Sun Pharma Q1 FY25 Analysis: Key takeaways!!

Business Outlook:

• Sun Pharma’s Q1 FY25 performance showcases a mixed bag, with the India business registering strong growth of 16.4% YoY, while the US and ROW markets saw some sequential decline.
• The company’s specialty business continues to be a key focus area, with Ilumya and the upcoming launch of LEQSELVI™ expected to drive growth.
• The integration of Taro is underway, with the management expecting synergies to evolve over time, though no significant short-term benefits are anticipated.

Strategic Initiatives:

• Sun Pharma is actively investing in its R&D pipeline, with specialty R&D accounting for 45.2% of the total R&D spend in Q1.
• The company is building in-house clinical development capabilities to enhance its ability to manage late-stage specialty product development.
• Expanding the sales force in India and Emerging Markets to drive growth in the branded generics business.

Trends and Themes:

• Increasing competition in the specialty segment, with the launch of products like Bimzelx and Sotyktu, is a key theme to watch out for.
• Regulatory challenges and pending re-audits for certain manufacturing facilities, such as Halol, remain a concern.
• The outcome of the LEQSELVI™ litigation will be crucial for the company’s specialty business growth.

Industry Tailwinds:

• Favorable demographics and increasing healthcare awareness in Emerging Markets, such as India, present growth opportunities.
• The global shift towards specialty products provides a tailwind for Sun Pharma’s specialty business.

Industry Headwinds:

• Pricing pressures and competition in the US generic market.
• Reimbursement challenges for new specialty products, as witnessed in the case of LEQSELVI™.

Analyst Concerns and Management Response:

• Analysts are concerned about the sequential decline in the US business and the potential impact of the LEQSELVI™ litigation. The management has emphasized its intent to rigorously oppose the motion and remain committed to the product’s launch, subject to the court’s decision.
• Regarding the integration of Taro, the management has stated that there are no significant short-term synergies expected, but the teams are working towards creating a more efficient single entity in the long term.

Competitive Landscape:

• Sun Pharma continues to maintain its leadership position in the Indian pharmaceutical market, with an 8.6% market share.
• In the US, the company faces stiff competition in the specialty segment, with the launch of products like Bimzelx and Sotyktu.

Guidance and Outlook:

• The company has not provided any long-term financial guidance, but the management has indicated that the R&D spend is expected to step up in the subsequent quarters.

Capital Allocation Strategy:

• Sun Pharma’s strong balance sheet, with a net cash position of $2.3 billion, provides flexibility for future investments and inorganic growth opportunities.

Opportunities and Risks:

• Opportunities in the Emerging Markets, driven by favorable demographics and the company’s strong brand presence.
• Risks from regulatory challenges, litigation outcomes, and pricing pressures in the US generic market.

Regulatory Environment:

• Ongoing regulatory issues, such as the pending re-audit of the Halol facility, remain a key concern for the company.

Customer Sentiment:

• The company’s strong brand presence and market leadership in India reflect positive customer sentiment.
• In the US specialty segment, the management has highlighted the interest from payers for the LEQSELVI™ product.

Top 3 Takeaways:

1. Sun Pharma’s focus on the specialty business, with the upcoming launch of LEQSELVI™ and the pipeline of other specialty products, is a key growth driver.
2. The integration of Taro is a work in progress, with the management expecting synergies to evolve over time.
3. Regulatory challenges and the outcome of the LEQSELVI™ litigation remain critical factors that will shape the company’s performance going forward.

Depreciation and Interest will eat away whatever they will make out out of Highlighted assets.
They Need to increase Revenue out of these assets and do it faster

Triveni Engineering & Industries Q1 FY25 Analysis: Key takeaways!!

Business Outlook:

• Triveni Engineering & Industries is poised for a robust performance in the upcoming year, driven by improvements in pricing and increased availability of raw materials in the sugar sector.
• The distillery segment is expected to benefit from potential revisions to the ethanol pricing framework and lifting of feedstock restrictions, which could enhance profitability.
• The Power Transmission business continues to witness strong demand, both domestically and internationally, in sectors such as oil and gas, petrochemicals, and basic industries.
• The Water business is well-placed for several upcoming project awards, including a significant contract in Europe, which could drive growth in the segment.

Strategic Initiatives:

• The company has undertaken a multi-year program to replace the vulnerable Co0238 sugarcane variety with more robust varieties, aiming to improve yield and crop resilience.
• Triveni has further consolidated its position in Sir Shadi Lal Enterprises Limited, a strategic acquisition that provides access to a loyal farmer base and high-yielding cane acreage.
• The company’s continued investments in R&D for the Power Transmission business have led to material cost reductions and expanded addressable markets.
• Diversification into the IMFL (Indian-Made Foreign Liquor) segment, with the launch of two new brands, represents a new growth avenue for the company.

Trends and Themes:

• The government’s push for Atmanirbhar Bharat and Make-in-India initiatives have created opportunities for the indigenization of imported gearboxes, particularly in the Defense segment.
• The increasing focus on water and wastewater treatment, both domestically and internationally, presents a favorable long-term outlook for the Water business.
• The evolving ethanol blending program, with a target of 20% blending, is a key theme driving growth in the Alcohol business.

Industry Tailwinds:

• Continued momentum in Indian economic activity and robust demand in sectors like oil and gas, petrochemicals, and basic industries.
• Government policies supporting the growth of the sugar, ethanol, and water treatment industries.
• Increasing international opportunities in the Power Transmission and Water businesses.

Industry Headwinds:

• Challenges in the ethanol business due to rising input costs and pricing issues, particularly for grain-based feedstocks.
• Potential delays in project awards and execution in the Water business due to the election cycle.

Analyst Concerns and Management Response:

• Analyst concern: Impact of using maize as a feedstock on the Alcohol business margins, given the lower profitability.
  Management Response: The company acknowledges the margin challenges with maize and is hopeful that the government will address the pricing framework and remove feedstock restrictions to improve the viability of both grain-based and sugarcane-based distilleries.

Competitive Landscape:

• Triveni maintains a strong position in the Power Transmission business, with a record order book, and is well-positioned to capitalize on the growing demand for indigenously manufactured gearboxes.
• In the Water business, the company faces competition from various players, but its diverse capabilities and PQ (Pre-Qualification) across segments provide a competitive advantage.

Guidance and Outlook:

• The company expects a double-digit increase in sugarcane availability for the upcoming season, driven by successful crop development initiatives.
• Alcohol business is targeting a production volume of over 21 crore liters in FY25 and around 25 crore liters in FY26.
• The Power Transmission business is poised for continued growth, supported by strong demand in both domestic and export markets.
• The Water business is expecting several project awards in the near future, which could drive growth in the segment.

Capital Allocation Strategy:

• Triveni has undertaken the acquisition of an additional 36.34% stake in Sir Shadi Lal Enterprises Limited, further consolidating its position in the subsidiary.
• The company has a prudent approach to capital expenditure, evaluating each investment decision based on the expected returns.

Opportunities and Risks:

• Opportunities: Increased ethanol blending targets, growing demand for water and wastewater treatment solutions, and the government’s push for indigenization in the Defense sector.
• Risks: Volatility in input costs, potential delays in project awards and execution, and regulatory changes affecting the sugar and ethanol industries.

Regulatory Environment:

• The company is closely monitoring the government’s actions, including the potential revision of the Minimum Selling Price (MSP) for sugar and changes to the ethanol pricing framework, which could significantly impact the profitability of the respective business segments.

Customer Sentiment:

• Triveni’s strong relationships with the farming community, particularly in the Shamli region, and its focus on improving cane yields and quality are expected to maintain customer loyalty and support.
• The company’s reputation and track record in the Power Transmission and Water businesses have contributed to its ability to secure orders from both domestic and international customers.

Top 3 Takeaways:

1. Triveni Engineering & Industries is poised for a robust performance, driven by improvements in the sugar and ethanol businesses, along with sustained growth in the Power Transmission and Water segments.
2. The company’s strategic initiatives, including crop development programs, acquisitions, and investments in R&D, are expected to strengthen its competitive position and enhance long-term profitability.
3. The company’s diversified business model, strong order book, and favorable industry tailwinds position Triveni as a promising investment opportunity in the engineering and infrastructure space.

