Sun Pharma's Q2FY11 results were ahead of our expectations due to an impressive performance in India (+36%) and launch of products in US with limited competition. Sun launched generic Exelon (brand size USD130mn shared exclusivity with Watson Labs) and generic Optivar (brand size USD50mn SUNP is the 2nd generic along with Apotex). While sales growth on the high base of Q2FY10 (due to generic Protonix) is encouraging, it needs to put in the context of sustainability of sales of these products. Both these products buoyed exports growth to 2%. We are still unclear about the base business performance as this is the 12th quarter in a row that performance has been impacted by one time products.

Large part of the growth driven by India India sales grew 36% on the low base of last year due to onetime adjustment made last year. Export formulations grew 2% on a high base of last year (due to Protonix sales) driven by launch of generic Optivar and generic Exelon in Q2FY11. Caraco distributed products of USD90mn (predominantly Exelon, Eloxatin and Optivar) even as sale of its manufactured products stood at USD9mn.

EBITDA margins at 32%, pressure on the base business in the US continues Despite sale of high margin products in the US (Exelon and Optivar) margins stood at 32%, indicating pressure on the base business in the US even as Caraco's issues with the US FDA continue.

VALUATIONS AND RECOMMENDATION We have not factored Taro's financials for our estimates given limited clarity on financials. We re-iterate our `SELL' with a target price of Rs1,606 (22x Dec'11 earnings). With the base business in the US under pressure due to the ongoing issues with the US FDA, margin of safety is small at current valuations of 28x FY12E recurring earnings estimates.