Sun Pharmaceutical Industries Ltd.

Sun Pharmaceutical Industries Ltd.

RESULT UPDATE UPDATE RESULT

15th February, 2018 22nd May 2017

India Equity Institutional Research II

II 15th February, 2018

Result Update – Q3FY18

Page 2

Sun Pharmaceutical Industries Ltd.

Solid recovery going ahead...

CMP

Target

Potential Upside

Market Cap (INR Mn)

Recommendation

Sector

INR 572

INR 633

11%

1,385,001

ACCUMULATE

Pharma

Result highlights •With a stronger sales from emerging markets and domestic business the company net sales stood at INR 65,982 Mn which was down by 14.1% y-o-y but was marginally up by 0.1% q-o-q. •EBIDTA stood at INR 14,534 Mn which degrew 40.8% y-o-y but grew 5.6% q-o-q. Reduction in R&D cost and other expenses led to improved profitability of the business. The company has reported margins of 21.8% in Q3FY18 against margins of 20.7% in Q2FY18 •The company has reported profit of INR 3,653 Mn against the profit of INR 9,121 Mn in Q2FY18.PAT Margin for the quarter stood at 5.49% down by 822 bps q-o-q and 1308 bps y-o-y. The current quarter had one time tax impact of INR 5131 Mn. Excluding this tax impact, the PAT margins stood at 13.2% which marginally degrew by 51 bps q-o-q and 537 bps y-o-y. •The US business continue to see the pricing pressure coupled with lower approvals and launches due to issues with halol plant impacted the topline. However, growth from Ex US business let to stable revenues in the quarter. MARKET DATA

KEY FINANCIALS

Shares outs (Mn)

2399

EquityCap (INR Mn)

2399

Mkt Cap (INR Mn)

1385001

52 Wk H/L (INR)

728/433

Volume Avg (3m K)

Particulars (INR Mn) Revenues EBITDA Net Income EPS P/E (x) EV/EBITDA (x) RoCE (%)

5706.9

Face Value (INR)

1

Bloomberg Code

SUNP IN

FY15 272,451 79,494 45,253 18.8 31.4 18.0

FY16 276,400 84,073 46,415 19.3 28.1 16.2

FY17 302,643 87,751 56,502 23.5 26.4 15.3

FY18E 2,59,816 57,160 20,940 12.4 46.8 24.7

FY19E 2,80,049 73,373 41,005 20.8 27.9 19.0

19.9

16.7

19.5

9.0

11.0

Source: Company, KRChoksey Research

Muted results for the quarter: The largest Pharma company of India has delivered muted results with a de-growth of 14% Y-o-Y due to high base business in FY17 which had higher revenues from its gGleevec and continuous price erosion in the base business. However, the launch of gCoreg and ramp up in sales of Oncology drug Odomzo helped to stabilise the revenues. We expect that going forward the company will continue to see high single digit price erosion which will lead to muted revenues in FY18.

SHARE PRICE PERFORMANCE 140

North America’s business witnessed growing trend: The North America’s business has witnessed growing trend with sales at INR 21,241 Mn in Q3FY18, a growth of 6.9% Q-o-Q but a degrowth of 37.8% Y-o-Y. This was mainly due to higher revenues from gCoreg where the company is sole player in the market coupled with ramp up in sales of Odomzo. This quarter was also impacted due to deferred sales of the previous quarter was booked in the current quarter. The Halol plant issue is not yet resolved which has led to less approvals and launches in the quarter.

90

Sun Pharma Industries Ltd

Feb-18

Aug-17

Feb-17

Aug-16

Feb-16

Feb-15

Aug-15

40

Sensex

MARKET INFO SENSEX

34297

NIFTY

10546

Business in RoW and emerging markets has registered growth: In emerging markets the company recorded sales of INR 12,212 Mn which grew 5.2% Y-o-Y mainly due to consolidation of the Biosintez acquisition in Russia. The RoW markets have registered growth of 2.15 Y-o-Y with sales at INR 7,766 Mn. The growth was partly boosted by the consolidation of revenues from the acquisition of 14 brands such from Novartis. Going ahead, we believe that these markets will grow strongly and will help to aid the business leading to long term profitability of the firm. Domestic business saw decline: Sale of branded formulations in India for Q3FY18 was INR 20,850 Mn, up 6% Y-o-Y and accounting for 32% of total sales. However, the sales in the quarter has witnessed a degrowth of 6.12% which mainly due to seasonal mix and GST effects. We expect that going ahead the company will deliver robust growth in the domestic business due to new product launches and strong recovery post GST.

SHARE HOLDING PATTERN (%) Particulars

Dec 17

Sep 17

Jun 17

Promoters

54.38

54.38

54.38

FIIs

17.2

18.17

19.74

DIIs

14.91

13.88

12.86

Others

13.51

13.57

13.02

100

100

100

Total ANALYST

Vaibhav Chowdhry, [email protected], +91-22-6696 5571 Dhara Patwa, [email protected], +91-22-6696 5585

418 ANDA’S Approved

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

126 Pending ANDA approvals

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q3FY18

II 15th February, 2018

Page 3

Sun Pharmaceutical Industries Ltd. Valuations & Views:. We believe that the growth momentum for the company will pick-up post FY18 on the back of improved profitability from the in-licensed drugs such as Odomzo and Absorica which has a potential to generate USD 150-200 mn revenues at its peak sales. Rampup in non US markets such Europe, emerging markets and India business will help to sustain the margins. The company’s Halol plant is awaiting clearance approval by USFDA in which could be the trigger for the stock. The TAD for Tildrakizumab is on March 2018, a positive response by the USFDA would give boost to SUN’s specialty pipeline. The company is developing some of the new molecules such as tildrakizumab and Seciera which are currently under Phase III clinical trials. These molecules have better efficacy than the drugs available in the market. Launch of the drugs post FY19 will give a boost to the topline. Going ahead, we believe the topline to deliver a Y-o-Y grow by 8 % with sales at INR 2,80,049 mn in FY19 and EBITDA at INR 73,373 with margins at 26.2% At CMP of INR 572 the stock is trading at PE of 46.1x at FY18E with EPS of INR 12.4 and FY19 EPS of 20.8 We recommend “ACCUMULATE” rating on the stock and value the stock at 30.5x FY19E EPS of INR 19.5 with a target price of INR 633 indicating 11% upside from CMP.

ANALYST Vaibhav Chowdhry, [email protected], +91-22-6696 5571 Dhara Patwa, [email protected], +91-22-6696 5585

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q3FY18

II 15th February, 2018

Page 4

Sun Pharmaceutical Industries Ltd. Q3FY18 Result Snapshot Exhibit 1: Consolidated Result Update (INR Mn) INR mn Net Sales Other Operating Income Total Sales Total Operating Expenditure Material Cost % of sales Employee Costs % of sales Other Exp % of sales EBITDA EBITDA margin (%) Other Income Interest Expense Depreciation & Amortisation PBT Exceptional Items PBT (Incl. Exceptional Items) Tax Effective tax rate (%) PAT Share of Associates Minortiy Interest Net Income Net Margin (%) EPS

Q3FY18 65,982 550 66,532 51,999 20,997 31.6 13,726 20.6 17,275 26.0 14,534 21.8% 1,292 953 3,393 11,479 0 11,479 7,488 65.2 3,991 10 348 3,653 5.49% 1.5

Q2FY18 65,901 602.8 66,504 52,747 18,775 28.2 13,233 19.9 20,739 31.2 13,757 20.7% 2,548 1,574 3,587 11,144 0 11,144 1,114 10.0 10,030 12 897 9,121 13.71% 3.8

Q3FY17 76,832 2,419 79,251 54,720 22,487 28.4 12,151 15.3 20,082 25.3 24,531 31% 1,222 1,665 3,068 21,020 0 21,020 3,729 17.7 17,291 70 2,500 14,720 18.57% 6.1

QoQ (%) 0.1 (8.7) 0.0 (1.4) 11.8

YoY (%) (14.1) (77.3) (16.0) (5.0) (6.6)

3.7

13.0

(16.7)

(14.0)

5.6 116bps (49.3) (39.4) (5.4) 3.0 0.0

(40.8) -911bps (205.8) (42.7) 10.6 (45.4) 0.0

572.2

100.8

(60.2)

(76.9)

(60.0) -822bps (60.0)

(75.2) -1308bps (75.2)

Source: Company, KRChoksey Research

Key Con-call Highlights: • The company’s halol plant is currently undergoing USFDA inspection and the management avoided to comment on the regulatory action •The US business of the Sun continues to see high single digit price erosion due to intense competition and consolidation of channels. •Sunpharma has reduced Co-pay in Absorica which may lead to low prescriptions base going ahead. But the company guided to improve the profitability they would adopt this strategy. The company will focus on “low prescriptions and high profit strategy”. •The management guided that they would drop certain filings which are more competitive and will revise the number of filings. Currently, they have dropped 10 ANDA filings. •The management has reduced their guidance for R&D expense from 9-10% of total sales to 8-9%. •The reduction in filings will lead to lower R&D cost •The speciality pipeline of the company which contains PDUFA date of Tildrakizumab on March 2018 for USFDA is on track while the European filings may see delay to Dec 2018. •In gCoreg the company is sole player in the market with the innovator. •The company has started marketing Odomzo in US and has also received a new approval for the same. •The recall of Doxil was limited to a specific batch as it had failure of certain system. ANALYST Vaibhav Chowdhry, [email protected], +91-22-6696 5571 Dhara Patwa, [email protected], +91-22-6696 5585

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q3FY18

II 15th February, 2018

Page 5

Sun Pharmaceutical Industries Ltd. KEY FINANCIALS Exhibit 2: Income Statement INR Mn Net Sales Other Operating Income Operating Expenses EBITDA Depreciation Other Income EBIT Interest Paid Pre-Tax Profit Non-Recurring Items Pre-Tax Profit Tax (current + deferred) Net Profit Minority Interests Share of associates Net Income

FY15 2,75,183 1,469 1,94,281 82,371 11,947 4,508 74,932 5,790 69,142 -2,381 71,523 9,147 62,376 -9,363 -126 52,888

FY16 2,78,881 5,990 2,03,287 81,584 10,375 6,583 77,791 5,232 72,559 -6,852 79,410 9,138 70,273 -11,126 15 59,161

FY17 3,02,643 13,142 2,14,892 1,00,893 12,648 6,232 94,477 3,998 90,479 0 90,479 12,116 78,364 -8,819 99 69,644

FY18E 2,59,816 2,598 2,05,255 57,160 13,960 6,792 49,992 4,203 45,789 -9,505 36,284 6,531 29,753 -8,827 15 20,940

FY19E 2,80,049 2,800 2,09,477 73,373 15,885 6,929 64,417 4,893 59,524 0 59,524 9,702 49,822 -8,836 20 41,005

FY15 2,071 2,54,309 2,56,381 28,512

FY16 2,407 3,27,418 3,29,825 40,853

FY17 2,399 3,63,997 3,66,397 37,909

FY18E 2,399 3,89,027 3,91,426 37,909

FY19E 2,399 4,30,939 4,33,338 37,909

27,682 985 27,187

32,906 1,028 21,055

31,769 3,148 13,418

33,051 3,148 14,655

34,414 3,148 16,014

62,279 31,538 55,715 4,90,279

52,061 35,829 41,746 5,55,302

66,549 43,954 50,959 6,14,102

67,031 44,133 51,548 6,42,901

67,519 44,041 52,143 6,88,526

1,10,202 5,989 37,010 45,860

1,24,130 11,161 56,347 64,252

1,49,403 9,610 55,362 70,190

1,90,815 9,706 55,362 70,464

2,09,930 9,803 55,362 70,742

21,174 53,123 56,680 1,09,980 21,933 28,329 4,90,279

7,138 67,757 64,225 80,751 10,716 68,826 5,55,303

2,309 72,026 68,328 86,628 10,191 90,055 6,14,102

2,424 65,488 68,406 78,053 10,395 91,789 6,42,901

2,545 69,053 67,672 99,191 10,603 93,624 6,88,526

Source: Company, KRChoksey Research

Exhibit 3 : Balance Sheet INR Mn Equity Share Capital Reserves & Surplus Total Shareholders Fund Minority Interest Non- current liabilties Long Term Borrowings Deferred Tax Liabilities Other LT Liabilties & Provisions Current Liabilities Short-term Borrowings Trade Payables Other Current Liabilities & Provisions Total Liabilities Non- current Assets Fixed Assets Non-Current Investments Goodwill Other Non-Current Assets Current assets Current Investments Trade Receivables Inventories Cash & Bank Balances Short Term Loans & Advances Other Current Assets Total Assets Source: Company, KRChoksey Research

ANALYST Vaibhav Chowdhry, [email protected], +91-22-6696 5571 Dhara Patwa, [email protected], +91-22-6696 5585

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q3FY18

II 15th February, 2018

Page 6

Sun Pharmaceutical Industries Ltd.. Exhibit 4: Cash flow statement INR Mn

FY15

FY16

FY17

FY18E

FY19E

PBT

64,029

65,707

90,479

36,284

59,524

Depreciation

11,947

10,375

12,648

13,960

15,885

Change in Working Capital

1,796

2,468

-4,092

6,254

-3,291

Other items

-21615

-11691

-28212

-2328

-4810

Cash flow from operations

56,158

66,859

70,823

54,169

67,308

Proceeds from sale of fixed assets

-23,419

-34,035

-36,929

0

0

501

706

1025

-55371

-35000

Other Investing Activities

-5740

-10387

-6312

-212

-218

Cash flow from investing

-28,657

-43,716

-42,216

-55,583

-35,218

Proceeds from borrowings

79,184

82,945

53,640

1,765

1,850

Repayment of borrowings

-96,645

-90,765

-45,268

0

0

Payments for purchase of property, plant and equipment

Finance costs (includes borrowing costs capitalised)

-3504

-3014

-3338

-4203

-4893

Dividend paid

-3,105

-7,217

-2,399

-4,723

-7,909

Others

12,204

-835

-25,488

204

0

Cash flow from financing

-11,865

-18,885

-22,854

-6,958

-10,952

Net increase in cash and cash equivalents

15,635

4,258

5,753

-8,371

21,138

Opening Cash Balance Effect of exchange differences on restatement of foreign currency cash and cash equivalents

43,587

72,856

80,317

86,424

78,053

1,208

4,225

355

0

0

Pursuant to the Scheme of Amalgamation

12,426

0

0

0

0

Closing Cash Balance

72,856

81,338

86,424

78,053

99,191

Source: Company, KRChoksey Research

Exhibit 5: Ratio Analysis INR Mn EPS CEPS BVPS DPS Valuation (x) P/E P/BV EV/EBITDA Return ratio (%) EBIDTA Margin PAT Margin RoE RoCE Leverage Ratios (x) Long Term D/E Net Debt/Equity Debt/EBITDA Interest Coverage Current ratio Growth Ratios (%) Income growth EBITDA growth PAT growth Turnover Ratios Asset Turnover (x) Inventory Days Debtors Days

FY15 26.50 21.92 123.71 3.49

FY16 23.51 18.89 137.05 1.00

FY17 32.66 29.03 152.71 3.50

FY18E 12.40 8.73 163.14 1.86

FY19E 20.77 17.09 180.61 3.11

41.5 8.9 28.36

51.1 8.8 35.45

15.3 3.3 12.01

46.8 3.6 24.73

27.9 3.2 19.00

28.9% 19.9% 24.9% 19.9%

29.3% 20.3% 19.3% 16.7%

33.3% 25.9% 22.5% 19.5%

22.0% 11.5%

26.2% 17.8%

7.9%

12.1%

9.0%

11.0%

0.35 -0.08 1.13 12 1.9

0.26 0.01 1.04 14 2.3

0.27 0.03 0.97 22 2.0

0.26 0.06 1.75 10 1.9

0.24 0.01 1.39 12 2.1

72% 10.7% 39%

1% 2.4% 3%

9% 23.7% 39%

-14% -43.3% -62%

8% 28.4% 67%

1.88 307 70

2.11 370 89

2.11 307 87

1.52 310 92

1.47 315 90

Source: Company, KRChoksey Research

ANALYST Vaibhav Chowdhry, [email protected], +91-22-6696 5571 Dhara Patwa, [email protected], +91-22-6696 5585

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com

India Equity Institutional Research II

Result Update – Q3FY18

II 15th February, 2018

Page 7

Sun Pharmaceutical Industries Ltd.. Sun Pharmaceutical Industries Ltd..

