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Superior performance across segments led to strong earnings beat

Improving traction in Specialty products

* SUNP’s 1QFY22 earnings were well above our expectation, led by over 25% growth in all segments, except API. Steady traction in the Specialty portfolio, recovery in the core portfolio of Branded Generics, new launches in US Generics, and partial benefit of COVID-related products led to strong growth in 1QFY22 earnings.

* We raise our FY22E/FY23E earnings estimate by 5%/6% to factor in: a) continued ramp-up in Ilumya-led Specialty portfolio, b) addition of products in the Specialty portfolio, and c) strong COVID-related offtake, revival in core therapies, and healthy pace of launches in Domestic Formulation (DF). We value SUNP at 25x 12-months forward earnings to arrive at our TP of INR900.

* We remain positive on SUNP on the back of: a) its strategy of NCE-led brand building in developed markets, b) industry leading market share in the Branded Generics market of DF, EM, and RoW, c) its Complex Generics pipeline and improving operating leverage. We maintain our Buy rating.

Revenue growth/operating leverage drives earnings

* Sales grew 30% YoY to INR96.7b (est. INR86b) in 1QFY22.

* DF sales rose 39% YoY to INR33.1b (34% of sales). US sales grew 35% YoY to USD380m (29% of sales). RoW sales increased by 35% YoY to USD185m (14% of sales). Sales in EM were up 25% YoY to USD218m (19% of sales). API sales declined by 7% YoY to INR5.2b (5% of sales).

* Gross margin fell 100bp YoY to 72.6% in 1QFY22.

* However, EBITDA margin expanded 580bp YoY to 27.8% (est. 24.3%), due to lower staff expense/other expenditure excluding R&D (-540bp/-190bp YoY as a percentage of sales).

* EBITDA was up 64% YoY to INR27b (est. INR20.9b).

* The exceptional expense of INR6.3b is on account of: a) additional provision of USD60m by Taro, related to an ongoing civil anti-trust matters; b) INR1.5b towards impairment of an acquired intangible asset under development; and c) INR382m in writing down of assets, which classified as held.

* Adjusting for the same, PAT grew 74% YoY to INR20b (est. INR15b).

Highlights from the management commentary

* Specialty sales stood at USD148m v/s USD143m. A QoQ rise in global Specialty sales is seen, despite the entry of g-Absorica in the market.

* SUNP guided at healthy double-digit growth in the Specialty portfolio in FY22. Japan and Australia remain promising markets for Ilumya.

* COVID-19 and allied products contributed 8-10% of DF sales in 1QFY22. Adjusting for the same, YoY growth is ~25%, led by superior growth in the core portfolio and partly due to a low base of the past year.

* Overall R&D spending to be 7-8% of sales for FY22.

* R&D spends for the Specialty portfolio is 26% of total R&D spends.

* Other expenses are yet to normalize to pre-COVID levels. It is expected to increase in 2QFY22, subject to the COVID-19 situation.

Valuation and view

* We raise our FY22E/FY23E earnings estimate by 5%/6% to factor in: a) continued ramp up in Specialty sales in the US, with incremental opportunities from inlicensed products, b) the benefit of an expanded field force in the DF segment, c) stable Taro business, and d) new product launches in US Generics.

* We expect 16% earnings CAGR over FY21-23E, led by 15%/13% revenue growth in the US/DF. We raise our TP to INR900/share on a 25x 12-months forward earnings basis.

* We remain positive on SUNP due to: a) investments in the global Specialty portfolio improving overall profitability, b) a robust pipeline of NDAs/ANDAs, and c) revival in the Branded Generics segment. We maintain our Buy rating.

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