US drags down revenues but margins improve…
Revenues de-grew 9.4% YoY to | 7585 crore (I-direct estimate: | 7948 crore) mainly due to 27.5% YoY decline in US formulations to | 2136 crore due to high base and continued pressure on dermatology segment (Taro included). India business grew 3.2% YoY to | 2388 crore whereas Emerging Markets business de-grew 2.4% YoY to | 1316 crore. RoW markets business also degrew 11.1% YoY to | 1030 crore. EBITDA margins expanded 47 bps YoY, 765 bps QoQ to 24.3% (I-direct estimate: 17.0%) despite higher employee expenses mainly due to lower other expenditure and better gross margins. EBITDA de-grew 7.6% YoY to | 1844 crore (I-direct estimate: | 1351 crore). Adjusted PAT de-grew 17.4% YoY to | 1146 crore (I-direct estimate: | 621 crore). Exceptional expense of | 3633 crore pertain to Taro's settlement with US DoJ (cumulative US$419 million) and US$60 million provision for multijurisdiction antitrust matters.
Specialty diversification to be key for US business
The US business comprises ~32% of turnover (FY20). The US product basket comprises 491 approved ANDAs, 95 pending final approvals (including 20 tentative approvals). It also has 55 approved NDAs and six 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, lockdown 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 8.2%, 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 | 11979 crore in FY20-22E backed by a lower base, new launches and price hikes
Valuation & Outlook
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 FY22. 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 | 625 based on 26x FY22E EPS of | 24.1.
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