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Sun Pharma’s Q2FY25 earnings came in slightly below expectations. Revenue reached INR 132.9 bn, reflecting a 9% YoY and 5% QoQ growth, driven primarily by robust performance in the US formulations segment. EBITDA rose significantly by 23.9% YoY and 9.2% QoQ to INR 39.4 bn, with margins expanding by 356 bps YoY and 112 bps QoQ to 29.6%. Adjusted PAT increased 28% YoY and 7.2% QoQ to INR 30.4 bn. The company aims for a goof topline growth this year, alongside a planned increase in R&D investment driven by specialty portfolio.

* India formulation business: The India formulation business contributed ~32% of total sales, growing by 11% YoY and 2.9% QoQ to INR 42.6 bn, primarily driven by volume growth. Market share increased to 8.1%, up from 7.7% the previous year. During the quarter, Sun Pharma launched 14 new products and continued to outpace IPM growth across major therapies. Looking ahead, the India business is expected to grow either in line with or slightly above IPM growth, projected to be in the high single digits for FY25.

* US formulation business: The US business represented 33% of total sales, reaching INR 43.3 bn with strong growth of 21.9% YoY and 11.3% QoQ, mainly driven by an expanding specialty products portfolio. The U.S. specialty business has shown robust growth, driven by new product launches and a strong prescription trend. Sun launched two generic products during the quarter, contributing to its overall sales performance.

* Emerging Markets & RoW: Emerging markets contributed 18% of sales, with marginal growth of 4.6% YoY and 3.5% QoQ. Meanwhile, the Rest of World (RoW) segment experienced a slight 2.2% YoY decline but grew 5.2% QoQ. Performance in major markets has been strong in local currency terms.

* Margin Profile: Gross margin expanded by 259 bps YoY and 87 bps QoQ, while EBITDA margin saw an increase of 356 bps YoY and 112 bps QoQ. R&D expenses for the quarter were INR 7,929 mn, representing 6% of sales. The company maintains a strong specialty product pipeline, with seven molecules currently in clinical trials. For FY25, management projects R&D expenses will account for 7-8% of total revenue, with a significant portion allocated to the specialty portfolio.

* Outlook & Valuation: The company’s growth is anticipated to be fueled by a shift in its product mix toward the specialty portfolio, an improved margin profile, and continued outperformance of the India business relative to IPM. Introducing FY27E estimates, we expect these factors to support Revenue/EBITDA/PAT growth at a CAGR of 11.5%/13.9%/19.3% from FY24-27E. Valuing the stock based on Sep-FY27E EPS with an assigned PE of 32x, we set a target price of INR 2,036 and maintain a BUY rating.

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