Sun Pharma Rating | Buy — A strong Showing In First Quarter

SUN Q1FY20 reported EPS came 40% ahead of JEFe led by lower R&D and tax rate. Adj. for these margins were 100bps and EPS 15% ahead. RoW business revenues were 15% higher while India/US were in line. Management retained the full year guidances. Cequa launch is delayed to Q3. We remain positive on specialty business outlook where our doc survey indicates $300-mn peak sales. Base business is also seeing recovery & with valuations at 20% discount at 16x FY21 PE, we retain Buy.

Strong quarter aided by lower R&D spend
SUNP reported a strong Q1FY20 with revenues 2% and margins 350bp ahead of expectation. Significant part of the beat was led by lower R&D and tax rate which will normalise going forward. Ex of these margins came 100bps and PAT came 15% ahead of JEFe. This was partly aided by slightly lower promotion spend which has a seasonality.

India business growth recovered to 8%. Management indicated that underlying growth was higher at 12%. US revenues at
$424 mn were down 4% q-o-q, in line with expectation. The key beat was in RoW markets which grew 60% y-o-y and came 15% ahead of expectation.

Concall highlights
Management indicated that Ilumya is ramping up and Skyrizi launch has not impacted formulary position. Cequa launch has been delayed to Q3FY20. Q1FY20 numbers though include the sales force for Cequa. It believes Cequa has a significant opportunity even if gRestais goes generic. One-time US sales ended in Q1. It aims to reduce working capital substantially in the current fiscal.

Management changes
Kal Sundaram will now handle Strategy, Japan and China from current role of India and EM. Kirti Ganorkar will take over India formulations. Aalok Sanghvi will take over generic business development while company is looking to hire for branded business development role.

We tweak our estimates for the quarter and continue to expect FY20: R&D (8%), promotion spend and tax rate higher than Q1FY20 run-rate. We change our USD/INR to 69/70.88/72 for FY20/21/22 from 72/72/72 earlier. Our FY20/21 EPS falls by 4/3% on account of the FX change.

Specialty: Remain positive
While we now build higher near-term spend in specialty vs our earlier estimate, we remain positive on the specialty business. Our doctor survey in US highlighted that Ilumya can achieve a peak sales of $300 mn. We also see Cequa peak sales of $70 mn.

Risk-reward favourable
Sun is trading at 16x FY21 PE, a 20% discount to peers. Risk-reward in our view is favourable. While FY20 margin improvement is lower than expected due to specialty investment, we remain positive on the specialty business. We expect base business to also see steady recovery in FY20/21. Retain Buy with TP of Rs 520. – Financial Express

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