Sun Pharma Research Report By HDFC Securities

Compelling valuations

We maintain BUY on SUNP following a miss to our estimates owing to a one-off. Our TP is revised to Rs 600/sh (22x FY21E EPS + Rs 40/sh for specialty). Hopes are hinged on a ramp up in specialty business.

HIGHLIGHTS OF THE QUARTER

 Revenue growth was muted during the quarter due to a one-time impact of Rs 11bn on domestic sales with the shift to direct distribution (from AML earlier). Adjusting for this, sales would stand at Rs 85bn (+18/7% YoY/QoQ).

 India sales at Rs 11bn were down 44% YoY. Adjusting for the one-off, sales grew 11% YoY. The co launched 4 new products during the quarter and continues to hold the highest market share in IPM (~8.2%). We expect the co to grow at 9-10% CAGR over FY19-21E driven by its strong branded franchise. The impact of change in distributor has been borne and won’t persist.

 US sales at US$ 443mn grew 22% QoQ boosted by a new contract for certain generics as well as traction gained in Taro. With the new DTC marketing ongoing for Ilumya and field force ready for Cequa’s launch (2QFY20), the mgmt. is confident in ramping up its specialty segment consistently over the next few years. We expect the segment to breakeven by FY22E.

Expenditure on front-end will remain unabsorbed until then, thereby denting overall profitability.

 EBITDA was at Rs 10.2bn with margin at 14.2% (-994/962bps YoY/QoQ). The one-time hit on sales due to change in distributor impacted profitability severely during 4Q. PAT stood at Rs 6.4bn (-51/32% YoY/QoQ).

 Near-term outlook: Expect the stock to recover.

STANCE

SUNP is likely to be in an investment phase for its US specialty business over FY20, with 7-8 products in the US, slow ramp up and heightened promotional spend (300-400bps margin impact). Meanwhile, the growth in the domestic biz is expected to return to double-digits while the co is also initiating cost control measures to improve margins.

We model a 13% revenue CAGR and ~350bps margin expansion to ~24% EBITDA margin over FY19-21E, resulting in PAT growth of 31% over the period. The stock has taken a beating following recently resurfaced corporate governance issues and is trading at 16x FY21E EPS.

However, the mgmt has addressed all investor concerns and taken corrective actions for the same. Return of investor confidence and ramp up in specialty will drive re-rating of the stock.