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On the rising path

Specialty portfolio sales in step-up mode

* SUNP delivered higher-than-expected profitability on: a) better traction in Specialty portfolio/US Generics, and b) extended benefit of lower opex. Marketing efforts for the Specialty portfolio remain constrained due to COVID-19, offering scope to gain further prescription share going forward.

* We raise our FY21E/FY22E/FY23E earnings estimate by 9%/7%/7%, factoring in: a) gains from marketing in the Specialty portfolio, b) market share gain/utilizing shortage opportunities in US Generics, and c) controlled operational cost due to uncertainties related to COVID-19.

* We continue to value SUNP at 25x 12 months forward earnings to arrive at our target price of INR740. We remain positive due to: a) superior execution in the Specialty portfolio, b) strong ANDA pipeline, and c) outperformance in the Branded Generics segment. Maintain Buy.

Product mix, operating leverage drive earnings

* 3QFY21 sales were up 9.2% YoY to INR88b (v/s our estimate of INR86.2b), led by US sales, up 11% YoY to INR27.6b (USD374m; 31% of sales), RoW+EM, up 11.6% YoY to INR27.8b (32% of sales), and India sales, up 9.4% YoY to INR27.5b (31% of sales). API sales fell 10.5% YoY to INR4.5b (6% of sales), dragging overall growth to some extent.

* Gross margin in 3QFY21 was up 80bp YoY to 73.6%.

* EBITDA margin expanded 550bp YoY to 26% (v/s our estimate of 24.3%), due to lower other expenditure (-520bp YoY as a percentage of sales), partially offset by higher staff expense (+30bp YoY as a percentage of sales).

* EBITDA increased 39% YoY to INR22.7b (v/s our estimate of INR21b).

* Adjusted PAT after minority interest rose 2.1x YoY to INR17.8b (v/s our estimate of INR13.8b). The YoY growth in adjusted PAT is higher than EBITDA due to higher other income and lower tax rate.

* Revenue/EBITDA/PAT rose 2%/21%/42% to INR247b/INR61b/INR45.7b in 9MFY21.

Highlights from the management commentary

* SUNP has crossed FY20 sales for Illumya in 9MFY21. It witnessed good traction for this product in the Japanese market.

* Specialty revenue has increased to USD148m in 3QFY21, with Ilumya, Cequa, and Odomzo sales at pre-COVID levels.

* The increased traction in the Specialty portfolio is led by a gradual increase in the market share for key products.

* The company is yet to see g-Absorica in the market.

* Excluding Taro, growth in Generics sales was led by market share gains, incremental upside from shortage of products, and efficient supply chain management.

Valuation and view

* We raise our FY21E/FY22E/FY23E earnings estimate by 9%/7%/7%, factoring in: a) better sales outlook for niche products, b) market share gain in the Branded/US Generics, and c) better operating leverage. We raise our target price to INR740/share on 25x 12 months forward earnings.

* We believe SUNP’s RoE is at a trough and would improve with 22% earnings CAGR, led by 9%/7%/10% sales CAGR in DF/US/RoW and 340bp margin expansion over FY20-23E. Maintain Buy.

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