Fundamental Analysis of Sun Pharmaceutical: Sun Pharma is the largest pharma company in India and the 15th largest listed company in terms of market capitalization. Plus, its stock has generated a sweet return of more than 100% to its investors in the last five years, against NIFTY 50’s 74% return.

Can the investors of this large cap stock expect similar returns in the future? Is it a good bet for new investors? We’ll attempt to answer these and other questions by performing a fundamental analysis of Sun Pharmaceutical.

Fundamental Analysis of Sun Pharmaceutical

We’ll being our study of the company by getting ourselves acquainted with its business, scale and diversity of its operations. Next, we’ll learn about the pharma industry landscape. After that, we’ll go through the financials of the pharma stock. A highlight of the future plans and a summary conclude the article at the end.

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Company Overview

Sun Pharmaceutical Industries Ltd. was founded by Dilip Shanghvi in 1983. Over the last 40 years, it has become the largest pharma company in India and the fourth-largest speciality generic pharmaceutical company in the world with a market capitalisation of Rs 2,25,000 crore.

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The pharma giant employs over 38,000 people globally. It has 43 production sites spread across various countries to formulate and manufacture injectables, sprays, ointments, creams, liquids, tablets and capsules. Overall, the company has operations in more than 100 countries across the globe.

The drug maker has grown organically and inorganically over the years acquiring some well-known names such as Ranbaxy and Concert Pharmaceuticals. It presently houses some of the world’s well-known brands such as Volini, Revital, Xelpros, and Abzorb.

Sun Pharma segregates its business into four key divisions: India Branded Formulations, US Formulations, Emerging Markets, and the Rest of the World. These divisions have been arranged geographically and the company has a different product portfolio across these divisions. We’ll read more about this in the next section of our fundamental analysis of Sun Pharma.

Segment Analysis

The company has leadership in different product categories in different markets:

  1. Sun Pharma’s fast-growing India Branded Formulations segment positions it as the largest pharma company in India with a market share of 8.5% making it a leader in the chronic segment. Neuro-Psychiatry, Gastroenterology, Anti-Infectives, Diabetology, and Analgesics are its largest revenue contributors.
  2. The US Formulations segment has a key presence in a speciality, generics & OTC sub-segments in Dermatology, Ophthalmology and Onco Dermatology. 
  3. Romania, Russia, South Africa, Brazil, Mexico and other 75 countries make up the Emerging Markets division where the company markets a vast basket of branded generics.
  4. The Rest of the World includes Western Europe, Canada, Japan, ANZ, Israel & other markets. Here the pharma giant develops, sources and markets complex generics and differentiated speciality, hospital & retail products.

The table below showcases the revenue share of different divisions of Pharmaceutical over the last four fiscal years.

Revenue SegmentFY19FY20FY21FY22
India Branded Formulations27.231.533.035.0
US Formulations38.133.831.230.5
Emerging Markets20.519.219.318.9
Rest of World14.215.516.615.5
(figures in %)

We can clearly see that the share of Sun Pharma’s domestic revenue in total revenue has grown over the years while that of US formulations has come down. 

Now we have a good understanding of the company and its various divisions. Let us move forward to read about the pharma industry landscape in the next section of our fundamental analysis of Sun Pharmaceutical Industries.

Industry Overview

The global pharmaceutical is projected to grow at a CAGR of 3-6% to reach $1.8 trillion in value by 2026. Excluding the Covid-19 vaccine demand, the sector is projected to expand at a 5% (approx.) annualised rate. 

As for regional demand, the developed markets (the US, United Kingdom, France, Italy, Germany, Spain and others) are expected to grow at a slower pace of 2-5% than pharmemerging nations (India, China, Brazil, Russia, and others) growth rate of 5-8%. 

Furthermore, India’s (the largest revenue segment of Sun Pharma) pharmaceuticals industry, the 3rd largest globally in terms of volume and 11th largest in terms of value is anticipated to grow at a much faster rate of 8-11% every year during this period.

During the period, the growth will be partly offset by rising competition from generics & biosimilars and the loss of exclusivity.

Going forward, a variety of factors including higher volumes, new treatments in Oncology & Immunology, adoption of speciality medicines, the negative impact of evolving lifestyles and food habits, improvements in healthcare access, increasing disposable income, and growing insurance coverage will be key growth drivers of the pharma industry. 

