Sun Pharma’s transactions evoke concern: Motilal Oswal

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Updated: August 28, 2019 7:08:08 AM

Contingent liability stood high at Rs 66.4 bn, 16% of NW due to income tax disputes (at Rs 58.9 bn).

Consolidated revenue grew 10% to Rs 290.7 bn and EBITDA grew 14% to Rs 63.1 bn, though on a low base.

Sun Pharmaceuticals’ FY19 annual report highlights the unwinding of transactions that had evoked investor concerns by squaring-off of loans advanced to Atlas with outstanding provisions related to product sales amounting Rs 22.4 bn, and transfer of domestic formulation (DF) generic distribution from promoter-owned Aditya Medisales (AML) to its wholly-owned subsidiary.

Sales to entities owned by KMP (primarily AML) stood at Rs 73.7 bn and receivables at Rs 6.1 bn. Operating cash flow post interest declined 49% to Rs 17.4 bn as cash conversion days rose to 303 days. Increase in capex to Rs 31.6 bn due to milestone payments made for specialty products led to FCF turning negative to Rs 14.3 bn. Thus, other intangible assets increased significantly to Rs 63.5 bn. Goodwill remained high at Rs 58.5 bn. Consolidated revenue increased 10% Rs 290.7bn led by recovery in US sales (grew 22% to Rs 107bn). Adjusting for exceptional loss, RoE, albeit low, improved 130bp to 9.1%, led by rise in NP margins. Contingent liability stood high at Rs 66.4 bn, 16% of NW due to income tax disputes (at Rs 58.9 bn).

Cash conversion cycle rose to 303 days (FY18: 244 days) as inventory days rose by 28 to 366 days. This led to a decline in earnings to cash flow conversion to 49% (FY18: 84%). Capex increased substantially from Rs 18.9 bn in FY18 to `31.6 bn, to fund acquisition of intangible assets (milestone payments) – Trademarks and Designs (Gross addition: Rs 22.3 bn) relating to rights of ILUMYA, YONSA, CEQUA and XELPROS. Thus, FCF turned negative to Rs 14.3 bn (FY18: Rs 15.4 bn). Other intangible assets increased significantly to Rs 63.5 bn (FY18: Rs 56.1 bn).

Op performance improves; albeit on low base:

Consolidated revenue grew 10% to Rs 290.7 bn and EBITDA grew 14% to Rs 63.1 bn, though on a low base. EBITDA margins expanded 100bp to 22% led by gross margin expansion. R&D spends reduced to Rs 19.8 bn, ~7% of revenue (FY18: Rs 22.3 bn, ~8% of revenue). Continued charge on Modafinil settlement at Rs 12.1 bn (FY18: Rs 9.5 bn) dragged PBT to Rs 38.1 bn (FY18: Rs 34.8 bn).

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