Sun Pharma's Q4FY19 results (Neutral) - Quarter marked by multiple one-offs

Q4FY19 result highlights

• Consol revs came at Rs71.6bn impacted by one-off reduction in sales of Rs10.85bn owing distribution channel changes in India; Adj. rev stood at Rs 82.5bn vs est of Rs77.7bn. Taro beat est at Rs12.7bn vs est Rs12.4bn; Ex-Taro, adj. revs came at Rs68.6bn vs est Rs64.42bn.
• Ex-Taro, US revs came at ~$280m (Q3 - $205m) vs est $220m; Mgt cited significant business of generic supplies to a customer which primarily drove qoq growth. However, mgt didn’t detail the nature on the contract which will expire in Q1FY20 and may possibly extend beyond that. Sheer quantum of this business adds uncertainty to FY20 US sales outlook.
• Adj. domestic sales grew 11% yoy vs est +9% growth. RoW+EM sales at $308m (post Pola acquisition) were inline with est.
• Reported EBITDA stood at Rs8.97bn vs est of Rs17.7bn; Adj for domestic sales reduction, we est EBITDA at ~Rs17bn.
• GMs of 73.9% were strong vs est of       71.4%; Other expenses came sharply higher– Rs27.4bn (run-rate of ~Rs21bn qtr in 9mFY19) vs est Rs21.9bn; Mgt cited Illumya DTC promotions costs, Pola pharma consolidation, higher R&D spends and Rs0.52 forex loss. R&D spend came at Rs5.67bn vs Rs4.65bn in Q3.
• PAT came at Rs7.2bn vs est Rs12.2bn aided by -4%  tax rate; Adj for India biz reduction, the earnings miss would be significantly lower for the qtr
• FY20 Guidance – Low-mid teens rev growth; R&D at 8-9% of sales; $200m capex; Significant DTC spends on Illumya to continue through FY20. Cequa launch in Q2FY20

Impact on financials: We reduce FY20/21 earnings by 4.6% / 5.8%

Valuations & view

Even adjusted for the domestic business sales disruption during Q4, the significant qoq fluctuations in profitability along with US sales underlines the near-term challenges for Sun as it seeks to transition into a global speciality player. With launch of 3 potential big ticket speciality products, Sun’s specialty strategy has taken significant strides forward. While there are multiple challenges 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. While Sun’s medium term growth story is exciting, we see limited upsides given the volatility in its base business along with the significant growth uncertainties inherent in any early stage speciality business. Uncertainty on whistle-blower complaint outcome adds to the challenges. Maintain Neutral with TP of Rs475. Pick-up in key speciality assets remains key monitorable.​