Sun Pharmaceutical Industries - Strong beat on profitability - ICICI Securities

Sun Pharmaceutical (Sun) has reported strong operational performance in Q2FY21; beat our estimate on gross and EBITDA margins by 290bps and 230bps, respectively. Consolidated revenue grew 5.9% YoY to Rs85.5bn (I-Sec: Rs85.5bn) and adj. PAT was up 55.3% to Rs15.9bn. Gross margin improvement of 300bps was driven by better revenue mix and focus on operational efficiency in manufacturing, is partially sustainable, in our view. Global specialty sales recovered after weak Q1FY21 and grew 38.5% QoQ as revenue of Ilumya, Cequa and Odomzo reverted to pre-COVID levels. We remain positive on long-term outlook considering strong India business, scale-up in specialty sales and focus on margin expansion through superior revenue mix and operational efficiency. Reiterate BUY on Sun Pharma.

- US recovered well, ROW & EMs drove growth: US revenues recovered well after weak performance in Q1FY21 with an improvement of 21.4% QoQ to US$335mn aided by recovery in specialty business. Specialty revenue stood at US$108mn, a growth of 38.5% QoQ and we expect further ramp-up in Ilumya and Cequa sales. We expect US revenues to remain flattish over FY20-23E as Absorica sales may decline in H2FY21 with competition and generic price erosion. India business grew just 0.7% YoY as acute segment continues to decline in a challenging environment. Chronic and sub-chronic growth remained strong. We expect the company to outperform industry growth supported by its strong chronic portfolio. API sales grew 9.0% driven by strong demand for its products.

- Margin beat continues: EBITDA margin at 25.6% was 230bps higher than our estimate led by better gross margin and controlled S,G&A and personnel cost. Gross margin improvement of 300bps was driven by superior revenue mix with improving sales of specialty products and better operational efficiency in manufacturing. We believe margin expansion caused by operational efficiency, revenue mix and cost control is partially sustainable. We estimate 310bps EBITDA margin expansion over FY20-FY23E despite decline in Absorica sales.

- Outlook: We expect India business growth to revert to double digit and gradual ramp-up in specialty sales. Overall, we expect 6.5% revenue and 18.3% adjusted PAT CAGRs over FY20-FY23E with EBITDA margin expansion of 310bps. Recent settlement by Taro for DoJ investigations of US$419mn has removed the key overhang from the stock.

- Valuations and risks: We largely maintain our estimates. Reiterate BUY with a revised target price of Rs610/share based on 24xSep'22E EPS (earlier: Rs617/share). Key downside risks: Higher than expected pricing pressures in the US, and regulatory hurdles.

Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.504.3 as compared to the previous close of Rs. 485.1. The total number of shares traded during the day was 1332584 in over 24285 trades.

The stock hit an intraday high of Rs. 518.15 and intraday low of 496. The net turnover during the day was Rs. 677966805.

Source : Equity Bulls

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