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In line sales, higher margin amid lower SG&A cost…

Q3 revenues grew 8.4% YoY to | 8837 crore (I-direct estimate: | 8636 crore). US formulations grew 10.8% YoY to | 2761 crore. Indian formulations grew 9.4% YoY to | 2753 crore. Emerging markets business grew 8.4% YoY to | 1507 crore. RoW markets business grew 15.6% YoY to | 1276 crore. API segment de-grew 9.4% YoY to | 485 crore. EBITDA margins expanded 465 bps YoY to 27.2% (I-direct estimate: 23.0%) due to lower other expenditure and better gross margins. Delta vis-à-vis I-direct estimates was mainly due to significantly lower other expenditure. EBITDA grew 30.7% YoY to | 2406 crore (I-direct estimate: | 1986 crore). PAT more than doubled to | 1852 crore (I-direct estimate: | 1319 crore) vs. | 914 crore in Q3FY20. Delta vis-avis EBITDA was due to higher other income, lower interest expense and lower tax rate.

Specialty diversification to be key for US business

The US business comprises ~32% of turnover (FY20). The US product basket comprises 497 approved ANDAs, 90 pending final approvals (including 22 tentative approvals). It also has 55 approved NDAs and eight pending NDAs. US growth has also been backed by extensive infrastructure with 44 global manufacturing facilities. Due to a challenging environment on the generics front, the management plans to diversify into specialty products such as Ilumya, Levulan (dermatology), BromSite, Cequa, Xelpros (ophthalmic), Odomzo, Yonsa (oncology), etc. US growth, however, is likely to remain muted in the near term mainly due to expiry of Absorica patent, pandemic impact on Ilumya & Levulan and slowdown in the generics space.

New launches to drive domestic revenues

Indian formulations form 30% of turnover (FY20). With a market share of 8.3%, Sun is ranked No. 1 in domestic formulations. It leads prescription share in 11 specialties including psychiatrists, neurologist, cardiovascular and diabetes. It has also embarked on a strategy to in-license latest generation patent protected products from various innovators. We expect Indian formulations to grow at 11% CAGR to | 13277 crore in FY20-23E backed by a lower base, new launches and price hikes

Valuation & Outlook

Q3FY21 revenues were in line with I-direct estimates whereas profitability was better on account of lower-than-expected other expenditure, higher other income and lower interest expense. While the company’s US generics front is going through calibrated product rationalisation, specialty segment looks promising due to robust product pipeline, steady progress. This metamorphic shift from generics to specialty, however, is likely to weigh on US growth in the near term. That said, higher contribution from specialty and strong domestic franchise is likely to change the product mix towards more remunerative businesses by FY23. This would have positive implications for margins also as we expect faster absorption of frontloaded costs on the specialty front. We maintain BUY and arrive at our new target price of | 675 (vs. earlier | 585) based on 25x FY23E EPS of | 27.0.

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