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Result Highlights

* Q4 revenues increased by 4% YoY but lower QoQ as US specialty sales had some pre-buying in Q3

* Gross margin expanded 187bps YoY, further aided by decrease in other expenses and staff cost on YoY basis; as other expenses up ~8% QoQ. EBITDA margin declined ~300bps qoq on revenue decline and higher other expenses.

* Exceptional item of Rs6.7bn pertains to part provision recognition made by Taro (US$ 80mn) relating to multi-district trial and settlement by Ranbaxy in EU (Rs895 mn) .

* Company did not guidance for FY22; healthy commentary on Ilumya, Cequa while generic Absorica impact not felt yet.

Our view:

Non-Taro US sales which showed first signs of life in Q3 FY21 may have temporary given up some gains as pre-buying partly weighed on specialty sales in Q4. In Q2 update, we had outlined our thought that until signs emerge of specialty turnaround, we would be reluctant to change our negative stance. Now ex-Taro US business has delivered in two successive quarters which we think implants a credible platform for the next 2 years.

Product wise Ilumya, Cequa have shown ability to grow in past 2-3 quarters and while generic Absorica would dent sales, reckon on balance, US business ex-Taro should maintain average US$240mn run rate in FY22. While competitive landscape in the branded business remains fierce as before, Sun has managed to grow ex-Taro quarterly revenues to one of their highest barring two exception-filled quarters in Q4 FY19/Q1 FY20.

While FY22 estimates do not undergo a material change, we would be ahead of consensus on FY23 EPS by ~10%, factoring in robust ~US$290mn quarterly run rate in FY23, for non-Taro business, vs US$210mn in FY21. We also raise FY23 target PE to 24x (from 15x earlier) as risks to US specialty business have receded after 2 quarters of solid execution. We upgrade to ADD from SELL with revised target price of Rs790 (Rs400 earlier).

A large part of our change in TP is driven by change in PE multiple and less due to valuing on FY23 EPS. Since Q2 FY21 results, stock has rallied and outperformed BSE Healthcare index; albeit, on a 1Y basis, SUNP has still underperformed benchmark indices. We expect stock to outperform LPC (tepid inhaler traction, target PE 22x) and DRRD (target ~23x) in the near term as US specialty business revenues play out. Key risk would be slowdown in US business or increased costs which can translate into earnings disappointment.

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