Strong margin beat but US sales plunge
* Sharp cut in opex, lower R&D spends and rise in gross margins boosted EBITDA margins by 765bps qoq to 24.3%. These trends are common across companies. On the other hand, SUNP’s US sales fell 25% qoq − the sharpest so far among covered names.
* The US business was largely impacted by a 38% qoq decline in specialty portfolio (at US$78mn) and 33% in Taro (63% of portfolio is derma, which is one of the severely hit segments). SUNP’s own generic business was flat qoq. India growth of +3% yoy beat our estimate of a 3% decline (chronic skew aided).
* Opex cut in Q1 is unlikely to sustain as marketing activity picks up from Q2 onward. With a slow ramp-up in the specialty portfolio, we expect limited margin expansion in the interim due to generic competition in Absorica (Dec’20), increase in India field force (by around 10%) and increase in R&D spends. We expect flat margins over FY20-22E.
* We raise FY22/23E EPS by 5% each and increase the TP to Rs542 as we roll over to 23x June’22E EPS (vs. 20x earlier). Higher multiple is on account of the reducing overhang of DOJ penalty with the recent settlement. We retain Hold and UW in EAP.
US miss, but sharp cut in opex drives margin beat: Revenues stood at Rs75.9bn (down 9% yoy/7% qoq), in line with our expectations. The US business plunged 25% to US$282mn (vs. our estimate of US$340mn), due to the impact of the lockdown on the specialty portfolio (~38% qoq decline at US$78mn) and Taro (~33% qoq decline, 63% of portfolio is derma, which is one of the hardest hit segments). SUNP’s own generics business was flat qoq. India growth of +3% yoy beat our expectation of a 3% decline (chronic skew aided). API was the other notable segment with 20% yoy growth, similar to what we have seen in other companies. Other common trends were the qoq improvement in gross margins (+220bps qoq), lower other expenses (-750bps qoq) and low R&D spends (-90bps qoq). Consequently, EBITDA margins at 24.3% were 400-500bps above estimates. During the quarter, SUNP also incurred a onetime settlement charge of Rs36.3bn related to the ongoing antitrust litigations in US. Adj. PAT stood at Rs19.8bn vs. our/consensus expectations of Rs5.6bn/Rs10.4bn.
Opex cut may be short-lived: We believe that the sharp cut in opex, is unlikely to sustain as marketing activity picks up across markets with the easing of lockdowns. SUNP expects a partial cut in opex to continue in Q2 as well and then fade off. Further, with a slow ramp-up in the specialty portfolio, we expect limited margin expansion in the interim due to generic competition in Absorica (Dec’20), increase in India field force (by around 10%) and increase in R&D spends.
Retain Hold: We revise FY22/23E EPS up by 5% each. We maintain Hold with a TP of Rs542, valuing the stock at 23x Jun’22E EPS (vs. 20x June’22 EPS earlier). SUNP is an UW in EAP. Key risk: Faster-than-expected ramp up in the specialty portfolio.
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