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Margin delivery continues; await further Specialty ramp up

Our view

Sun Pharma clocked a surprise as gross margin up ~100bps QoQ in an environment where peer commentary has constantly highlighted elevated input cost pressures. We have factored in some pull back in OPM in H2 as ex-R&D expenses inch up especially on low base of last year. Albeit, we note that some cost savings due to pandemic coupled with structural factors (improved gross margin due to specialty sales & lower R&D) would keep margin in a higher range compared to the past. Specialty sales jumped 43% YoY, again due to some base effect though Covid still took some toll on growth rate. Domestic business appears on strong footing excluding Covid-led boost. We raise FY22/23 margin assumption which results in a 12%/5% increase in FY22/23 EPS; retain ADD with unchanged 25x PE and revised TP Rs860 (earlier Rs820).

Result Highlights

* Revenue down 1% QoQ and up 12% YoY driven by domestic and emerging markets

* India sales up 26% YoY (Covid-impacted base in Q2 last year) with market share gains across categories. US specialty business clocked healthy growth from Ilumya and Cequa despite price pressure on Absorica and Levulan.

* Company seems to have evaded major impact of price erosion in US as gross margin higher by 100bps QoQ to 73.8%. Strong cost control (staff up just 3% and other exp ex-R&D up 14% in H1 on low base) led to an EBIDTA beat

Valuations

We raise FY22/23 margin which results in a 12%/5% rise in FY22/23 EPS; retain ADD with unchanged 25x PE and revised TP Rs860 (earlier Rs820).

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