Analyst Corner | ‘Reduce’ on Sun Pharma; target price revised to Rs 425

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Updated: June 1, 2019 2:29:42 AM

While guidance of low to mid teen revenue growth on reported basis is in line with our estimates, we expect margin to remain subdued given scale-up in specialty investments.

Q4 EBITDA margin (adj. for forex) was lower at 14.9% impacted by (1) one-time lower sales in India (80% margin) partly offset by higher US sales (20% margin) and (2) higher SG&A costs (+23% YoY) and staff costs (+17% YoY) given specialty ramp-up (DTC) and Pola Pharma acquisition in Japan.

EBITDA margin (adj. for sales impact) was 22% (down 210 bps YoY/ 280 bps QoQ) in our view vs our estimate of 24%. Management expects Ilumya sales to pick up gradually (as seeing prescription traction), but Cequa launch to be delayed by a quarter.

While guidance of low to mid teen revenue growth on reported basis is in line with our estimates, we expect margin to remain subdued given scale-up in specialty investments. We cut FY20/21E EPS by 3%/5% and revise TP to `425 (20x FY21E EPS) vs. `450 earlier. Outcome of pricing probe in US (w.r.t. Taro) and scale-up of specialty R&D assets remain the key catalysts. Reduce.

Q4’19 revenue at `70.4 bn grew 5% YoY (4%/5% below our/consensus estimate) as (a) India formulations (16% of sales) declined 44% YoY led by one-time impact of `10.9 bn due to shift in distribution of domestic formulations from Aditya Medisales (AML) to Sun Pharma’s wholly-owned subsidiary, Sun Pharma Distributors (SPDL); adjusted for this one-off, sales in Q4 were at `21.86 bn (+11% YoY); FY19 would still be muted at 5% YoY, (b) US business (45% of sales) grew 20% YoY/ +22% QoQ to $443 m primarily due to 6-month supply opportunity to a customer (starting from Q4FY19); base business was largely flat QoQ.

As a result, US sales (ex-Taro) grew 38% QoQ while Taro sales at $162 m grew 2% QoQ and 7% YoY, and (c) Growth in RoW (+44% YoY, 32% YoY in USD terms) led by Pola Pharma’s acquisition in Japan and bulk drugs/API (+37% YoY) was partially offset by decline in EM sales.

Staff and other expenses were higher. This led to reported EBITDA of `10.2 bn and margin at 14.2% (-9 pp YoY/ -13.6 pp QoQ). Adj for forex, India (80% margin) and US (20% margin) sales impact, the margin was at 23% (-138 bps YoY/ -216 bps QoQ). Lower other income (-7% YoY), flat depreciation coupled with lower tax rate at -4% led to reported PAT of `6.4 bn (-53% YoY/ -49% QoQ).

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