Fairval

Notes on Indian equities, sectors and economy

  • Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 90 other followers

  • Top Posts & Pages

Is Sun Pharma losing the plot?

Posted by fairval on September 11, 2015

A one-off event can be called an exception; twice, maybe a co-incidence; but when something happens 3-4 times in a row – then it is hard to wish it off. At Sun Pharma, materially significant write-offs seem to be becoming a feature of the business.

Since FY13, Sun Pharma has written off Rs 4025 crore (Rs 40.25 billion or ~USD 700m). To get a sense of how big this is, consider this: it is almost equal to the 2 year net profit (FY14 and FY15) of India’s second most valuable pharma company – Lupin. In the 3 year period, FY13-15, the amount is equivalent to almost 30% of Sun’s reported net profit.

Sun

The write-offs have been due to 3 separate causes so far:

  1. Rs 31 billion or roughly USD 550m was written off over FY13 and FY14 to settle a lawsuit related to acid-reflux drug Protonix, and was paid to Pfizer Inc. Japan’s Takeda Pharmaceutical
  2. The write-off of Rs 2.40 billion or USD 40m in FY15 was on account of Sun’s acquisition Ranbaxy; this was to settle litigation concerning its participation in Texas Medicaid
  3. In Q1 FY16, an amount of Rs 6.85 billion (~USD 110m) has been written off as part of restructuring costs involving Ranbaxy acquisition.  The company has guided there is more to come on this count.

Some of this reflects a problem of size. Sun’s revenue reached Rs 274 billion in FY15 (USD 4.4 billion). Sun has chased growth aggressively in its entire history. Its 3 year revenue CAGR for period ending FY15 was 50%,  while 5 year CAGR was 46%, by far the highest in the Indian pharma sector. The sizeable merger done with Ranbaxy in FY15 of course bumps the CAGR this up. But even without this, Sun is used to growing at 30% plus CAGR.

The increasing larger base makes hyper-growth an increasing difficult problem. Even if Sun was to grow at 20% now, it needs to create almost USD 900m of new revenue.

Pharma sector requires far greater risk taking than most other sectors. Greater risks could mean continuing stumbles, which could reflect in recurring writeoffs. So the current 4 year phase may not be an aberration, but a fact of life for Sun.

In financial terms, the implication could well be that profit CAGR will trail revenue CAGR, unless Sun goes through a phase of strong EBITDA expansion, which would again be tough to pull off at this stage and size.  This is already true. Compare the revenue CAGR posted above against net profit CAGR for the same periods. 3 year profit CAGR was 15%, and 5 year was 27% for the period ending FY15. That is way less than revenue CAGR.

Is the stock market factoring the write offs? To some extent, yes. Sun’s stock is down over 21% between April’15 and now, the biggest loser in the pharma space. Some analysts continue to have a Sell rating on the stock even at the lower price, though there continue to others who are strongly recommending the stock.

A foreign broker’s BUY report rates the stock at 28x FY17 eps. This is effectively 34x FY16 eps. A stock which has given 27% net profit CAGR for the last 5 years, should it get a forward PE of more than 30x? Difficult to justify, unless the assumption is that the write-offs will disappear, and there will no more stumbles. At India Business Reports (IBR), we think that’s tough.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: