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Maintain ‘buy’ on Sun Pharma, target price Rs 515

Motilal Oswal
Sun Pharma, Sun Pharma target price, Pola Pharma Japan, EBITDA, US market, Sun Pharma India sales

Revenues driven by India/ROW: SUNP's sales increased 16% YoY to Rs 79.5b (in-line) in 2QFY20, mainly driven by strong growth in India and RoW sales. India sales were up 35% YoY to Rs 25b (32% of sales), led by the robust outperformance to industry and partially led by a low base. RoW sales were up 49% YoY to $161m (16% of sales), led by organic growth and the integration of Pola Pharma Japan. However, the business was dragged to some extent by flat YoY US sales (30% of sales) at $339m, with Taro posting sales of $161m (+1% YoY). Emerging Markets (EM) sales were up 3% YoY at $201m (18% of sales).

Inferior product mix offset by controlled cost: Gross margin contracted 280bp YoY (+130bp QoQ) to 71.5%, mainly due to the change in the product mix and the distribution transition in India. EBITDA margin shrank at a lower rate of 80bp YoY to 20% (our estimate: 21%) due to controlled opex with lower employee/R&D cost (-110bp /100bp YoY). EBITDA was up 11% YoY at Rs 16.1b (in-line). Adj. PAT increased marginally by 3% YoY to Rs 10.6b (in-line) due to a higher tax rate.

Concall highlights: Global specialty sales were flat QoQ at USD91m. Higher Ilumya sales were offset by seasonality in Absorica and Levulan on a sequential basis. With respect to Absorica, SUNP intends to launch a lifecycle extension product in 4QFY20. gLialda would be launched in the near term in the US market. Specialty R&D formed 24% of total R&D spend for the quarter.

Valuation view: We raise our FY20/21 EPS estimate by3%/2% to Rs 18/Rs 22 to factor in robust growth in domestic formulation, increasing traction in the specialty portfolio and the reduced interest outgo. We continue valuing SUNP at 22x 12M forward earnings to arrive at a TP of Rs 515 (prior: Rs 490). Maintain ‘buy’.