Maintain ADD on Sun Pharma - Specialty recovery is encouraging - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities

Recovery in specialty business (USD 108mn, +38% QoQ) along with improved gross margin and lower other expenses helped Sun deliver a 14%/26% beat on EBITDA/ net income. Management commentary was optimistic on Ilumya and steady on US generics. However, they hinted at normalization of specialty spends from Q4 onwards. We maintain that scale up of specialty business will be the most critical catalyst for the stock. We increase our estimates for FY21 by 11% to factor the Q2 beat. Our estimates for FY22/23 largely remain unchanged. Maintain ADD. TP Rs565/sh.

Strong margin beat: Revenues grew by 5% YoY driven by specialty business, EM and RoW markets. Gross margin improvement (74.9%,+282bps YoY, +87bps QoQ) was driven by favorable product mix (higher specialty) and cost optimization efforts. EBITDA margin improved to 27% % (+497bps YoY, +374bps QoQ) as higher R&D cost (+108bps YoY, 150bps QoQ) was offset by lower other expenses (down 321bps YoY, down 113bps QoQ, lower travel/promotion expenses).

India performance in line with the industry growth: Sun's India business grew by 1% YoY as growth in chronic segment (high single digit), recovery in sub-chronic (low single digit) was offset by decline in acute segment (although improved sequentially). Sun launched 22 new products in Q2.

Specialty business surprised positively: Sun's specialty business recovered in Q2 with key products (Ilumya, Cequa and Yonsa) achieving revenue run rate of pre-Covid levels. Ilumya's launch in Japan received positive initial response. On Absorica, ~20% of market is shifted to LD version; however, generic entry in Dec will have an impact on sales.

Key call takeaways: a) Specialty R&D - 37% of overall R&D in Q2, studies conducted for additional indications for Ilumya; b) Debt repayment - USD300mn+ in H1, net debt (ex Taro) is at ~USD400mn; c) Halol resolution- completed remediation, requested for desktop audit, awaiting response from the FDA; d) US generics - marginal price erosion, expects to launch 2-3 products every quarter, Pending ANDA - 92, NDA - 6; e) Ilumya - 5% price hike taken in the US; Plaque psoriasis market size - Japan (USD500mn) and US (~10bn); f) API business - volumes have doubled in last 4 years.

Maintain Add, risks: Our target price is revised to Rs565/sh (from Rs570 earlier) based on 22x Sept'22e EPS. Key risks: delay in resolution of Halol 483s, higher price erosion in the US, slower ramp up in specialty portfolio, adverse outcome on SEBI investigation.

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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