Sun Pharma's Q3FY18 results (Outperformer) - Await Halol resolution / Tildra approval

Q3FY18 result highlights

• Consol revenues came at Rs66bn (-14% yoy; est. Rs69.3bn). US sales came lower at $328m ($309m in Q2) vs est $342m. India at Rs20.9bn (+6% yoy) was below est of +9%.
• Led by sharp qoq dip in Taro profitability, consol EBITDA came lower at Rs13.9bn vs est Rs15.4bn; margins of 21.2% vs est 22.3%. Ex-Taro EBITDA came broadly in-line at Rs9.6bn vs est Rs9.9bn; 17.2% vs est 17.1%. Taro EBITDA came lower at Rs4.4bn vs est Rs5.5bn.
• GMs came in at 68.2% below est of 71.5. SG&A expenses came sharply lower at Rs17.3bn (-17% qoq) aided by forex gains. R&D expenses were 14% lower yoy and aided EBITDA growth.
• Adj for Rs5.1bn one-off, tax rate was at 20.5% (10% in Q2) vs est 15%. Adj PAT was Rs8.78bn (reported PAT -Rs3.7bn) vs est of Rs10bn.

Key positives: Lower SG&A expenses; Tildra PDUFA date of Mar-18

Key negatives: Lower revenues; lower GMs, higher tax rate;

Impact on financials: We have reduced our FY18E/19E earnings by 24% / 6% and introduced FY20 estimates

Valuations & view

Sun’s muted 9mFY18 performance reflects the significant ongoing challenges in its business. Delays in Halol plant’s FDA issues resolution have added to near term challenges from heightened price erosion in the base business. This combined with continued challenges in obtaining new ANDA approvals have pushed the potential earning turnaround by few quarters (from H2FY18 to FY19). With the launch of Bromsite and Odomzo along with potential launches of Tildra (PDUFA date - March’18) and OTX 101 in FY19, Sun’s specialty strategy will take significant strides forward. Indian pharma companies need to take bold bets to transition from being a pure generics to a specialty play which is a medium term strategic imperative and Sun is best placed amongst peers. While valuations are rich, pick-up in revenue growth can drive accelerated earnings growth from the current subdued levels of profitability. Maintain Outperformer. Ability to get the Halol plant cleared in the FDA re-inspection and securing FDA approval for Tildrakizumab in March’18 remain the key near term monitorable.