Sun Pharma Rating ‘buy’: Q3 results were in line with expectations

SUNP reported Q3FY20 results in line with expectations, with revenues 2% below but margins 138bp ahead of expectations. India revenues grew 13% and were the key positive. US business ex Taro was in line. Specialty revenues was up 30% q-o-q led by seasonality and Cequa. We remain positive on the outlook for the specialty business, for which our doc survey suggests $300-mn Ilumya peak sales. With valuations at 15x FY22 PE (15% disc. to peers), we maintain Buy.

In-line quarter: SUNP reported results that were in line with expectations, with profit after tax 4% below expectations due to higher taxes and depreciation.

India strong; US in-line: India revenues were 2% ahead of expectations. US revenues, at $350 mn, were 3% below expectations led entirely by Taro which declined 16% y-o-y. US ex Taro revenues were up 11% q-o-q led by specialty business. RoW revenues were in line with expectation. EM revenues declined 5% due to lower tender sales ex of which revenues were up 15% y-o-y.

Margins: Margins were 138bp ahead of expectations, led by lower R&D. Taro margins were up 40bps q-o-q.

Conf call highlights: Mgmt indicated that FY20 R&D will be lower than 8-9% guidance but R&D will be higher in FY21. It is increasing its India sales force by c10%. This will be on board by Q1FY21. Cequa is evaluating DTC promotion.

Estimates: We adjust our estimates for the quarter and lower Taro sales. We increase FY21/22 R&D to 8% vs 7% earlier. We change our USD/INR to 70.5/ 72/72 vs 70.23/71.06/72 for FY20/ 21/22. Our FY20/21/22 EPS changes by -4/-7/-1%.

Remain positive on Specialty: Ilumya’s ramp-up has been slow, but we remain positive on both Ilumya and Cequa. Our doctor survey in the US highlighted that Ilumya could achieve peak sales of $300 mn. The ramp-up, though, is set to be slow, occurring over the next 12m. Cequa has seen a strong ramp-up in 3m since launch, is at c$15 mn annualised run-rate and we expect it to reach $100 mn+ peak sales.

Risk-reward favourable: Sun is trading at 15.4x FY22 PE, a 15% discount to peers. Risk-reward is favourable, in our view. We expect the base business to recover steadily. We expect the Specialty business to turn Ebitda positive in FY22 from a $150-mn Ebitda loss currently. Maintain Buy with Rs 520 TP, valuing it at 18.5x FY22 base PE.