We have covered the hard parts by understanding the business and the pharmaceutical industry landscape across the world. Now we’ll race through financials of the the stock.

Sun Pharmaceutical – Financials

Revenue & Net Profit Growth

The revenues of Sun Pharmaceuticals grew at a CAGR of 7.39% from Rs 29,066 crore in FY19 to Rs 38,654 crore in FY22. During the same period, the profit growth was weak at 1.37% only, affected by anti-trust settlements, impairment of intangible assets, restructuring of operations, and more. 

The table below presents the operating revenue and net profit of Sun Pharmaceuticals Industries.

Fiscal YearOperating RevenueNet Profit
2023TBATBA
202238,6543,389
202133,4982,272
202032,8384,187
201929,0663,209
4-Yr CAGR7.39%1.37%
(figures in Rs Cr except for CAGR)

Profit Margins

Moving on to studying the margins, the EBITDA margins (earnings before interest, tax, depreciation and amortization) and net profit margins (adjusted for exceptional items) have expanded during our study period aided by better realisations and higher volumes. 

The table below showcases the improving EBITDA margin and adjusted net profit margins of Sun Pharma over the last few financial years.

Fiscal YearEBITDA MarginAdj. Net Profit Margin
2023TBATBA
202226.920.0
202125.317.8
202021.312.5
201921.713.5
(figures in %)

Better margins coupled with volume growth translate into higher profitability. Let us analyse the profitability of our pharma stock in the next section of our fundamental analysis of Sun Pharmaceuticals Industries.

Return Ratios: RoE & RoE

Excluding the effect of exceptional items, the profitability metrics or return ratios: return on capital employed (RoCE) and return on equity (RoE) have remained strong over the years. This has partially aided the stock to uphold the interest of investors in the stock. 

The figures below represent the adjusted RoCE and RoE of Sun Pharmaceuticals Industries for the last few fiscals.

Fiscal YearRoCERoE
2023TBATBA
202216.415.0
202113.512.5
202011.09.1
201911.89.4
(figures in %)

Debt Analysis

We’ll keep our debt analysis short as the pharma giant is a debt-free company. Sun Pharmaceuticals Industries has a nil debt-to-equity ratio of 0.03 with a high-interest coverage ratio of 89 times.

Future Plans Of Sun Pharmaceutical

So far we looked at the previous fiscals’ data for our fundamental analysis of Sun Pharmaceutical. In this section, let us try to understand what lies ahead for the company and its investors.

  1. The company deployed Rs 2,219 crore, 5.8% of the fiscal revenue towards research and development in FY22 the benefits of which shall accrue in the coming years.
  2. The management is bullish on its 4 molecules under development in the speciality R&D pipeline as the segment is anticipated to be a key growth driver in the developed markets.
  3. Sun Pharma in-licensed and commercialised an anti-acne product in the US market. It is receiving a good response and is anticipated to bring higher sales in the coming years. 
  4. Furthermore, it is targeting volume growth in emerging markets and the rest of the world to improve the profitability of newly entered markets.
  5. In addition to all this, its recent launches and acquisitions such as Sezaby, Concert Pharmaceuticals, Uractiv, and Alchemee will bring revenue growth in coming years.

Fundamental Analysis of Sun Pharmaceutical- Key Metrics

We are almost at the end of our fundamental analysis of Sun Pharmaceutical Industries. Let us take a quick look at the key metrics of the stock.

CMP₹1,042.5Market Cap (Cr.)₹2,50,634
EPS₹17.6P/E Ratio29.63
Book Value₹221P/B Ratio4.3
EBITDA Margin26.9%Net Profit Margin20.0%
Debt to Equity0.0Interest Coverage89
Promoter Holding54.5%RoE15%

Conclusion

The investors in Sun Pharmaceutical Industries have maintained their faith in the stock despite the recent setbacks. The bottom line growth will be a key factor that the present and prospective investors should track closely. 

As the company has left its various worries behind, do you think the investors can expect higher returns in the future?  Or the possible future earnings are already discounted in the present stock price as it trades at a TTM P/E ratio of 17.55 which is below the sector P/E of 21.27? How about we continue this conversation in the comments below?

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