Sun Pharmaceutical Industries : FY17 Q3 Financial Result - Transcript

Managing Director, Sun Pharmaceutical Industries Ltd.

Whole Time Director, Sun Pharmaceutical Industries Ltd.

CEO (India, Emerging Markets & CHC Business), Sun Pharmaceutical Industries Ltd.

Moderator: Good day, ladies and gentlemen and a very warm welcome to the Sun Pharmaceutical Industries Limited Q3 FY17 Earnings Conference Call. As a remainder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing '*' then '0' on your touchtone phone. I now hand the conference over to Mr. Nimish Desai. Thank you and over to you sir.

Nimish Desai: Thank you. Good evening and a warm welcome to our third quarter FY17 earnings call. I am Nimish from the Sun Pharma Investor Relations Team. We hope you have received the Q3 financials and the press release that was sent out earlier in the day. These are also available on our website.

We have with us Mr. Dilip Shanghvi - Managing Director, Mr. Sudhir Valia - Whole Time Director and Mr. Kal Sundaram - CEO (India, Emerging Markets & CHC Business). Today the team will discuss performance highlights, update on strategies and respond to any questions that you may have. As is usual, for ease of discussion we will look at the consolidated financials. Just as a reminder this call is being recorded and a replay will be available for the next few days. The call transcript will also be put on our website shortly.

The discussion today might include certain forward-looking statements and these must be viewed in conjunction with the risks that our business faces. You are requested to ask two questions in the initial round. If you have more questions you are requested to rejoin the queue. I also request all of you to kindly send in your questions that may remain unanswered today.

I will now hand over the call to Mr. Shanghvi.

Dilip Shanghvi: Welcome and thank you for joining us for this earnings call after the announcement of financial results for the third quarter of FY17. Let me discuss some of the key highlights:

Our overall sales have grown by about 8% for the quarter. These numbers include the upside from the authorized generic sales of Olmesartan and its combinations in the US.

Let me update you on the Ranbaxy integration - The accrual of synergies from the Ranbaxy acquisition is as per our integration plan and we remain confident of achieving the US$ 300 million synergy target by FY18. Some of the savings from these synergies will help in creating our new specialty businesses.

We have added significant momentum to our specialty strategy during the quarter and we will continue to invest in building this business in the Dermatology, Ophthalmology and Oncology segments.

In order to enhance our presence in the Russian market, we announced the acquisition of Biosintez in Russia. This acquisition gives us access to a local manufacturing facility, in addition to a number of products which it is marketing currently in the country.

And finally let me update you on Halol. As you all are aware, the US FDA re-inspected the Halol facility in Q3 and has issued nine observations. We have submitted our response and corrective action plan to the US FDA for resolving these observations. We are now in the process of implementing these corrective steps and await US FDA's response.

I will now hand over the call to Mr. Valia for discussion of the Q3 performance.

Sudhir Valia: Thank you Mr. Shanghvi. Good evening everyone and welcome to all of you. Our Q3 financials are already with you. As usual, we will look at key consolidated financials.

The Company has adopted Indian Accounting Standards (Ind AS) from 01-April-2016. To facilitate a like-to-like comparison, the financials for the previous quarter and nine months ended Dec 2015 have been restated as per Ind AS. As per the requirements of Ind AS, sales are now reported on gross basis and hence margins are also calculated on gross sales.

Q3 sales are at Rs. 7,683 crores, up by 8% over Q3 last year. Material cost as a percentage of sales was 29.3%, higher than Q3 last year partly driven by authorized generic sales in US. Staff cost was at 15.8% of sales and other expenditure was at 26% of sales, both lower than Q3 last year.

As a result of the above, the EBITDA for Q3 was at Rs.2,224 crores, with EBITDA margins at 29%. Net profit for the quarter was at Rs. 1,472 crores with Net profit margin at 19.2% compared to Net profit of Rs. 1,545 crores for Q3 last year. EPS for the quarter was Rs. 6.10.

Let me also explain the variance in certain key items compared to Sep-2016 quarter.

Our material cost has increased to Rs. 2,249 crores in Q3 from 1,840 crores in Q2 which has had a direct impact on EBITDA. The sequential increase in overall material cost reflects the impact of authorized generic sales in US and consolidation of the material cost of our Japanese business post the product transfers from Novartis to Sun Pharma.

The other operating income variance over Q2 is the result of higher income booked in Q2 due to licensing income from Almirall for Tildrakizumab and the income from Japan pending product transfer to Sun Pharma. In Q3, Taro sold the rights of Keveyis for US$ 8.5 million which has been included in other operating income.

Higher finance cost in Q3 versus Q2 is mainly on account of the impact of forex on interest cost.

Now we will discuss the nine month performance. Net sales were at Rs. 23,439 crores, a growth of 14% over nine months last year. Material cost, as a percentage of the net sales was 25.3% which was higher compared to last year. The staff cost for the nine months was at 15.6% of net sales while other expenses were at 26.8%, both lower than last year.

As a result of the above, the EBITDA for the nine months was at Rs. 7,575 crores a growth of 35% over last year. EBITDA margins were at 32.3% for nine months compared to 27.4% last year.

Net profit for the nine months was at Rs. 5,741 crores with Net profit margin at 24.5% compared to Net profit of Rs. 3,129 crores last year. Net profit for nine month last year was adversely impacted by one- time items as well as exceptional charges of Rs. 685 crores. EPS for the nine months was Rs. 23.9.

Let me now briefly discuss Taro's performance.

Taro posted Q3 sales of US$ 220 million, while sales for the nine months were US$ 683 million. Taro's net profit for Q3 was US$ 140 million while net profit for the nine months was at US$ 373 million.

I will now hand over to Kal Sundaram, who will share the performance of our India business.

Kal Sundaram: Thank you Mr. Valia. Let me take you through the performance of our India business.

For Q3, sales of branded formulations in India were Rs. 1,969 crores, a growth of 5% over Q3 last year and accounting for approximately 26% of total sales. Growth was partly impacted by the demonetization