Sun Pharma: Promising year ahead

Given the overall sales momentum, analysts expect consolidated revenue to beat forecast of 15% for FY15

Sun Pharmaceutical Industries posted in-line quarterly results with year-on-year (y-o-y) revenue growth of 32 per cent, aided by US-based subsidiary Taro's good show, currency gains and higher sales of anti-cancer drug Doxil. The bottom line was, however, above expectation, gaining 57 per cent over the year-ago quarter, due to higher other income and lower taxes. Despite volumes and market share pressures, Taro (26 per cent of sales) had a good quarter, with revenues growing 16 per cent y-o-y. Improving realisations,  the case for the past few quarters, helped offset volume loss. The higher realisations helped Taro improve margins to 54.3 per cent, from 38.2 per cent a year ago.

The company’s Indian operations, too, posted good performance. Its sales grew 21 per cent y-o-y. Sun’s focus on high margin and faster growing chronic  ailment therapy has helped it consistently grow faster than the pharma industry.

The company has given a revenue growth forecast of 15 per cent for FY15, which analysts say is good, with growth coming primarily from the US. The country accounts for 56 per cent of sales. Given Sun's conservative guidance practice, analysts peg sales growth at 20 per cent for FY15. In addition to operational performance, the Street will keep an eye on the Ranbaxy acquisition.

While Sun continues to post strong numbers on a y-o-y basis, there are some concerns on Taro if its performance is viewed on a sequential basis. Taro saw its revenues and earnings before interest, taxes, depreciation and amortisation (Ebitda) margins fall 12.4 per cent to $187 million and 916 basis points to 54.3 per cent, respectively, on a sequential basis. According to analysts at Barclays, Taro is facing market share challenges in Taro's key products.

While Doxil, Sun's largest selling cancer drug in the US, continues to do well with sales of $55 million (Rs 330 crore), sales could come under pressure, as rival Johnson & Johnson has sorted out its supply issues. Analysts believe margins will normalise from the higher levels earlier and growth will be driven by its strong Abbreviated New Drug Application pipeline, with 27 cumulative filings. Further, Taro has a cash of $632 million, likely to be used for acquisitions.

Sun's robust product pipeline, strong financials and prospects in key markets of the US and India is why investors are confident about the stock. About 85 per cent of analysts covering the stock have a 'buy' rating, while the rest have a 'hold' and there are no 'sell' calls, with a consensus target price of Rs 697.