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Upgrade to BUY on Sun Pharma - Strong beat, encouraging trends in specialty - HDFC Securities

Posted On: 2021-08-02 16:16:33 (Time Zone: UTC)

Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities

Sun's Q1 revenue/EBITDA grew by 28%/55% YoY, led by robust growth across markets and restricted spends driving sharp operating leverage and margin expansion to 28.7% (+495bps YoY, +404bps QoQ). Its specialty business surprised positively despite the generic impact of Absorica (USD148mn, +6% QoQ, +90% YoY). The consistent traction seen in the past three quarters gives us comfort on the company's ability to execute its specialty pipeline and break even by FY23. Further scale-up in the specialty business will improve profit growth visibility and support rerating, in our view. Sun's strong balance sheet (net cash) is likely to aid specialty spends and inorganic initiatives. While the margin may likely revert to 25% in 2HFY22 as costs normalise, we expect double-digit growth in India and the specialty business to drive 28% earnings CAGR over FY20-23e. We raise our estimates for FY22/23 by 10%/15% to factor in the Q1 beat and improved profitability and revise our TP to INR900/sh. Upgrade to BUY.

All round beat: Revenue grew by 28% YoY, driven by strong growth in India (+39% YoY), US (+3% QoQ, specialty led), EMs (+22% YoY) and RoW (+33% YoY). EBITDA margin expanded to 28.7% (+404bps QoQ) as moderation in gross margin (-97bps QoQ, product/region mix) was offset by savings in staff costs (-159bps QoQ) and other expenses (-302bps QoQ) due to restricted spends during the lockdown.

Strong recovery in base business, COVID drugs boost India: The India business grew by ~39% YoY (vs. ~37% for the IPM), led by recovery in the core business, a low base, and sales of COVID drugs (~10% of sales). The chronic segment grew at a healthy pace, acute segment performed in line with the market, whereas the sub-chronic segment did exceptionally well.

Specialty business gains strength; addition of Winlevi promising: Despite generic competition in Absorica, the specialty business grew ~6% QoQ to USD148mn, led by strong traction in Ilumya, Cequa, Levulan and Absorica LD sales. Key products like Ilumya and Cequa are tracking higher than the pre-COVID level. Given doctors' clinics are not yet fully operational, we see decent scope of further ramp-up. Winlevi, the recently added anti-acne product with a new mechanism of action and broad-based use (vs Absorica), will further boost the derma portfolio and specialty business growth.

Key call takeaways: (a) Guidance: R&D: 7-8% of sales; costs to increase with-normalisation; (b) Specialty business to break even by FY23/24; (c) Winlevi - aims to launch by Oct-Dec; (d) Ilumya - ~8% share in US IL-23 market.

Upgrade to BUY and revise TP to INR900/sh: Our TP is based on SOTP of 25x FY23e EPS (24x earlier) and NPV of INR15/sh. for gRevlimid. Key risks: delay in Halol resolution and slower ramp-up in the specialty portfolio.

Shares of Sun Pharmaceutical Industries Ltd. was last trading in BSE at Rs. 774.45 as compared to the previous close of Rs. 774. The total number of shares traded during the day was 741708 in over 23140 trades.

The stock hit an intraday high of Rs. 799.6 and intraday low of 764. The net turnover during the day was Rs. 576652430.

Source: Equity Bulls

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