SUNP’s Q2FY22 revenue, Ebitda and profit were 2%, 12% and 22% ahead of our estimates led by strong performance in India and continued specialty scale-up. The domestic business reported strong 26% y-o-y growth (15% two-year CAGR excluding Covid benefits). Specialty ramp-up remains on track with continuing traction in Ilumya/Cequa. We expect ramp-up in the specialty segment to continue over FY2022-23e, driving strong earnings growth. We increase our earnings estimates by 6% each over FY2022-24e. Add with revised FV of Rs 915.
Domestic continues to shine; specialty grows sequentially
Domestic formulations grew 26% y-o-y; US sales at $361 mn (-$19 mn q-o-q), were 7% below our estimates, mainly due to weak Taro numbers. EMs and ROW also reported healthy growth on a low base, well ahead of our estimates. API sales declined 15% y-o-y and q-o-q. Gross margins improved 110 bps q-o-q to 73.8% reflecting better product mix in domestic/EM. Staff costs (+6% y-o-y) remained under control as expected. A sharp decline in R&D, and decline in other expenses reflect normalisation of promotional costs in the US (+16% y-o-y), and led to Ebitda exceeding our estimates by 12%. Ebitda margin at 28.1% was 390 bps ahead of our estimate. Lower R&D cost is due to spillover of certain clinical studies into subsequent quarters. Higher other income and lower tax rate further boosted profit which exceeded our estimates by 22%.
Specialty ramp-up on track
Sun continued to execute on its specialty ramp-up which grew $9 mn q-o-q despite impact of Absorica genericisation. This indicates steady ramp-up in Ilumya which we believe is now annualising $200 mn sales. Strong growth in Ilumya despite optimisation of DTC spends bodes well for profitability profile. We now expect Ilumya sales to reach $275 mn/$300 mn in FY2023/24 with ex-US Ilumya sales (Europe) also witnessing strong traction. Sun has recently launched Ilumya in Canada. Among other products, Cequa is scaling up gradually in a growing market while recent launch of Winlevi in US will boost dermatology offerings.
Post expansion of field force and renewed focus, we expect domestic segment to remain on a strong footing and deliver healthy growth over the coming years. Specialty scale-up and operating leverage benefits will help drive strong earnings growth over FY2023-24e. Sun has repaid debt of $209 mn in H1FY22 and has net cash of about $200 mn (Ex-Taro basis).
ADD with revised Fair Value of Rs 915
With risks to specialty business ramp-up receding, we value the stock at 25X and revise Fair Value to Rs 915. Continued execution in specialty provides further re-rating potential. ADD.