Sun Pharma’s Q3 results were below estimates on back of higher tax charges at Taro and charge-backs pertaining to generic Protonix. However this quarter reflected the base business numbers after several quarter of one-off products sales. We recommend Hold at these levels with target price of Rs433 as most of the positives are currently factored in. The launch of Eloxatin and Prandin can act as key triggers going forward. On the negative front we believe Taro numbers especially the margins could see some downside risk post completion of audit as witnessed in 2008 audited results.

Sales growth below expectation

Net sales at Rs16,011mn, up 56.8% YoY, were below estimates primarily on back of lower sales at Caraco. Caraco reported net sales of USD40mn and now primarily reflects the base business numbers in absence of any big one-off product sales during the quarter. While Taro sales at USD102mn and domestic sales at Rs6,403mn were in-line with estimates.

Salary cost and higher other expenses trim margins

Sun reported OPM of 27.5% which was below estimates primarily on back of higher salary cost at Taro and provision pertaining to charge backs on generic Protonix. Salary cost during the quarter spiked by 137% YoY to Rs2,754mn while other expenses increased by 79.4% to Rs3,632mn.

Key call takeaways

1) Sun upgraded its FY11 sales growth guidance to 42% post the Taro consolidation. 2) Has cut back on R&D spend as focus is now on regulatory compliance of US facilities, Sun now plans to file 20-22 ANDAs for FY11 as against 30 earlier 3) Cash on books at Rs38,000mn.

VALUATIONS AND RECOMMENDATION

We believe most of the upsides are factored in the stock at current levels. The launch of Eloxatin and Prandin can act as key triggers going forward. The stock is currently trading at
24.5x FY2011E and 22.4x FY2012E earnings. We recommend HOLD on the stock with a target price of Rs433 valuing the company at 22x FY12E earnings.