Sun Pharmaceutical Industries Rating: Q1FY19 results were ahead of expectations

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Published: August 20, 2018 12:52:05 AM

Sun’s Q1 results were ahead of expectation led by improvement in US ex Taro and lower R&D. Gross Margins though disappointed.

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Sun’s Q1 results were ahead of expectation led by improvement in US ex Taro and lower R&D. Gross Margins though disappointed. Management cautioned on margin improvement in near term due to rising R&D and investment in specialty. While Sun’s specialty portfolio is seeing launches and we expect earnings to improve, valuations at 24x FY20 leave no room for misses. Given specialty execution risks and still challenging US markets, we retain Hold.

Results ahead of expectation: Sun reported results better than expected with revenues 4% and margins 136bps ahead of expectation. Gross margins came 222bps below expectation. Ebitda beat was driven by lower R&D (7% vs FY guidance of 8-9%). Lower tax rate led to reported profit after tax being 11% ahead of expectation.

US ex Taro improves: US revenues
ex Taro increased $27 mn q-o-q and was the key positive. The improvement was led by Welchol launch and some improvement in base business. Taro revenues though declined $20 mn q-o-q. Management indicated that it expects US ex Taro to grow from current levels. India business was in line and grew 22% y-o-y off low GST base. RoW and EM growth was in line with expectation.

Margin improvement to be limited in near term: Management highlighted that margins will see pressure from (i) ramp-up of front-end, (ii) launch expenses for specialty, and (iii) higher R&D expenses. While it is working on cost optimisation which along with Halol launches and ramp-up would provide some positive triggers, margin improvement will be limited.

Estimates: We adjust our estimates for the quarter and USD/INR (68 vs 66). Our FY19-20 EPS increases by 0-5%.

Speciality ramp-up key: Sun has been investing heavily in specialty pipeline with increased R&D spend on the same and FY19 will see three key launches. The ramp-up in these is the key for SUN going forward. Execution risks though are high and ramp-up will have challenges led by competition from existing and new launches. Stock trading at 24x FY20 adjusted PE leaves no room for miss. We retain our Hold rating with revised price target of Rs 555.

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