Specialty challenges eclipse medium-term outlook; FY21e EPS down 4%; ‘Reduce’ retained with revised TP of Rs 380
Sun Pharmaceutical (SUNP) reported a weak Q4FY19, marred by many one-offs on both the income and expense sides. The US business gained from a one-off generic supply opportunity of $70–80 mn, which will continue in Q1FY20, while the domestic business recorded a one-off impact of Rs 10.85 bn from merger of Aditya Medisales (AML). The company guided for mid-teen revenue growth for FY20; however, adjusted for one-offs in base year, it would be limited to a single-digit in our view.
We believe medium-term earnings growth will be challenging given Ilumya’s slow uptake and concurrently rising R&D cost. We are cutting FY21E EPS by 4% to factor in the miss. Maintain Reduce with a revised target price of Rs 380 (earlier Rs 400) as we roll forward to September 2020E EPS.
Performance muted; one-offs aplenty
Results were impacted by the following one-offs: i) Rs 10.85 bn pertaining to change in India distribution from AML to wholly owned subsidiary; ii) business of generic supply to a US customer, which partly led to $81 mn QoQ growth in US sales; iii) forex loss of Rs 520 mn; and iv) tax benefit of Rs 2.59 bn. While the impact on sales excluding these one-offs is known, management refrained from quantifying their impact on earnings.
Specialty ramp-up slower than expected
SUNP, with its $1-bn investment in US specialty, has built a portfolio of nine products. It launched three of these in FY19. However, a breakeven in this would take long as the company has already lined up more investments.
Outlook: Risk-reward skewed
Near-term specialty challenges eclipse medium-term outlook as ramp-up has been slow even as competition is intensifying. While stock seems to be ascribing a fair value to domestic and EM businesses, it overestimates opportunity in specialty. Hence, we maintain ‘REDUCE/SU’.