Maintain ADD on Sun Pharma - In-line quarter, outlook remains intact - HDFC Securities

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

Sun's Q4 revenue/adj. PAT grew by 4%/81%, broadly in line with estimates as healthy growth in India (+13% YoY) offset muted growth in other markets. EBITDA margin declined to 24.2% (-226bps QoQ), primarily due to increase in SG&A costs. Sun's specialty business witnessed decent growth in FY21 (USD473mn, +10% YoY) despite challenges in the year due to Covid. We expect specialty business in the US to grow at 21% CAGR over the next two years as ramp-up in Ilumya, Cequa and Yonsa is likely to offset decline in Absorica (Teva entered in April). With cost normalisation and increase in R&D investments, we expect EBITDA margin to remain flattish over the next two years. We increase our estimates for FY22/23e by 5/7% to factor in higher growth in India and lower tax rate. Maintain ADD. Revised TP is INR740/sh.

In-line quarter: Revenue grew by 4% YoY to INR85bn, as robust growth in India (+13% YoY) was offset by subdued performance in APIs (-10% YoY) and US (-1% QoQ/ YoY). EBITDA margin declined to 24.2% (-226bps QoQ) due to increase in other expenses (+208bps QoQ, higher travel cost).

Robust growth in India: Sun's India business grew by 13% YoY, outperforming the IPM by 744bps in the quarter. It maintained its leadership position with 8.3% market share. Sun launched 31 new products in Q4. As per Sun, the chronic segment continues to grow, whereas the acute segment faces challenges. Sun expects Covid portfolio to provide short-term benefits. It has entered into agreements with Eli Lilly and MSD for Baricitinib and Molnupiravir respectively.

Specialty business outlook remains intact: Sun's global specialty business moderated by 6% QoQ to USD139mn in Q4, partially on account of high base in Q3 (year-ending in the US). Despite generic entry in Absorica, Sun expects to grow the business, led by ramp-up in Ilumya, Cequa and Yonsa. We factor in 21% CAGR for specialty business in the US over the next two years.

Key call takeaways: (1) R&D - 8-9% of sales, share of specialty R&D to increase; to work on third wave of biosimilars (launch post CY28); Ilumya - trials for psoriatic arthritis indication facing recruitment hurdles due to Covid. (2) US generics - pending ANDAs: 94, NDAs: 9. (3) India - added ~1,000 people (MR strength: 10,000+); productivity to improve. (4) Cequa - no visibility of generic entry. (5) Absorica - Sun launched an AG. (6) Net debt (ex-Taro) at ~USD179mn aims to be net-debt free (ex-Taro) by FY22. (7) Halol resolution - awaiting FDA to inspect the plant. (8) guidance - R&D: 8- 9% of sales, Capex - USD200mn.

Maintain ADD: Our target price is revised upwards to INR740/sh, based on24x FY23e EPS (vs. 23x earlier). Risks: delay in resolution of Halol, higher price erosion in the US, and slower ramp-up in specialty portfolio.

Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.669.65 as compared to the previous close of Rs. 699.75. The total number of shares traded during the day was 1451657 in over 38403 trades.

The stock hit an intraday high of Rs. 698.6 and intraday low of 666.55. The net turnover during the day was Rs. 979307543.

Source : Equity Bulls

Keywords