Balaji Amines: All the moving averages have been contracting for 2.5 years. The stock looks good on a weekly timeframe and might be ready for a breakout.

Triggers lined up for the company:
Electronic Grade DMC: The existing DMC plant is under execution, which will be commissioned during FY 24-25. This has good demand for EV Batteries which has good potential in the coming years we are the only manufacturer of DMC in India right now with an installed capacity of 15,000 MTPA.

Dimethyl Ether: The project for the manufacture of DME is under execution at Unit-IV. The Plant is expected to be commissioned around March 2025. This has an application in the Aerosol industry apart from using as a replacement to LPG for Industrial and Commercial usage. The Bureau of Indian Standards (BIS) has initiated to blend DME 20% with LPG seeing the advantages of DME. The same is under final printing as Gazette Notification.

• New expansion of approximate Rs 750 crores in Subsidiary Balaji Speciality Chemicals Limited

More details are available in the latest quarterly presentation. It’s more of a contra call as the chemical sector is still out of favour. The company has posted not-so-good results in Q1FY25. It’s best to wait for the quarterly call before taking a position.

A few points on Pricol, assimilated from the Annual Report, AGM, and some from my own work:

1. Majority of the products are propulsion agnostic.

2. Adding one greenfield plant in Pune.

3. Company is in advanced discussions with 7 OEMs for disc brake systems. This will be huge growth area in the coming years, says the management.

4. Seven or eight manufacturers are getting added to the EV portfolio soon.

5. Has made significant investments in PCBs making it an electronics company from a mechanical company, says the management. Have even made robots in-house for manufacturing requirements. Going ahead, turnover will increase but manpower will not increase.

6. Has filed 20 patents for 15 inventions in India and abroad, with 17 patents already granted and the rest under review

7. Has successfully designed and started development of the Pricol E-cockpit platform. However no immediate revenue stream should be expected from this, it is a long-term opportunity for the company, nevertheless. Presently the prototypes are designed and discussion with customers are going on.

8. Has kick-started Battery Management System (BMS) development along with technology partner BMS Power Safe. Here again, no immediate revenues should be expected but this too is a good long-term opportunity. At present, the prototype development meeting the new regulatory requirements of Indian market is going on and expected to be completed by end of this calendar year. Post which, customer roadshows will be undertaken for commercialisation.

9. Pricol Telematics Control Unit (TCU) with SIBROS Software are installed & successfully running in 2-Wheeler, Off-Highway & Commercial vehicles in Domestic & International customer side. Here again, revenues are expected to start post FY26 onwards. At present, the integrated platforms are under testing with various domestic and international OEMs.

10. Achieved 62 % of energy consumption through renewable sources. Striving to achieve the target of 75 % in FY2024-25 and 100 % by FY2026

11. Balance in Retained Earnings is now negative Rs.65 crores only. Once it turns positive (most likely this year itself), the Board can declare dividends

12. I find there is a sharp increase in Warranty Expenses (Rs.31 crores this year Vs Rs.10 crores last year) as well as Provisions for Warranty Related Claim (Rs.20 crores this year Vs. 6 crores last year) in recent years. I asked the company if there is a change in the nature of customer contracts, but it said the increase is due to increase in sales, and additional provisioning based on the expected claims from customers.

13. As at 31st March, 2024, the contingent liability on account of various labour related cases has increased to Rs. 54.58 crores (Previous year – Rs.46.66 crores) with the addition of one more year’s interest.

14. The industry is facing a GST dispute with the government on whether instrument clusters attract GST at 18 % or 28 %. This matter is pending in Madras High Court and is an unspecified contingent liability.

15. Interestingly, the Company has claimed loss on disposal of investment in Spanish subsidiary amounting to Rs.408 crore as business loss in the return filed for the AY 21-22 but paid advance tax on the same. If the claim is accepted by the tax authorities, the company are sitting on a potential cash bonanza worth (income tax refund) of at least Rs.100 crore upwards if I am not wrong.

16. Suzuki looking at us as key partner for their global operations, said the management at the AGM.

Excellent business, but some housekeeping issues linger from a troubled past.

(Disc.: Invested)