Rating Legend

Date

CMP (INR)

TP (INR)

Recommendation

15-Feb-18 15-Nov-17 14-Aug-17 15-Feb-17 11-Nov-16 16-Aug-16 01-Jun-16 15-Feb-16 12-Aug-15 21-Jul-15 8-Jul-15 30-May-15 9-April-15 16-Feb-15

572 513 450 623 667 797 755 847 843 805 879 966 1152 939

633 613 550 930 940 940 885 971 910 910 991 991 1200 991

ACCUMULATE BUY BUY BUY BUY BUY BUY BUY ACCUMULATE ACCUMULATE ACCUMULATE HOLD HOLD ACCUMULATE

Our Rating

Upside

Buy

More than 15%

Accumulate

5% - 15%

Hold

0 – 5%

Reduce

-5% – 0

Sell

Less than -5%

ANALYST CERTIFICATION: We, Vaibhav Chowdhry (B.Com, MBA), research analyst and Dhara Patwa (BBA,MBA), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. KRCSSPL is a registered Research Entity vides SEBI Registration No. INH000001295 under SEBI (Research Analyst) Regulations, 2014. We submit that no material disciplinary action has been taken on KRCSSPL and its associates (Group Companies) by any Regulatory Authority impacting Equity Research Analysis activities. KRCSSPL prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analyst covers. The information and opinions in this report have been prepared by KRCSSPL and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KRCSSPL. While we would endeavor to update the information herein on a reasonable basis, KRCSSPL is not under any obligation to update the information. Also, there may be regulatory, compliance or other reasons that may prevent KRCSSPL from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or KRCSSPL policies, in circumstances where KRCSSPL might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KRCSSPL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. KRCSSPL accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Our employees in sales and marketing team, dealers and other professionals may provide oral or written market commentary or trading strategies that reflect opinions that are contrary to the opinions expressed herein, .In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Associates (Group Companies) of KRCSSPL might have received any commission/compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of brokerage services or specific transaction or for products and services other than brokerage services. KRCSSPL or its Associates (Group Companies) have not managed or co-managed public offering of securities for the subject company in the past twelve months KRCSSPL encourages the practice of giving independent opinion in research report preparation by the analyst and thus strives to minimize the conflict in preparation of research report. KRCSSPL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither KRCSSPL nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that, Vaibhav Chowdhry (B.Com, MBA), research analyst and Dhara Patwa (BBA,MBA), research associate, of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific brokerage service transactions. KRCSSPL or its associates (Group Companies) collectively or its research analyst do not hold any financial interest/beneficial ownership of more than 1% (at the end of the month immediately preceding the date of publication of the research report) in the company covered by Analyst, and has not been engaged in market making activity of the company covered by research analyst. It is confirmed that, Vaibhav Chowdhry (B.Com, MBA), research analyst and Dhara Patwa (BBA,MBA), research associate, do not serve as an officer, director or employee of the companies mentioned in the report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other Jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject KRCSSPL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform them of and to observe such restriction.

Please send your feedback to [email protected] Visit us at www.krchoksey.com Kisan Ratilal Choksey Shares and Securities Pvt. Ltd Registered Office: 1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai – 400 001. Phone: +91-22-6633 5000; Fax: +91-22-6633 8060. Corporate Office: ABHISHEK, 5th Floor, Link Road, Andheri (W), Mumbai – 400 053. Phone: +91-22-6696 5555; Fax: +91-22-6691 9576.

ANALYST Vaibhav Chowdhry, [email protected], +91-22-6696 5571 Dhara Patwa, [email protected], +91-22-6696 5585

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com