SUN PHARMA

Unhurt And Going Strong
Sun Pharma has managed the present hostile economic situations well and emerged unscathed where many others have stumbled
Economists are placing bets on how far the current global meltdown will go. Economic environment has become extremely challenging for businesses, and equities are no longer the favourite destination for savings. No business is recession proof, but some businesses are recession resistant, and the pharmaceutical sector tops the list.

In India, Sun Pharmaceutical (Sun Pharma), the country’s largest pharma company by market capitalisation, with its strong fundamentals offers a long-term growth opportunity. Since January, equity markets have taken a beating but Sun Pharma, with its stiff resistance on the downside, managed to move up in a falling market till September. The stock, however, lost momentum due to general lack of confidence in the markets, and is now trading around its January levels of Rs 1,100.

Background. Sun Pharma is present in over 30 markets and has a portfolio of 1,000 registered and marketed products. It has 17 manufacturing units, including three in the US, for formulations and active pharmaceutical ingredients (API) for the domestic and international market. In financial year 2008, international markets’ share in revenues was 57 per cent (41 per cent from the US).

Financials. Revenues for the company have doubled and net profits tripled, in the last four years. In the September quarter, sales on a consolidated basis went up by 76 per cent and net profits by 135 per cent, against the same quarter last year. In the US generics market, after growing at 70 per cent (three-year CAGR) at the end of FY08, sales were up 195 per cent, year-on-year (y-o-y), in the September quarter. In the first half of FY09, net sales went up by 71 per cent and net profits by 128 per cent on a y-o-y basis.

Sun Pharma’s debt position is comfortable. It raised Rs 180 crore as external commercial borrowing in FY05, of which Rs 100 crore has been repaid and the rest will be paid back by end of this fiscal. This isn’t a big concern as the company has about Rs 1,085 crore cash balance.

Investment rationale. In an environment where businesses are struggling to survive, especially in markets like the US, the biggest overseas market for Sun Pharma, revenue from the US generic market went up by around 200 per cent in the September quarter. Recently, Caraco Pharma, a Sun Pharma subsidy in the US received a Food and Drug Administration (FDA) warning regarding quality. The FDA may withhold approval of new drugs in the short term, but this does not affect the sale of existing products, or Sun Pharma’s exports from India.

Despite its current weakness, the US markets will continue to drive growth in pharma. US President elect Barack Obama plans to make health insurance affordable and has also argued for low-cost generic drugs. The first will increase demand for pharma products while the second will help Indian generic companies in general and Sun Pharma in particular.

Sun Pharma has spent about Rs 950 crore on research and development since 1993. It now has 72 patents and has brought out 40 new products in the Indian market every year. In the September quarter, it launched nine products, taking the new product tally to 16 in the first six months of this fiscal.

While macroeconomic events will continue to drive the broader markets, we believe a strong business like Sun Pharma will continue to grow at its own pace. Enter the stock with a long-term view, and buy in small quantities to take advantage of any price correction.
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