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Steady quarter, internals remain strong

Sun Pharmaceutical (Sun) reported Q4FY21 performance was in-line with our estimates. India growth was strong at 12.9% while global specialty revenue remained stable. Consolidated revenue grew 4.1% YoY to Rs85.2bn (I-Sec: Rs87.5bn) and adj. PAT was up 103.4% to Rs13.4bn. EBITDA margin dropped 320bps QoQ to 24.0% (I-sec: 23.7%) as expected with increasing S,G&A expenses. Specialty product Ilumya reported sales growth ~51% in FY21 to US$143mn, globally. Generic entry in Absorica will impact the revenue in near term but it was already estimated. We remain positive on long-term outlook considering strong India business, scale-up in specialty sales and focus on margin expansion through superior revenue mix and operational efficiency. Considering recent rally in stock price, we downgrade Sun to ADD.

India strong, US stable:

US revenues were sequentially stable at US$370mn with steady performance in the specialty portfolio. Specialty revenue stood at US$473mn in FY21, a growth of 5.2% led by ramp-up in Ilumya and Cequa which we expect to continue. However, generic entry in Absorica would impact the growth in near term. We expect overall US revenues to CAGR at 6.0% over the next two years to US$1.5bn despite decline in Absorica revenue. India business grew strong 12.9% YoY and was higher than industry growth of ~6%. Chronic and sub-chronic growth remained strong while acute portfolio continues to face challenges. We expect the company to continue its outperformance vs the industry growth supported by its strong chronic portfolio. ROW and EMs grew 6.3% and 3.5% respectively during the quarter

Margins remained strong:

EBITDA margin at 24.0% was 30bps higher than our estimate led by better gross margin, despite increase in S,G&A costs. FY21 witnessed strong gross margin improvement of 230bps, driven by superior revenue mix with higher sales of specialty products and better operational efficiency in manufacturing. We believe that the current margin expansion caused by operational efficiency, revenue mix and cost control is partially sustainable. Hence, we expect EBITDA margin to remain stable over FY21-FY23E at ~24-25%.

Outlook:

We expect India business to outperform and gradual ramp-up in specialty sales to continue. Overall, we expect 9.4% revenue and 10.3% adj. PAT CAGRs over FY21-FY23E on high PAT base of FY21. Focus on cost control and free cash flow generation has augured well and net debt (ex-Taro) now stands at US$179mn which is expected to reduce further

Valuations and risks:

We raise FY22E-FY23E earning estimate by 2-4% to factor in better margins. However, considering recent rally in stock which has capped the upside, we downgrade Sun to ADD from Buy with a revised target of Rs752/share based on 25xFY23E EPS (earlier: Rs692/share). Key downside risks: Higher than expected pricing pressures in the US, and regulatory hurdles.

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