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Sun Pharma reported Q1FY25 results were marginally below our estimates. The company reported a top line of INR 126.5bn (+6% YoY and +5.6% QoQ), the growth was led by double-digit growth in India and Emerging Markets. EBITDA came at INR 36.1bn (+8.3% YoY and +18.9% QoQ) and the margin expanded to 28.5% (+61bps YoY and +318bps QoQ). PAT at INR 28.36bn grew 24.1% annually and 3.1% sequentially. The company is targeting to achieve high-single-digit topline growth for the year and increase the R&D spend.

* India formulation business: The India formulation business, accounting for 33.1% of total revenue in Q1FY25, saw a significant growth of 16.4% YoY and 11.8% QoQ to INR 41.4bn, majorly driven by volume growth and new product launches. SUNP currently holds 8.6% of the Indian pharmaceutical market, up from 8.3% the year before. Throughout the quarter, the business launched 6 new products, and it is still outpacing the IPM growth for all of the major therapies. Going forward, it is expected that the India business will either grow in line with the IPM or marginally above the market growth which is expected to be a high-single digit in FY25.

* US formulation business: The US business, which accounted for 31.1% of total sales during the quarter, flattened out on a YoY basis and de-grew by 1.6% to INR 38.89bn (US$ 466mn). The growth was primarily driven by the expanding specialty products portfolio. The company launched 5 generic products in the US during the quarter. The US FDA approved LEQSELVI 8mg tablets for the treatment of adults with severe alopecia areata, and the company is excited about the launch in the US markets.

* Emerging Markets: Emerging markets expanded +10.5% YoY and 16.5% QoQ to INR 23.69bn during the quarter (18.9% of total revenue). All of the large markets have done well in the local currency terms.

* Margin Profile: The gross margin expanded by 195bps YoY and contracted by 128bps to 78.9%. EBITDA margin increased by 61bps YoY and 318bps QoQ to 28.5% as a result of lower operating and R&D expenses. Of the overall R&D spent during the quarter, 45% went into specialty R&D. In FY25, the management projects that R&D expenses would account for 8–10% of overall revenue, where a large part will be towards the specialty portfolio.

* Outlook & Valuation: The company's growth is driven by improvement in the product mix which is shifting towards the specialty portfolio and driving the margin. India’s business will either grow in line with the IPM growth or outperform on the back of it leading position in the market. We anticipate that the factors mentioned above will result in a Revenue/EBITDA/PAT CAGR of 10.4%/12.7%/17.3% between FY24–26E. We value the stock on FY26E EPS and arrive at a target price of INR 1,835 (valuing at 32x) with a BUY on the company.

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