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Specialty scaling up with margin improvement

Sun Pharma 2QFY23 revenues stood at Rs 108bn up 13% YoY, which was in-line with our estimates. US revenues US$ 412mn (up 14% YoY) and India sales of Rs 34.6bn (up 8.5% YoY). Taro sales declined by 1% YoY to US$130mn and Emerging markets sales were up 15% YoY. Revenue traction has supported 29% Adj. EBITDA margin, amid cost escalations and forex loss. Adj. PAT came in at Rs25bn up by 18% YoY and 31% QoQ. Sun is on the path to achieve its FY23 guidance of single to low double-digit sales growth (11.6% YoY in H1FY23) with stable growth in specialty and India, and expansion in margins, despite increase in R&D. Maintain BUY, with a revised TP of Rs1,200 (26x Sep’24E).

US specialty continues to grow with Winlevi + Ilumya,

Cequa US sales grew 14% YoY to US$412mn led by traction in the specialty portfolio. Global specialty sales stood at US$201mn, up by 27.5% YoY mainly contributed by increased traction in llumya, Winlevi and Cequa. Specialty R&D spend contributed 22% of R&D spend. The management continues to follow-up with the USFDA for re-inspection of Halol, (Received 10 observations from USFDA in May’22 and later OAI in Aug’22). We believe the plant clearance would take longer than estimated time and it will require re-inspection from USFDA. The compliance status may lead to improvement in pace of new launches

Increased MR counts to drive volume and future growth

India business grew by ~9% YoY and 2% QoQ to Rs34.6bn led by steady performance in chronic/ sub-chronic therapies such as CNS, Gastro, Gynaec, Respiratory and Urology. However, Adj. for Covid the sales was up by 11% YoY. Sun launched 34 new products in Q2 and continues to hold 8.2% MS as of IMS MAT Sep. The field force expansion has been completed (~10% of FY22 count of ~11,000) and focusing towards increasing reach and access to gain market share while improving market productivity. Management remain optimistic for better penetration in Metros and Tier I cities. This initiative coupled with automation, digitization and efficiency measures we expect domestic formulations to drive good profitability in near term.

Valuation and risks

Sun focus is on gaining revenue traction, cost control/optimization, business continuity, and on the specialty basket. R&D may normalize to 6-8%, as clinical trials pick-up. SUNP maintains its leadership position in the domestic market and support from ROW markets is healthy. US market has been steady and improving its base riding on specialty business with new addition of Winlevi along with prescription increased to support the base further. We anticipate the specialty basket focus strategy to start paying better dividends from FY23E, which would add significant delta to earnings going ahead as most of the costs are already in the base. Given the optimization of the specialty play and stable India growth we increase our target multiple to 26x on Sep’24E (Earlier 24x) average EPS of FY24E & FY25E to arrive at a revised TP of Rs1,200. Maintain BUY. At CMP of Rs1,016, the stock trades at 28x FY23E EPS of Rs 35.8 and 24x FY24E EPS of Rs 43

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