At first sight, Sun Pharmaceutical Industries Ltd’s sales guidance for 2012-13 appears conservative compared with its performance last fiscal. The company’s sales in 2011-12 grew by 40% to Rs8,006 crore, and it expects sales to grow by 18-20%. But the two figures are not comparable. The first one is reported sales growth. And the second one is in constant currency terms.
In dollar terms, Sun Pharma’s sales in 2011-12 rose by 33%. This factor becomes important given the sharp depreciation in the rupee, and the accompanying volatility. About 60% of the company’s drug sales (formulations) are outside India.
In 2011-12, it also benefited from a low base effect in the previous year, as its subsidiary Taro Pharmaceutical Industries Ltd’s revenue was consolidated from September 2010. There were some more one-offs. It got an unexpected boost in the March quarter, as the US Food and Drug Administration allowed it to temporarily supply a cancer drug in short supply. If this drug’s shortage ends, this revenue source may dry up.
Also, Taro has said that its sales and profit growth in 2011-12 have been driven by pricing-related effects, which may not continue.
Another factor that boosted growth was Rs180 crore additional revenue in its Indian business in the March quarter, due to a change in how it distributes its products.
In short, the presence of these non-recurring factors has made Sun give what may appear to be a conservative guidance. But it may well revise its guidance as the year progresses, based on its actual quarterly results, as it has done in the past. It has warned that its first half performance in 2012-13 is likely to reflect the effect of these one-offs.
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Its base business appears to be in strong shape, which is what investors would be focused on. In the US, formulation sales rose by 83% (66% in dollar terms), and in India—adjusted for the distribution policy change—its sales rose by 21%, which is healthy.
Operating profit margins remain healthy at 41% in the quarter, versus 30% a year ago, and 45% in the preceding quarter. Net profit after minority interests rose by 85% year-on-year. Though Sun Pharma does not give earnings guidance, it has said margins may come under pressure in the current fiscal, due to a high base effect caused by the one-off events mentioned earlier.
If Sun Pharma’s base business gets a boost from successful patent challenges and litigation, that would be a plus.
The induction of Israel Makov, Teva Pharmaceutical Industries Ltd’s former president and chief executive, as chairman prompted questions from an analyst, in a conference call, on whether Sun may become active on the acquisition front. The company gave a non-committal reply, but it does have the cash, and also mentioned that it can grow faster in the rest-of-the-world markets (other than India and the US).
While its current share price factors in the positives, better-than-expected US sales growth or a couple of good acquisitions could be valuation triggers. Risks to be watched for are the effects of currency volatility, or if US revenue growth underperforms.
Graphic by Ahmed Raza Khan/Mint
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