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Strong show despite concerns

Sun Pharma (SUNP IN) reported better than expected Q3FY26, with revenue, EBITDA and PAT (adjusted for one-off expenses and tax credits) coming better than our estimates by 6%, 14% and 23%, respectively. One-off innovative-products-related licensing income of USD 55mn helped. Excluding that, EBITDA was still 3% better than our estimate. All major businesses, except the US business, performed well. Global specialty business continues to grow, though Q3 was softer. Recent launches of Leqselvi and Unloxcyt will add to the growth. India growth at 16% and other EM constant currency growth at 13% surpassed expectations. Large product launch expenses, as earlier guided by the management, seem to be finally hitting the P&L. Still, we expect current margins to sustain in the near term and improve in the medium term. We raise our FY26EFY28E core EPS estimates by 4-6%. We see the recent correction as an opportunity to buy. We upgrade SUNP to Buy from Accumulate and retain our target price at INR 1,968

Specialty plans progress well: Revenue from the global specialty business grew 13.2% YoY in Q3, adjusted for milestone income. This segment has become more global with the launch of Ilumya in multiple markets outside the US and Europe, including India and China. SUNP has recently launched Leqselvi (Deuruxolitinib for alopecia areata) and Unloxcyt (cosibelimab for skin cancer). These will add to growth in FY27. We believe these acquired products can help sustain growth rate for SUNP’s innovative products segment, even as Ilumya matures. We estimate each of them to be a +USD 200mn product in 3-4 years. US generics weak: US generics continued to be weak, down YoY. While lower sales of oneoff gRevlimid contributed to the weakness, management indicated that there was price erosion in some other products as well. There is no clear visibility of significant improvement in the performance of this business.

India and RoW – Strong show; semaglutide to help next year: India business grew 16% YoY, continuing the strong performance of past few quarters. RoW (19% YoY excluding milestone income) and EM (28% YoY) formulations business growth were helped by INR depreciation. Management indicated constant currency growth of 13% in EMs. Expect these businesses to grow in low double-digit percentage consistently. These businesses could benefit from the opening up of the semaglutide market to generic players. SUNP management confirmed that it will enter the India market on day-1 and is a filer in Canada.

Product launch expenses pick up; margin outlook stable: Large product launch expenses, as earlier guided by the management, seem to be finally hitting the P&L. We expect these to weigh on margins for the next 3-4 quarters. Still we believe the current margins will sustain in FY27 and likely improve in FY28

Upgrade to BUY; TP unchanged at INR 1,968: We raise our FY26E-28E core EPS estimates by 4-6%. SUNP trades at 31.2x FY27E core P/E. We see recent correction as an opportunity to buy. So, we upgrade SUNP to Buy from Accumulate, but retain our target price at INR 1,968, which is 33.9x FY28E core P/E plus cash per share. Slower-than-expected ramp up in key innovative product sales in the US and US trade tariffs are key risks

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