Analysts Bet On Sun Pharma's Specialty Portfolio Ramp-Up, Cost Moderation After Q2 Results

Analysts expect Sun Pharmaceutical Industries Ltd.'s expansion of its specialty portfolio, robust franchise building in branded generics, new drug applications in the U.S. generics market, and cost controls to aid growth.

Net profit of India's largest drugmaker rose 11% year-on-year to Rs 2,262 crore for the quarter ended September, according to its exchange filing. That compares with the Rs 1,965-crore consensus estimate of analysts tracked by Bloomberg.

Sun Pharma Q2 Results FY23: Key Highlights (YoY)

• Revenue up 14% to Rs 10,952 crore

• Ebitda up 18% at Rs 3,198 crore

• Margin at 29.2% versus 28.1%

Shares of Sun Pharma were trading 0.23% lower at open on Wednesday, while the benchmark Nifty 50 eased 0.16% on the NSE. Of the 44 analysts tracking the company, 41 have a 'buy' rating, two suggest a 'hold, and one recommends a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 7.3%.

Brokerages' take on Sun Pharma's quarterly results:

• Maintains 'buy' with a target price of Rs 1,240 apiece, implying an upside of 20%.

• Better than expected Q2FY23 earnings, led by:

  • superior execution in the specialty portfolio

  • US Generics (excluding Taro)

  • the Domestic Formulation (DF) segment

  • benefits from the PLI scheme

  • a favorable currency movement

  • low R&D spend at 5.3% v/s management's guidance of 6-8%.

• Positive on the stock on the back of an increased prescription base for the specialty portfolio, robust franchise building in branded generics, niche ANDA pipeline awaiting approval, and controlled cost.

• Specialty business grew 27.5% year-on-year led by a pickup in sales of Ilumya, Cequa, and Winlevi.

• Moderation in prescriptions of Winlevi seems temporary and the company expects a revival in coming quarter.

• Sales of Cequa have been growing, despite the generic launch of Restasis.

• Sun Pharma continues to face challenges in recruitment of patients for psoriatic arthritis indication for Illumya.

• Maintains 'buy' with a target price of Rs 1,094 apiece, implying an upside of 5.5%.

• Q2FY23 sales/Ebidta/PAT deviated from estimates due to weak performance by Taro (primarily due to one-time gross to net adjustments).

• Reported gross and Ebidta margins, ex-Taro, were the highest in the past 24 and 23 quarters, respectively.

• Improvement in the Ebidta margin was driven by an increase in specialty sales, better pricing in the branded business, better currency realisation, contribution from some high-value products in US generics and some moderation of raw material costs.

• Strong margin performance improves the company’s earnings visibility.

• Expect earnings growth to sustain owing to a rise in specialty sales and growth in branded generics.

• Earnings upside from US generics (e.g., gRevlimid and others) not factored into estimates are a strong possibility.

• Weak demand for seasonal products impacted sequential growth of India formulations.

• Most of the new launches in India were related to the anti-diabetes segment, as per management.

• Lower U.S. revenue is primarily due to lower Taro revenue. Expect U.S. sales to recover in subsequent quarters.

• U.S. sales are primarily driven by specialty sales.

• The price erosion intensity in the broader U.S. generics market remains high.

• The company is on track for gRevlimid launch but timelines not disclosed.

• Management expects R&D spend (both in generics and specialty) to rise in the ensuing quarters.

• P&L in Q2FY23 was impacted by one-time charges at Taro, forex losses and a lower tax rate.

• Maintains 'buy' with a target price of Rs 1,192 apiece, implying an upside of 15%.

• Results beat on profitability mainly due to strong gross margin while excluding Taro.

• Revenue grew due to strong growth in US specialty segment.

• Positive on Sun Pharma due to the following factors:

  (i) Ramp-up of branded/specialty business in the US

  (ii) Continued growth in India business

  (iii) Potential inorganic opportunity due to a strong balance sheet

  (iv) Maintenance of healthy Ebitda margin at around 27% despite higher R&D spends (going forward as per management's R&D spend guidance).

• Improvement in the existing specialty products’ margins and operating leverage post regulatory clearance of the Halol plant, likely to be offset by continuous spending on the expansion of the specialty pipeline.

• Launch of Revlimid remains on track, the management said.

• Derma portfolio is likely to grow faster in H2FY23 due to seasonality.

• The company has completed its field force expansion in India.