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Superior execution across key segments

Yet to see increased R&D spend in the Specialty portfolio

* SUNP delivered a strong beat on 1QFY23 earnings, led by broad based growth across business segments (US/Domestic Formulation (DF)/emerging markets (EMs)/RoW). While lower R&D spends has further enhanced margin in 1QFY23. However, the postponement of clinical trials would delay in obtaining potential approvals/subsequent commercial benefit from new chemical entity (NCE) assets.

 * We have raised our FY23/FY24 EPS estimate by 6%/4%, factoring in steady industry outperformance in the Branded Generics segment and lower R&D spends. We continue to value SUNP at 25x 12M forward earnings to arrive at our TP of INR1,100. We remain positive on SUNP on the back of sustained scale-up in the Specialty portfolio, robust franchise building in the Branded Generics portfolio, and healthy ANDA pipeline awaiting approval. We reiterate our Buy rating.

Higher employee cost and other expenses lowers EBITDA margin YoY

* Sales rose 10% YoY to INR106b in 1QFY23 (est. INR95.3b).

* EM/US sales grew 12.6%/11% YoY to USD245m/USD420m (18%/30% of sales). In INR terms, US sales grew 16% YoY to INR32b in 1QFY23.

* DF sales grew 2.4% YoY to INR34b (32% of sales). Excluding sales of COVIDrelated products in 1QFY22, the YoY growth would have been 13% in 1QFY23. Sales from RoW grew 2% YoY to USD190m (14% of sales). API sales grew 16.3% YoY to INR6b (6% of sales) in 1QFY23.

* Gross margin rose marginally by 15bp YoY to 73.9% in 1QFY23.

* However, EBITDA margin contracted by 320bp YoY to 24.6% (est. 22.2%) on higher other expenses/employee cost (up 390bp/130bp), but was partially offset by lower R&D spend (down 180bp) as a percentage of sales.

* EBITDA was stable YoY at INR26b (est. INR21b)

* SUNP clocked a forex gain of INR1.5b in 1QFY23. Adjusted PAT dipped 4% YoY to INR19b (est. INR14b).

Highlights from the management commentary

* Global Specialty sales stood at USD191m in 1QFY23. The same stood at USD673m in FY22.

* Illumya, Cequa, and Odomzo were the key growth drivers, while there has been a gradual build-up in the sales of Winlevi

* Excluding the sale of COVID-related products, total sales grew 14% YoY in 1QFY23.

* SUNP spent 21% on R&D in its Specialty portfolio.

* Specialty sales grew YoY, despite a seasonal impact on Levulan sales.

* Winlevi has been prescribed by 10k doctors in the US and has exhibited 22% QoQ growth in prescriptions.

Key takeaways from the management interaction

* Challenges in Ukraine/Russia had delayed clinical trials related to Illumya.

* SUNP would have to conduct phase 1/phase II trials for Illumya for Japan market. Hence, it would be atleast 1.5-2 years away for commercial benefit from this product.

* SUNP launched 2 products in generics segment (Ex-Taro)

* The EM sales grew 16% YoY in CC terms for the quarter.

* In India, there are 20-25 players who have launched Sitagliptin generic

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