Sun Pharma's Q1FY19 results (Outperformer) - Strong start to FY19

Q1FY19 result highlights

• Consol revenues came at Rs71.4bn (+16% yoy; est. Rs71.3bn). US sales came in higher at $380m ($368m in Q4) vs est $337m despite Taro revenue miss. We estimate ex-Taro US sales stood at $244mn vs ($212mn in Q4) est of $210mn. India revs grew 22%yoy (LTL +29%) . RoW and EM revenues were below estimates.
• GMs came in lower at 70.5% (73.6% in Q4) vs est of 72% driven by product mix. SG&A exp came lower at Rs20.8bn (-5% qoq) led by lower R&D exp of Rs4.9bn (6.8% of revs; -21% qoq). Mgmt expects R&D spends to increase in line with annual R&D guidance of 8-9% of sales.
• Mgt guided that high upfront expenses involved in the upcoming big ticket specialty launches e.g. ILUMYA and Cequa will also increase the SG&A spends in the subsequent quarters.
• EBITDA (ex OOI) came marginally higher at Rs15.2bn vs est Rs15bn; margins of 21.3% vs est 21%. Ex-Taro EBITDA came higher at Rs10.7bn vs Rs9.07bn in Q4. Taro EBITDA was lower at Rs4.5bn vs est Rs5.1bn.
• OOI was higher at Rs0.85bn vs est of Rs0.5bn. Depreciation stood lower at Rs4bn vs est of Rs4.5bn. Tax rate was higher at 13% vs est 10%. Reported PAT stood higher at Rs9.8bn vs est of Rs8.9bn
• Continues with FY19 guidance of early double digit revenue growth with increased marketing spends on speciality launches as well as R&D

Key positives: Higher US sales ex Taro; lower R&D cost; Halol resolution

Key negatives: Lower Taro sales; lower GMs

Impact on financials: We have maintained our FY19/20 estimates

Valuations & view

The recent receipt of USFDA clearance for the Halol facility combined with the strong growth in US sales during the quarter gives comfort the worst is finally behind for Sun’s US generic business. Consistent 21%+ EBITDA margins over past 3 quarters are further indicative of emerging stabilization in Sun’s business. With launch of 3 potential big ticket speciality products, Ilumya, Cequa and Yonsa, along with the already commercialized Bromsite and Odomzo, Sun’s specialty strategy will take significant strides forward from FY19 onwards. While there are multiple and formidable challenge in making this transition and it will take time to yield results, it is a strategic imperative for larger Indian players to go down this path. Sun is clearly best placed amongst large domestic peers to make this transition which can create significant value over the medium term if executed well. While valuations are now rich post the upmove subsequent to Halol unit clearance, we continue to remain positive on Sun’s medium term growth prospects. Maintain Outperformer with TP of Rs619 and recommend adding into any weakness.