31.5
12,400
85,155
4,000
18,400
0
99,555
15,929
16.0
11,000
72,626
65,873
39.9
(INR Million)
2018E
333,974
8.0
111,731
33.5
13,000
98,731
3,000
20,500
0
116,231
19,759
17.0
12,000
84,472
84,472
28.2
2019E
373,470
11.8
130,791
35.0
14,000
116,791
2,000
22,500
0
137,291
22,653
16.5
13,000
101,638
101,638
20.3
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
1,036
120,628
121,663
2,739
-5,199
130,820
46,542
20,406
26,136
3,447
22,129
90,681
20,870
19,261
33,672
16,878
24,950
14,410
10,541
65,730
130,820
2013
1,036
148,862
149,897
2,072
-7,122
161,197
56,026
24,421
31,604
5,626
24,116
113,420
25,778
27,108
40,587
19,948
38,439
15,752
22,687
74,981
161,198
2014
2,071
183,178
185,249
24,982
-9,110
220,333
63,886
28,904
34,982
8,415
27,860
177,393
31,230
22,004
75,902
48,257
61,509
15,887
45,622
115,884
220,333
2015
2,406
253,826
256,232
77,827
-17,516
345,203
130,369
60,617
69,752
20,386
27,163
297,403
56,680
53,123
109,980
77,619
126,574
59,198
67,376
170,828
345,203
2016
2,406
311,636
314,042
83,381
-21,259
417,023
165,221
69,301
95,920
22,425
13,086
331,817
64,236
67,959
139,893
59,730
103,297
48,325
54,972
228,520
417,024
2017E
2,406
341,897
344,303
47,308
-21,259
422,211
154,369
79,335
75,034
24,667
27,163
391,231
59,481
54,750
188,869
88,130
152,957
63,852
89,105
238,274
422,211
(INR Million)
2018E
2,406
409,479
411,885
34,795
-21,259
489,280
166,369
90,149
76,220
27,134
27,163
468,702
60,123
58,768
254,282
95,529
167,012
64,541
102,471
301,690
489,279
2019E
2,406
494,227
496,633
25,700
-21,259
577,933
191,369
102,588
88,781
29,847
27,163
561,803
64,177
65,647
325,924
106,055
186,734
68,893
117,841
375,069
577,933
14 March 2017
5

Sun Pharma
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
10.8
12.0
50.6
1.8
17.2
2013
14.5
13.8
62.3
2.2
17.5
2014
22.0
14.8
77.0
2.6
18.7
2015
19.7
23.8
106.5
4.3
21.8
32.4
6.0
5.4
19.1
0.7
24.0
26.9
40.1
0.7
88
95
109
-0.2
25.6
28.8
45.2
0.8
88
84
91
-0.2
31.5
33.4
55.5
0.8
50
71
64
-0.2
21.5
22.7
37.8
1.0
71
76
110
-0.1
2016
19.6
23.8
130.5
0.0
0.0
32.6
4.9
5.3
18.4
0.0
16.5
18.7
27.9
0.7
89
85
89
-0.2
2017E
27.4
35.3
143.1
6.0
20.2
23.3
4.5
4.4
14.0
0.9
20.0
22.0
33.8
0.7
65
70
110
-0.4
2018E
35.1
40.5
171.2
6.0
17.5
18.2
3.7
3.9
11.5
0.9
22.3
23.6
45.2
0.7
64
66
106
-0.5
2019E
42.2
48.1
206.4
6.0
14.7
15.1
3.1
3.2
9.2
0.9
22.4
24.0
51.9
0.7
64
63
104
-0.5
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
31,947
4,845
-8,319
-5,373
0
23,099
-10,585
12,515
169
0
-10,416
5,318
-978
-282
-5,115
-1,058
11,626
22,046
33,672
2013
49,063
-2,109
-2,336
-10,379
0
34,239
-22,501
11,737
-1,987
0
-24,488
4,334
-668
-443
-6,058
-2,835
6,915
33,672
40,587
2014
69,257
-18,892
-5,589
-9,010
0
35,767
-18,580
17,187
-3,745
0
-22,324
6,674
22,910
-442
-7,270
21,872
35,315
40,587
75,902
2015
77,198
4,569
-20,865
-17,553
0
43,348
-82,570
-39,223
698
0
-81,872
37,513
52,845
-5,790
-11,964
72,605
34,080
75,902
109,982
2016
79,561
2,996
-27,780
-13,092
0
41,685
-38,341
3,344
14,077
0
-24,264
11,705
5,554
-4,769
0
12,490
29,911
109,980
139,892
2017E
97,555
18,400
39,223
-15,929
0
139,249
6,244
145,493
-14,077
0
-7,833
-25,476
-36,073
-4,000
-16,890
-82,439
48,977
139,893
188,870
(INR Million)
2018E
111,731
20,500
1,997
-19,759
0
114,468
-16,653
97,816
0
0
-16,653
0
-12,513
-3,000
-16,890
-32,403
65,412
188,869
254,282
2019E
130,791
22,500
-1,736
-22,653
0
128,902
-29,274
99,628
0
0
-29,274
0
-9,095
-2,000
-16,890
-27,985
71,643
254,282
325,924
14 March 2017
6

Sun Pharma
NOTES
14 March 2017
7

Disclosures
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Motilal Oswal Securities Ltd
14 March 2017
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