IGI Logo

Strong beat on margin; specialty picks-up

Sun Pharmaceutical (Sun) has reported strong operational performance in Q3FY21; beat our estimate on gross and EBITDA margins by 160bps and 520bps, respectively. Consolidated revenue grew 8.4% YoY to Rs88.4bn (I-Sec: Rs88.6bn) and adj. PAT was up 102.8% to Rs18.5bn. Global specialty sales has seen a strong recovery with 37% QoQ rise in revenue, largely driven by higher Ilumya sales. Ilumya sales in 9MFY21 crossed the FY20 mark of US$94mn. Generic entry in Absorica is a near term risk, although its already factored in estimates. 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. Reiterate BUY on Sun Pharma.

* Growth across the business segments: US revenues continued to ramp-up driven by the specialty portfolio and improved 11.6% sequentially to US$374mn despite 5.1% decline in Taro’s performance. Specialty revenue stood at US$148mn, a growth of 37.0% QoQ and we expect further ramp-up in Ilumya and Cequa sales. We expect overall US revenues to remain flattish over FY20-23E as Absorica sales would decline with entry of generic competitior causing price erosion. India business grew strong 9.4% YoY vs an industry growth of 6.4%. Chronic and sub-chronic growth remained strong. We expect the company to outperform industry growth supported by its strong chronic portfolio. ROW grew 15.6% and EMs revenue increased 8.4%. API business declined 9.4% YoY.

* Margin beat continues: EBITDA margin at 27.2% was 520bps higher than our estimate led by better gross margin and controlled S,G&A and personnel cost. Gross margin has been strong for past three quarters driven by superior revenue mix with improving 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 estimate 370bps EBITDA margin expansion over FY20-FY23E despite decline in Absorica sales.

* Outlook: We expect India business to continue to outperform and gradual ramp-up in specialty sales to continue. Overall, we expect 6.5% revenue and 20.6% adj. PAT CAGRs over FY20-FY23E with EBITDA margin expansion of 370bps. Focus on cost control and free cash flow generation has augured well and net debt (exTaro) now stands at US$250mn.

* Valuations and risks: We raise FY21 earning estimate by 13.4% to factor in strong 9MFY21 and raise FY22-23 EPS by 2-4%, factoring in better margins. Reiterate BUY on the stock with a revised target price of Rs692/share based on 24xFY23E EPS (earlier: Rs652/share). Key downside risks: Higher than expected pricing pressures in the US, and regulatory hurdles.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer