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Strong Q1 beat on all fronts but upside capped…

About the stock: Sun Pharma is the world’s fourth largest specialty generic company with sales of US$3.8 billion & boasts of 43 manufacturing sites addressing segments like specialty products, branded generics, complex generics, pure generics and APIs.

* With a market share of 8.2%, Sun is ranked No. 1 in domestic formulations. It enjoys leadership position in 11 specialties based on prescription

* Revenue breakup: US formulations~30%, Indian branded~30%, Emerging markets~17%, RoW~14%, API & others~6%.

Q1FY22 Results: Sun Pharma reported robust Q1FY22 results.

* Sales were up 28.1% YoY to | 9718.7 crore

* EBITDA in Q1FY22 was at | 2821 crore, up 53% YoY with margins at 29%

* Consequent adjusted PAT was at | 2075 crore (up 81% YoY)

What should investors do?

Sun Pharma’s share price has declined by ~0.8x over the past five years (from ~| 763 in June 2016 to ~| 675 levels in June 2021).

* We maintain HOLD as we wait for more consistency on the specialty front. At the current level, the stock has priced in the medium term traction

Target Price and Valuation: We value Sun at | 800 i.e. 28x P/E on FY23E EPS.

Key triggers for future price performance:

* It has embarked on a strategy to in-license latest generation patent protected products from various innovators

* Higher contribution from specialty & strong domestic franchise is likely to change the product mix towards more remunerative businesses by FY23

* In the US, Sun diversifying into specialty products like Ilumya, Levulan, BromSite, Cequa, Xelpros, Odomzo, Yonsa, winlwvi etc.

Alternate Stock Idea: Apart from Sun, in our healthcare coverage we also like Cipla.

* It has a diversified portfolio with respiratory segment leadership

* BUY with a target price of | 1040

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