Upgrade Sun Pharma to ‘buy’ with TP of ₹950

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August 04, 2021 1:01 AM

We upgrade SUNP to ‘BUY’ as: i) Ilumya outperformance and Cequa’s strong recovery to help mitigate Absorica loss; b) Winlevi boost to derma portfolio to monetise Absorica salesforce; c) gRevlimid launch in FY23, broad-based India growth, Winlevi uptick and specialty acceleration to translate into 30%+ margin in FY24.

We raise FY23E EPS by 27% due to core business improvement, gRevlimid and Winlevi. Raise multiple to 28x on consolidated EPS to account for near-term specialty losses that yields revised SOTP-based TP of ₹950.We raise FY23E EPS by 27% due to core business improvement, gRevlimid and Winlevi. Raise multiple to 28x on consolidated EPS to account for near-term specialty losses that yields revised SOTP-based TP of ₹950.

Sun Pharma’s (SUNP) Q1FY22 revenue /EBITDA/ PAT beat consensus estimates by 11%/ 30%/ 40% as all businesses performed better than expectations as Covid tailwinds were backed by structural recovery.

We upgrade SUNP to ‘BUY’ as: i) Ilumya outperformance and Cequa’s strong recovery to help mitigate Absorica loss; b) Winlevi boost to derma portfolio to monetise Absorica salesforce; c) gRevlimid launch in FY23, broad-based India growth, Winlevi uptick and specialty acceleration to translate into 30%+ margin in FY24.

We raise FY23E EPS by 27% due to core business improvement, gRevlimid and Winlevi. Raise multiple to 28x on consolidated EPS to account for near-term specialty losses that yields revised SOTP-based TP of ₹950.

Q1FY22 takeaways — strong all-round performance: 11% top-line beat as all businesses exceeded expectations. US at $380mn; best performance in nine quarters driven by Ilumya that mitigated Absorica generics impact. Ilumya doubled YoY as per secondary data. India, ex-Covid, grew in double digits. Gross margin declined slightly due to Absorica genericisation, but lower employee costs and opex control ensured EBITDA margin beat that stood at 28.4%.

Unimpeded growth ahead as specialty builds confidence: Barring Absorica genericisation that should trough out in the next couple of quarters, SUNP is poised for consistent growth in the next 4-5 years as its specialty portfolio (Exhibit 3) led by Ilumya is on track to clock 20% CAGR; Eli Lilly scrapping mirikizumab lessens potential competition. While we acknowledge that Winlevi may face commercialisation hurdles, the throughput is likely to be very high as no new investments are to be made.

Cequa has become the fastest growing molecule and we expect strong growth till FY23 and eventual plateauing as Restasis generics hit the market. gRevlimid launch in H2FY23 should provide comfort to US base business. Recovery in the ex-Taro US business, steady EMs and RoW growth, solid domestic chronic business and visible cost control are likely to provide comfort to base business.

Outlook and valuations: Higher revenue visibility; upgrade to ‘BUY’. We raise FY22/23E EPS by 11%/27% to factor gRevlimid and Winlevi in our forecasts and margin expansion as specialty ramps up. Our target multiple on Dec 2022E EPS is 28x (from 25x) as specialty’s best economics are likely to be seen only in FY25/26. Raise TP to ₹950 (from ₹675) based on 28x Dec 2022E and ₹20 from gRevlimid.

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