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Domestic Formulation on steady footing

Improving traction in Specialty products

* Sun Pharma (SUNP) delivered a 4QFY21 performance marginally below our expectations, weighed by moderation in US and API sales. Domestic Formulation (DF) business growth has been strengthening for three consecutive quarters now. Marketing efforts are driving strong performance in Illumya, a specialty product – 51% YoY growth was reported for FY21. It further intends to build a Biosimilar portfolio for launch over CY28–30.

* We raise our earnings estimate by 9%/8% for FY22E/FY23E, factoring in a) continued ramp-up in Illumya, led by the Specialty portfolio, b) healthy growth in the base DF portfolio as well as additions to the COVID portfolio, and c) subsequently better operating leverage. We continue to value SUNP at 25x 12M forward earnings to arrive at TP of INR740. Maintain Buy.

DF and low base drive strong YoY growth in earnings

* SUNP’s 4QFY21 sales grew 4.4% YoY to INR84b (vs our est: INR88b).

* DF sales grew 13% YoY to INR27b (32% of sales), ROW sales were up 5.5% YoY to USD163m (14% of sales), Emerging Market (EM) sales were up 2.8% YoY to USD192m (17% of sales). US sales declined 1.3% YoY to USD370m (32% of sales) on 15% YoY decline in Taro sales for the quarter.

* The gross margin expanded 190bps YoY to 73.4%. The EBITDA margin expanded at a higher rate of 600bps YoY to 23.3% (our est: 23.9%), led by lower other expenditure / employee cost (-330bp/-50bp YoY as % of sales).

* EBITDA was up 41% YoY to INR19.7b (our est: INR21b).

* SUNP had an exceptional expense of INR6.7b on account of a) additional provisions by Taro worth USD80m related to ongoing multi-jurisdiction civil anti-trust matters and b) the final judgment issued by the Court of Justice to the European Union (CJEU), which led to INR895m being debited in 4QFY21. Subsequently, it recognized deferred tax amounting to INR1.2b related to the Taro settlement.

* Adjusted for the same, PAT grew 97% YoY to INR14.6b (our est: INR16b).

* Sales/EBITDA/PAT grew 3.6%/27.5%/56.2% to INR335b/INR82b/INR62b for FY21.

Highlights from management commentary

* Global Specialty sales stood at USD139m for 4QFY21 v/s USD143m QoQ. The QoQ drop was attributable to increased buying at the end of the calendar year and the adverse impact of the pandemic situation.

* SUNP garnered global sales of USD143m from Illumya, up 51% YoY.

* SUNP remains on track to drive Illumya sales using a) the continuous involvement of opinion leaders, b) an expanding prescriber base, and c) better traction from existing patients.

* SUNP is building a Biosimilar portfolio for launch over CY28–30. We are yet to see clarity on the amount of investment needed for product development as well as building capacity.

Valuation and view

* We raise our earnings estimate by 9%/8% for FY22E/FY23E, factoring in a) heightened demand due to COVID, steady growth in the Chronic segment, and recovery in the Sub-Chronic category in the DF segment; b) the benefit of an expanded field force in the DF segment; and c) improving traction in the global Specialty portfolio.

* Accordingly, we raise our TP to INR830 on a 25x 12M forward earnings basis.

* We remain positive on SUNP on its superior execution in the global Specialty portfolio / Branded Generics and a robust ANDA pipeline. Maintain Buy.

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