Maintain ADD on Sun Pharma - All-round beat - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities

Strong recovery across markets, good traction in specialty business (USD 148mn, +25% YoY, +37% QoQ), and lower spends helped Sun deliver a 6%/33% beat on EBITDA/ net income. We expect stabilisation in the US generics, growth recovery in acute segment in India, and ramp-up in specialty business to drive healthy topline growth of 9% CAGR over the next two years. However, increasing R&D investments (Phase 3 trials of Ilumya for psoriatic arthritis indication) and other expenses (as Covid restrictions ease) is likely to cap earnings growth at ~8% CAGR over FY21e-FY23e. We increase our estimates for FY21-23e by 3-14% to factor in the Q3 beat. Maintain ADD. Our revised TP is Rs660/sh.

Revenue and margin beat: Revenue grew 8% YoY, driven by robust growth across US (+11% QoQ and YoY, specialty driven), India (+9% YoY, chronic led), EMs (+8% YoY) and RoW markets (+16% YoY, Japan, EU and Taro's RoW business). EBITDA margin came ahead of expectation at 26% (+480bps YoY), largely led by lower R&D spends (-10bps YoY, -75bps QoQ) and other expenses (-460bps YoY).

Strong performance in India: Sun's India business grew by 9% YoY, outperforming the IPM by 310bps in the quarter, led by strong performance in chronic and recovery in sub-chronic and acute segments (sequentially). In line with our expectations, Sun's brands have gained market share in most therapies. Sun launched 27 new products in Q3.

Specialty business traction is encouraging: Sun's global specialty business grew ~37% QoQ to USD148mn, driven by a ramp-up in key products such as Ilumya, Cequa, Odomzo and Absorica. Global sales for Ilumya in 9mFY21 crossed FY20 sales of USD94mn. Ilumya received good response in Japan (Psoriasis market is USD500mn in Japan vs. USD10bn in the US).

Key call takeaways: a) Specialty R&D - 27% of overall R&D, started Phase- III studies for psoriatic arthritis indication for Ilumya; b) Debt repayment - USD490mn in 9mFY21, net debt (ex-Taro) at ~USD250mn; c) Halol resolution - awaiting response from the FDA; d) US generics - Pending ANDAs: 90, NDAs: 8; e) Cequa - recently started DTC campaign (spends won't be as high as Ilumya); f) Absorica - no visibility on generic entry, will continue to market LD version.

Maintain ADD, risks: Our target price is marginally revised upwards to Rs660/sh, based on 23x FY23e EPS. Key risks: delay in resolution of Halol 483s, higher price erosion in the US, slower ramp-up in specialty portfolio, and adverse outcome on SEBI investigation.

Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.629.45 as compared to the previous close of Rs. 609.4. The total number of shares traded during the day was 831890 in over 16724 trades.

The stock hit an intraday high of Rs. 648.3 and intraday low of 610.85. The net turnover during the day was Rs. 527464151.

Source : Equity Bulls

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