One-offs in US/deferred R&D spend/lower tax rate drive earnings
* Revenue primarily driven by RoW market: Sales were up 16% YoY to INR82.5b in 1QFY20, mainly led by strong growth in RoW sales (+56% YoY to USD167m – partly led by the integration of the recently acquired Pola Pharma Japan since Jan’19). US sales increased 12% YoY to USD424m (36% of total sales), mainly driven by a significant contribution from generic supply to a customer. India sales were up 8% YoY to INR23b, while emerging market sales were flat YoY at USD194m. Taro sales were up 4% YoY at USD161m.
* India distribution transition impacts gross margin: Gross margin shrank 30bp YoY (-370bp QoQ) to 70.2%, mainly due to the change in product mix and distribution transition in India. However, EBITDA margin expanded 70bp YoY to 22% (our estimate: 21%), largely due to lower R&D/employee cost (- 200bp/-140bp YoY). EBITDA was up 19% YoY at INR18b (our estimate: INR16b). Adj. PAT grew at a relatively high rate of 34% YoY to INR13.2b due to higher other income, lower finance cost and tax rate.
* Concall highlights:
(1) Specialty portfolio comprising patented products had sales of USD94m across markets.
(2) Commercialization of Cequa is delayed to 3QFY20 as it had certain manufacturing- and supply chain-related issues.
(3) Market share of Odomzo reached 12% at end-1QFY20.
(4) Finance cost declined sharply due to reduced INR borrowing.
* Valuation view: We raise our FY20/21 EPS estimate by 7% to factor in improved growth in the domestic formulation business and lower finance cost. We continue valuing SUNP at 22x 12M forward earnings to arrive at a price target of INR510 (prior: INR465). The company’s strong ANDA pipeline for US generics, gradual build-up in the specialty portfolio and the healthy outperformance in DF reinforce our positive stance on SUNP. Maintain Buy.
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