Buy Sun Pharma Ltd for the Target Rs.2,310 by Motilal Oswal Financial Services Ltd
Specialty and branded lead the way On-track to complete Organon acquisition by 4QFY27
* Sun Pharma (SUNP) delivered in-line revenue/EBITDA in 1QFY27, whereas adjusted PAT came in higher than expected (11% beat), led by higher other income.
* The global innovative portfolio maintained growth momentum (13% YoY) and accounted for 22% of 1Q sales.
* US generics segment declined in 1Q due to lower g-Revlimid contribution and increased competition across select base products.
* Notably, brand-building exercise across therapy areas and MR additions led to sustainable industry-beating growth in the domestic formulation (DF) segment in 1QFY27.
* Superior execution has enabled two consecutive years of outperformance. Notably, it is broad-based across therapies and a healthy mix of volume and new launches.
* We maintain our earnings estimates for FY27/FY28. We value SUNP at 38x 12-month forward earnings to arrive at a TP of INR2,310.
* SUNP remains on track to a) expand its innovative medicine portfolio through enhanced marketing efforts on new launches, increasing the prescriber base and the prescription rate for existing products. Further, improved industry-level growth and strong brand franchise support healthy growth for SUNP. Currency tailwinds would be a favorable growth driver for SUNP’s revenue. These benefits would be partially offset by price erosion in the US generics segment. Accordingly, we build in an 11% earnings CAGR over FY26-28. Maintain BUY.
Segment mix benefit offset by higher opex YoY
* Sales grew 10.1% YoY to INR151.8b (vs our est. INR152.8b).
* Gross margin expanded 90bp YoY to 80.5% for the quarter.
* EBITDA margin contracted 155bp YoY to 27.5% (our est. 26.2%), as employee costs/other expenses rose 90bp/160bp as % of sales.
* Accordingly, EBITDA grew 4% YoY to INR41.8b (our est. INR40b).
* An exceptional item of INR821m included
(1) a charge of INR1.7b for due diligence/legal/filing fees to acquire all outstanding shares of Organon
(2) incremental costs of INR370m wrt the reassessment and refinement of employee compensation structures
(3) net forex gains of INR1.2b.
* Adj. PAT was INR30.9b (est. INR29.8b), up 3.1% YoY. The tax rate was high at 29% for the quarter
Reiterate BUY
* We maintain our earnings estimates for FY27/FY28. We value SUNP at 38x 12- month forward earnings to arrive at a TP of INR2,310.
* SUNP remains on track to a) expand its innovative medicine portfolio through partnerships, launches and increasing reach. Further, stable performance in branded generics via MR addition positions SUNP well to outperform the industry. These benefits would be partially offset by price erosion in the US generics segment. Accordingly, we build in an 11% earnings CAGR over FY26-28. Maintain BUY.
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