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Hold Sun Pharmaceuticals Industries Ltd For Target Rs.720

* We downgrade Sun Pharma to Hold as we believe current valuations amply captures all the upside related to specialty. The stock is trading at 1-year fwd PE of 28x. We value it at 24x PE on our FY23E EPS and add SCD044 NPV of Rs15 to arrive at a TP of Rs720 (Rs660 earlier)

* Q4 revenue of Rs85.2bn was largely in line with our estimates. EBITDA came in at Rs20.6bn, marginally missing our estimates by 3%. EBITDA margin of 24.2% came in line with our estimate. Adj. PAT of Rs13.4bn was also in line.

* Global specialty revenue of US$139mn in Q4 was in line with our expectations. Global Ilumya sales of US$143mn for FY21 puts Q4 Ilumya sales at ~US$45-47mn, a tad lower than expectations. The qoq softness was attributed to seasonally higher sales in Q3.

* We largely maintain FY22/23 estimates. We expect yoy margin compression in FY22 due to an increase in promotional and R&D expenses. We introduce FY24 estimates with revenue, EBITDA and EPS of Rs440bn, Rs120bn and Rs35, respectively.

Mixed segmental performance:

Taro’s qoq growth partially offset the weakness in North America generic business. India business was a bright spot with 13% yoy growth and beat our estimates by 7%. RoW and EM posted strong yoy growth of 44% but missed our estimates by 7%. API business decreased by 10% yoy. Positive growth outlook but costs to inch up: Management expects all the businesses to grow in FY22. On the specialty front, management sounded positive about Cequa for the coming year.

Management has outlined three growth drivers for Ilumya:

1) getting more Rx from existing prescribers and 2) continued endorsement from key opinion leaders and HCPs. Promotional and marketing expenses are expected to inch up across geographies although some savings will be sustainable. R&D expense is also expected to inch up as clinical trial activity increases. Surprisingly, management also shared its interest for the biosimilar space. The company will focus on products losing patents beyond FY28.

Specialty franchise build up to continue:

We estimate global specialty sales to ramp up to US$600mn in FY22 and US$725mn in FY23, primarily led by Ilumya and Cequa, offset in part by genericisation of Absoica. We estimate global Ilumya sales approaching US$250mn mark in FY22, scaling to US$400mn in FY24. For Cequa, we expect peak sales of ~US$75mn in FY23.

Margins to compress before expansion:

EBITDA margin at 24.2% declined ~225bps qoq due to normalization of other expenses and employee cost. We expect a reversal of Covid-related savings to continue, leading to 50-60bps EBITDA margin compression in FY22E. However, continued specialty ramp-up is expected to lift EBITDA margin higher to ~26% in FY23E.

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