MOSL: SUN PHARMA (Buy)-Weak quarter-Guides for significant cut in margins

​Sun Pharma: Weak quarter; Guides for significant cut in margins

(SUNP IN, Mkt Cap USD17.2b, CMP INR451, TP INR515, 14% Upside, Buy)

• Weak operating performance: Revenue fell significantly by 25% YoY to INR62.1b. Gross margin shrunk ~400bp YoY (+~500bp QoQ) to 72.8%. EBITDA declined 62.5% YoY to INR10.9b, with the margin down 1,780bp YoY (-400bp QoQ) at 17.6% due to negative operating leverage. SUNP incurred exceptional expense of INR9.5b for settlement of antitrust litigation in the US, due to which it reported net loss of INR4.2b. Adjusting for the exceptional item, net profit came in at INR5.3b v/s INR20.3b in 1QFY17.
• Revenue guidance maintained; EBITDA margin to remain muted in FY18: SUNP maintained its revenue guidance of single-digit decline in FY18 (est. of -7.5%). However, it guided for a gradual recovery in EBITDA margin from 1QFY18. It expects 2HFY18E EBITDA margin to be ~20-22% (est. of ~21.5%), much below its historical margins of 28-30% (post RBXY acquisition).
• US underperforms, recovery expected from FY19: US business declined 42% YoY to USD351m in 1QFY18 (v/s ~USD381m in 4Q). Although Ex-Taro sales remained flat QoQ, weak Taro sales led to a sequential decline. We expect ~25% decline in US sales in FY18 due to pricing pressure, partially offset by key launches such as Xelpros, Elepsia, Glumetza and Odomozo ramp-up. We expect pick-up in US sales from FY19, driven by Halol resolution and commercialization of Tildrakuzumab (FY19 beginning)/Seciera (2HFY19E).