Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities
(TP Rs 535, CMP Rs 532, MCap Rs 1,276bn)
Sun's Q1 EBIDTA/PAT beat expectations on account of improved gross margin (product mix, productivity) and lower expenses (SG&A and R&D). India business grew by 3% YoY (chronic led). The US business declined 25% QoQ, impacted by muted trends in specialty (in line with expectations) and generics (Taro, price erosion). However, market share for specialty products were maintained at pre-Covid levels. The scale up in specialty is key to drive operating leverage and margins. While the costs pertaining to this business are largely expensed, the revenue traction is yet to be seen. Sun's balance sheet continues to remain strong (repaid ~USD200mn debt in Q1). We increase our EPS estimates by 4%/7% to factor the beat and improvement in gross margin. We maintain Add rating with revised TP of Rs535.
Margin beat: Sun's EBIDTA margin increased by ~487bps on a QoQ basis to 23.3% as improvement in gross margin (down 219bps) coupled with lower other expenses (down 480bps) and R&D costs (down 89bps) offset increase in staff expenditure (+300bps). Adjusting for the exceptional item (DOJ penalty on Taro), the PAT came at Rs11.3bn (down 18% YoY, +42% QoQ, one off revenues in the base).
Leadership in chronic therapies to aid market share gains: Sun's India business grew by 3%YoY (vs. 6% decline for IPM) as growth in chronic segment (10% YoY) offset decline in acute segment (down -20% YoY). Sun launched 10 new products in Q1 and has expanded the field force by 10% as guided in the past.
Specialty business down, but market share maintained: Sun's specialty business declined by 38% QoQ to USD78mn, however, it has been able to maintain its market share at pre-Covid levels. The fall in revenues was largely led by Levulan and Ilumya as these are clinically administered products. Sun expects some specialty products to achieve breakeven by FY22e. We believe traction in Ilumya is key to drive operating leverage and margin expansion. The product's advantage (lower dosing frequency, better safety profile) over peers should prove to be beneficial in the longer term. Contribution from US and non-US markets will be keenly monitored.
Key call takeaways: a) Specialty R&D - 39% of overall R&D in Q1; b) Debt repayment - USD200mn in Q1, net debt (ex Taro) is at USD451mn; c) Halol resolution- FDA has alternate guidelines in place to inspect facilities; d) US generics - price erosion continues, expects product flow to aid base business, Pending ANDA - 98, NDA - 5; e) No change in cost structure in India biz.
Maintain Add, risks: We increase our TP to Rs535 based on 22x FY22e EPS (from 21x earlier). Key risks: Delay in resolution of Halol 483s, higher price erosion in the US, slower ramp up in specialty, adverse outcome on ongoing SEBI probe on whistle-blower complaint.
Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.528.5 as compared to the previous close of Rs. 519.8. The total number of shares traded during the day was 445809 in over 10099 trades.
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