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Sunday, Nov 03, 2002

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Sun Pharma: Hold

Sanjiv Shankaran

Mr Dilip Shanghvi, Chairman and Managing Director, Sun Pharma...Will the company duplicate its success overseas?

A GOOD performance in the domestic formulations (medicines in final form such as tablets) market helped Sun Pharma register a profit after tax of Rs 101 crore on sales of Rs 407 crore in the first half (April-September) of financial year 2002-03.

The domestic formulations market is the most important business segment of Sun Pharma now.

Relatively fast-growing therapeutic segments such as psychiatry and neurology and cardiovascular are critical to Sun.

These segments accounted for about 52 per cent of domestic prescription formulation sales in fiscal 2002.

Within these segments, Sun's competitiveness rests on its research and development (R&D) skill. The company's ability to synthesise complex drugs puts it ahead of the increasing number of companies that have begun to target fast-growing therapeutic segments.

Domestic formulations comprised about 67 per cent of Sun's sales in the first half of financial year 2002-03, and grew at about 14 per cent in relation to the corresponding previous period. Total sales in the first half of 2002-03 was Rs 407 crore, up 11.9 per cent in relation to the previous year's first half.

Raw material consumption is the most important expenditure in Sun's manufacturing operation. The company's raw material expenditure in 2002-03 first half was Rs 158 crore, an increase of 9.72 per cent in relation to the previous year.

As a proportion of total sales, raw material expenditure was 39 per cent of sales. The relatively slower increase in the most important component of expenditure resulted in a significant growth in profit from its core operations (excluding profit through investments etc).

In the first half of 2002-03 profit from operations was Rs 118 crore, up by 18 per cent in relation to the corresponding period of the previous year.

Profit from operations, as a proportion of sales, was 29 per cent, a healthy level of profitability.

The profit after tax in the first half of 2002-03 was Rs 101 crore, up by 14 per cent in relation to the corresponding previous period.

Investment outlook

Sun Pharma is on the verge of an important transformation. At present, the domestic formulation business is the pillar on which the company rests.

Over the last few years, Sun has worked towards creating conditions that would assist business overseas, especially in the US.

Business in the US will be carried out through two avenues: Directly and through a US-based affiliate, Caraco Pharmaceuticals. Caraco's performance till end-2001 was lacklustre.

Since then, things have changed for the better. Caraco has sharply reduced its losses, and appears poised to make a profit in the near future.

Caraco's turnaround, and Sun's direct foray into the US may begin to pay off next year.

Once the US business and other overseas ventures are well set, they will endow Sun's operations with diversity and the attendant safety.

In addition, to diversity, profitability may also increase because export realisations are generally higher than that obtained within India.

At present, Sun's share price is about Rs 552, around 15 times its earnings per share (EPS) of fiscal 2001-02. Improvement in the company's valuation will hinge on the progress made in the US.

Though the situation looks promising there, investors appear to have become jittery about Indian pharmaceutical ventures in the US. Returns are high there, but so are the associated risks.

This, in turn, has led the equity market, marking down Indian companies that have made tangible progress overseas.

In the context of the equity market jitters and Sun's prospects, the best course of action may be to avoid fresh exposures at the moment.

Shareholders, however, may consider staying invested because the company's business outlook is promising enough to weather the equity market's current nervousness.

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