Stock Pick From The Pharma Sector
3/7/2013 9:00 PM Thursday
Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.
The company recommended as the Choice Scrip for this issue is one of the largest Pharma companies in the country.
HERE IS WHY:
- Largest Indian Pharma company by sales and market cap
- Has strong products in the pipeline
- The geographic spread of revenues is fairly broad-based
The management of Sun Pharma claims that the amount of Rs 1000 invested in its IPO in 1994 would have cumulatively grown to about Rs 3.3 lakh by December 2012. Isn’t that a phenomenal record of value creation? It becomes even more interesting considering the fact that we are talking about a pharmaceutical company which has been into a very competitive business of manufacturing APIs and branded formulations. While value creation is a function of the overall growth of the company, the moot question to answer before we recommend this stock to you is whether the growth momentum will continue in the future as well? Here are the points which should answer this for you.
Sun Pharma is the largest Indian company by revenues. Its market cap of over Rs 82000 crore exceeds that of Ranbaxy, Lupin and Dr Reddy's Laboratories put together. The company is also a consistent dividend payer which is an added advantage.
Having started operations in 1983, the company now has 24 manufacturing facilities across four continents. The company derives 36 per cent of its revenues from the domestic pharma market. US Generics is its largest business segment which contributes around 43 per cent to its topline, while Active Pharma Ingredients contributes another seven per cent. The international generics business (excluding the US) contributes to the remaining 14 per cent of its revenues.
On the domestic front, Sun Pharma is a dominant player with a market share of around five per cent. The company operates in the specialty segments which contribute to around 30 per cent of its domestic revenues. This includes therapeutic segments like Cardiology and Diabetology, primarily classified as lifestyle diseases. It also has a presence in other key segments like Gastroenterology, Gynecology and Neuropsychiatry. Its dominant position has helped the company achieve a strong growth in the domestic market. Its revenue growth is expected to continue in future as well.
Besides, of its 14 therapeutic segments, the pharma giant has a leadership position in five, which further strengthens the assurance that the company will see sustainable revenue growth in the domestic markets going forward.
|SHAREHOLDING PATTERN AS ON 31/12/2012|
|Promoters ||63.68 |
|FII ||21.45 |
|DII ||4.44 |
|Bodies Corporate ||5.03 |
|Others ||5.4 |
|GRAND TOTAL ||100 |
US Generics, the largest revenue driver of the company, has shown a fantastic growth over the last five years. Eight acquisitions in the USA since 1997 now have helped the company build strength. In 2010, Sun Pharma acquired the Israel-based Taro Pharma which contributes 34 per cent to its consolidated topline as of now. It recently acquired two other companies in the US - URL Pharma and Dusa Pharma. Both these companies have some strong products in the pipeline which will further help Sun Pharma to increase its business in the US. URL Pharma has 107 upcoming products, while Dusa Pharma has given it an access to dermatology products in the US. The company already has 403 ANDAs filed in the US, of which 261 are approved.
In the international generics segment, the company is present in 40 countries including South Africa, Russia, Brazil and Mexico. The advantage of being in these countries is that these markets remain less regulated and hence provide good growth opportunities. The company supplies APIs primarily in the regulated markets. It however uses APIs for vertical integration and hence the segment is strategic in nature.
Its recent performance reflects on the long-term nature of its growth prospects. For 9MFY13, it has reported a 44 per cent jump in its total sales to Rs 8167 crore. Its EBITDA margins at 45 per cent are the best that it has clocked in the last four years. Its adjusted net profit is up by 46 per cent at Rs 2580 crore. The company also has a strong balance sheet which carries a cash balance of Rs 6500 crore on it.
|LAST FIVE QUARTERS (Rs/CR)|
|Dec '12||Sep '12||Jun '12||Mar '12||Dec '11|
|Total Income ||2865.49 ||2663.86 ||2683.47 ||2336.18 ||2145.13 |
|Depreciation ||84.43 ||82.89 ||80.14 ||82.26 ||77.42 |
|Other Income ||67.84 ||169.27 ||-27.22 ||211.87 ||-86.34 |
|Interest ||-12.31 ||28.26 ||21.21 ||11.2 ||-59.11 |
|Tax ||236.86 ||213.89 ||192.49 ||176.83 ||63.43 |
|Net Profit ||881.3 ||319.64 ||795.55 ||820.21 ||668.3 |
On the valuation front, the scrip, at the CMP of Rs 799, is trading at a TTM P/E of 29.3x. Being a market leader, Sun Pharma enjoys a premium over its peers. The scrip has been performing well ever since it launched its IPO and we are therefore quite sure of its value creation potential going forward too. We recommend entering the scrip at its CMP, which could easily give returns of more than 20 per cent over the next year.
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