Buy Sun Pharma;target of Rs 980: Khambatta Securities

Khambatta Securities's research report on Sun PharmaSun Pharmaceuticals Ltd. (Sun Pharma) total income remained flat y-o-y but grew marginally at 3.6% q-o-q to Rs 70,821 mn in 3Q FY16, in-line with our expectations for the quarter. EBITDA remained flat y-o-y but increased 12.2% q-o-q to Rs 21,690 mn. EBITDA margin decreased 61 bps y-o-y but increased 235 bps q-o-q to 30.6% during 3Q FY16, exceeding our expectations for the quarter, mainly due to lower than expected Cost of Goods Sold and Employee benefits expense as a percentage of revenues. Net profit increased 259.9% y-o-y and 28.6% q-o-q to Rs 14,229 mn. Net margin increased 1439 bps y-o-y and 391 bps q-o-q to 20.1% in 3Q FY16, exceeding our expectation mainly due to better than expected performance at operating level further enhanced by lower than expected tax expense.Though Sun Pharma continues to face integration issue with Ranbaxy, negatively impacting the company’s profitability, profitability of the company is improving with the help of Taro’s performance and improvement in US business. Research & Development (R&D) expense is expected to remain high due to expense related to development of MK-3222 (Tildrakizumab), an investigational therapeutic antibody candidate, which is currently being evaluated in Phase 3 registration trials for the treatment of chronic plaque psoriasis, a skin ailment. We continue to believe that profitability will be negatively impacted by cost associated not only with integration of Ranbaxy but also remediation efforts at Halol, Mohali, Devas, Poanta Sahib and Toansa facilities. However, Sun Pharma Management has indicated that it expects to approach US FDA for re-inspection of Halol plant during 1Q FY17. Also, the company has successfully launched generic Gleevac on 1 Feb 2016 and expects to garner 30% market share gradually. Management has continued to supply Doxil to other markets from Halol facility without interruption and expects to continue doing so but sales have been impacted by competition.

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