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Superior execution drives broad-based revenue growth R&D spending to increase in the coming quarters

* Sun Pharma (SUNP) delivered an in-line 2QFY24 financial performance. SUNP garnered healthy growth across specialty as well as branded generics businesses. It continues to implement its initiatives towards: a) an improvement in prescriptions for commercialized specialty products, and b) filing of new products as well as clinical trials for products under development.

* We retain our estimates for FY24/FY25. We continue to value SUNP at 26x 12M forward earnings to arrive at our TP of INR1,310.

* SUNP is well-positioned to reinforce its specialty franchise through the addition of new products, the expansion of its reach, and the superior implementation of its existing products. It continues to outperform both in the branded generics market of India (DF) and other emerging markets. Reiterate BUY.

Product mix benefit more than offset by higher opex YoY

* SUNP’s sales grew 11% YoY to INR120b (in line). DF sales rose 11% YoY to INR38b (32% of sales). The US sales grew 8% YoY to INR35.5b (USD430m, up 4% in CC terms; 30% of sales). The ROW sales increased 18% YoY to INR17b (14% of sales). EM sales grew 13% YoY to INR23b (20% of sales) in 2QFY24.

* Global specialty sales rose 19% YoY to USD240m for the quarter.

* Gross margin expanded 180bp YoY to 76.8% in 2QFY24.

* EBITDA margin contracted 310bp YoY to 25.2% (in line) as superior product mix was more than offset by higher opex (employee expenses/other expenses up 110bp/380bp YoY as a % of sales).

* Accordingly, EBITDA was flat YoY at INR30.2b for the quarter.

* PAT declined 3% YoY to INR24b (in line).

* For 1HFY24, sales/EBITDA/PAT grew 12%/8%/9% YoY to INR324b/INR84b/ INR64b.

Highlights from the management commentary

* While specialty sales have been stable for three quarters now, the prescription trends in the US continue to gain momentum for Ilumya, Cequa and Odomzo.

* SUNP indicated an increased prescription scope for Winlevi as well going forward.

* Taro has maintained its continuity in business despite a critical situation in Israel.

* The YoY growth in the DF segment has been majorly driven by volume and partly supported by new launches/price hikes.

* SUNP has maintained its R&D guidance of 7-8% for FY24.

* The dispatches from Mohali have resumed post-implementation of the corrective measures.

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