Maintain ADD on Sun Pharma - Specialty scale up delayed - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities.

Sun Pharma (Q4FY20): Specialty scale up delayed. Maintain ADD
(TP Rs 480, CMP Rs 451, MCap Rs 1, 082 bn)

Sun's Q4 EBIDTA/PAT missed expectations on account of higher costs and certain one off expenses. US business (ex Taro) was largely stable. The ramp up in global specialty business was encouraging (+7% QoQ) led by traction in Ilumya, Yonsa and Cequa, however, the outlook for FY21 remains sluggish. Specialty related costs will remain elevated whereas ramp up in revenues may get delayed exacerbated by Covid led challenges. On the other hand, Sun's balance sheet continue to remain strong with increased focus on cash conservation (repaid ~USD400mn debt in FY20) and cash collection during uncertain times. We maintain Add rating with revised TP of Rs480.

In line revenues, margins disappoint: Q4 revenues at Rs 81.5bn (+15% YoY, flat QoQ, low base) were largely in line. EBIDTA margin at 18.4% were below expectation (down 319bps QoQ) led by lower gross margin (down 118bps YoY, Taro led, product mix) coupled with higher employee cost (+119bps QoQ, incentives provision) and higher other expenses (+81bps QoQ, specialty costs). Adjusted for one off expenses (Rs2.6bn) and forex loss (Rs1.4bn), PAT stood at Rs80.3bn (19% miss).

Covid may dent near term outlook for specialty business: Sun's specialty business (USD126mn) grew by 7% QoQ led by improved traction in Ilumya, Cequa and Yonsa. Ilumya reported revenues of USD94mn (including royalty/licensing income) for FY20. The product's advantage (lower dosing frequency, better safety profile) over peers should prove to be beneficial in the longer term; however, scale up in the near term needs to be monitored. For Cequa, while the TRx have declined post Coivd, Sun has been able to maintain its market share.

India business to grow in line with the industry: Sun's Q4 growth at 8% YoY was in line with estimates. Sun expects Q1FY21 to be challenging for the entire industry. While chronic segment continues to see momentum, acute and semi-chronic segments remain most impacted.

Key call takeaways: a) Global specialty sales at USD126mn, specialty R&D at 24% of overall R&D in Q4; b) Debt repayment - ~USD400mn in FY20, expect similar reduction in FY21; c) Halol resolution- FDA has alternate guidelines to inspect facilities; c) SEBI probe - no further update; d) US generics - price erosion continues, expects product flow to aid base business, Pending ANDA - 98, NDA - 5; e) R&D - expects to inch up to 7-8% of sales.

Maintain Add, risks: We increase our TP to Rs480 based on 21x FY22e EPS in line with peers. Key risks: Delay in resolution of Halol 483s, higher price erosion in the US, lower growth in the India business, slower ramp up in specialty, adverse outcome on ongoing SEBI probe on whistle-blower complaint, DOJ investigation, and drug price fixing lawsuit in the US.

Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.459.25 as compared to the previous close of Rs. 450.55. The total number of shares traded during the day was 332089 in over 7515 trades.

The stock hit an intraday high of Rs. 461.8 and intraday low of 444.75. The net turnover during the day was Rs. 151327616.

Source : Equity Bulls

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