Sun Pharma - Q2FY21 Result Update - YES Securities

Sun Pharma (Q2FY21) - SELL (Target Rs400, Downside 17%)

Our view: A lot of capital is locked in assets that generate little commensurate revenues especially in the process of creating specialty assets in US that have an uphill battle against established names. While we appreciate and reckon that Sun's mcap in some sense (an assumed multiple on 15-18% PAT margin in domestic business can form basis of a valuable unlocking play, looking at peers) is currently factoring just the domestic business while 70-75% of balance sheet assets practically given very little thought. Reckon till signs emerge of any repivot on capital invested in US specialty or, alternatively (& more likely), robust growth in US branded portfolio which boosts margin unlike current climate where costs playing a big role, would be reluctant to change current negative stance. While stock has been a laggard in recent rally, believe turnaround can be had if US specialty fortunes shift which will be a rerating trigger; albeit, visibility of which is not available at present. We bump up FY22 estimates by 6.5% in lieu of lower taxes and better margin performance (as FY22 costs expected to rise 4-7% on low base of FY21) which results in revised TP of Rs400, without any change in target PE. Key risk would be faster turnaround in specialty asset like Ilumya that can boosts ex-Taro US sales while bigger dent to Absorica sales after December expiry would be downside risks to our estimates.

Q2 FY21 call highlights

- Ilumya, Yonza and Cequa revenues are back to pre-COVID levels; cognizant of generic in Restatis and believe it can expand market though there will be an impact on branded product

- Not looking at structural savings in US specialty spending but will be carried forward in Q3 at least as COVID surges again in US

- Taken 20% share onto Absorica LD as COVID has interrupted plans; generic Absorica looms in December

- 5-year Ilumya data would be used to communicate with doctors, payors with no change as such in marketing push- being first to market will be an advantage as no other 5-year data in IL-23 so far

- Doctor feedback has been IL-17 produces faster response but IL-23 brings durability of response

- Reduced marketing, selling, distribution and traveling costs yoy

- Haven't seen generic pricing environment soften in US and do get opportunities in certain pockets

- Launch 2-3 products per quarter which will add to base business

- Challenge in segment reporting like US generic and specialty sales

- Noises being made about negotiation of prices in Medicare (not done now) by both US candidates although valuation of US pharma companies do not reflect such a concern

- Product mix, cost optimization led to improved gross margin ex-Taro in US

- FX loss of Rs1.6bn vs gain in Q1 leading to impact of Rs1.9bn

- Doctor call rates have increased significantly in domestic market

- Most affected business is acute where there is some recovery from Q2 to Q1; footfalls of patients have increased and Q3 will see better

- Newer patients are larger part of driver in Cequa; initiated DTC in Cequa but not at same scale as Ilumya

Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.485.1 as compared to the previous close of Rs. 469.2. The total number of shares traded during the day was 463378 in over 10254 trades.

The stock hit an intraday high of Rs. 490.45 and intraday low of 466.05. The net turnover during the day was Rs. 222450497.

Source : Equity Bulls

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