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Sun Pharmaceutical’s (Sun) Q2FY23 performance has been better than our estimates. Consolidated revenues grew 14.7% YoY to Rs109.5bn (I-Sec: Rs105.9bn) and adj. PAT was up 14.3% to Rs22.6bn (I-Sec: Rs18.6bn). EBITDA margin stood at 27.0% (I-Sec: 25.7%). Specialty portfolio grew 5.2% QoQ to US$201mn (I-Sec: US$190mn) led by growth in Ilumya, Cequa and Winlevi. India business (ex-covid) grew ~11% YoY on the back of an increase in overall market share. We remain positive on the company’s long-term outlook considering its strong India business, scale-up in specialty sales and focus on margin expansion through superior revenue mix and operational efficiency. However, we believe, current valuation at 28.1x FY24E EPS captures the near-term potential, hence we retain HOLD with a revised target price of Rs1,002/share (earlier: Rs972/share).

Business review: US revenues declined 2% QoQ to US$412mn due to steep fall in Taro, but ex-Taro growth stood at 7% QoQ to US$282mn. The growth was driven largely by 5.2% increase in global specialty business to US$201mn. Specialty business was supported by ramp-up in Ilumya, Cequa and Winlevi. Expect overall US sales at 5.0% CAGR over FY22-FY25E to ~US$1.8bn. India business (ex-covid) grew ~11% YoY led by an increase in the overall market share. We expect the company to continue to outperform industry growth with its strong chronic portfolio. EMs grew 6.6% YoY while RoW declined 3.7% YoY. API sales were up 9.0% YoY. EBITDA margin expanded by 20bps YoY and QoQ to 27% driven by 220bps QoQ (+170bps YoY) increase in the gross margin to 75.3%. We expect EBITDA margin to remain at ~26-27% with better operational efficiency and improving revenue mix likely to be offset by increase in R&D spend

Key concall highlights: 1) Winlevi: i) Management expects growth to continue in the coming quarters; ii) ~1/3rd of the customers are repeat. 2) MR activities in the US have reached pre-covid levels. 3) Domestic business: i) 32 products were launched led by antidiabetic products ii) no covid product sales in Q2FY23. 4) R&D: i) Management expects R&D expense momentum to continue in the coming quarters; ii) R&D spend towards specialty segment stood at ~22%; iii) R&D guidance at 6-8% of sales has been maintained.

Outlook: We introduce FY25E estimates and expect 9.0% revenue and 13.3% adj. PAT CAGRs over FY22-FY25E. We expect India business to outperform and ramp-up in global specialty sales to continue supporting margins and profitability offset by rising R&D spend.

Valuations and risks: We raise our revenue estimates by 1-3% to factor-in higher sales in the specialty business; however, lower other income and rising tax rate results in 1-2% cut in EPS over FY23E-FY24E. Current valuation at 28.1x FY24E EPS captures the near-term potential, hence we retain HOLD with a revised target price of Rs1,002/share (earlier: Rs972/share) based on 26x Sep’24E EPS (roll-forward by 6 months). Key upside risk: Faster-than-expected growth in India and the US. Key downside risks: Higher-than-expected pricing pressures in the US and regulatory hurdles

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