MOSL: SUN PHARMA (Buy)-One-offs in US/deferred R&D spend/lower tax rate drive earnings
SUN PHARMA: One-offs in US/deferred R&D spend/lower tax rate drive earnings
(SUNP IN, Mkt Cap USD14.7b, CMP INR438, TP INR510, 17% Upside, Buy)
- Revenue primarily driven by RoW market: Sales were up 16% YoY to INR82.5b in 1QFY20, mainly led by strong growth in RoW sales (+56% YoY to USD167m - partly led by the integration of the recently acquired Pola Pharma Japan since Jan'19). US sales increased 12% YoY to USD424m (36% of total sales), mainly driven by a significant contribution from generic supply to a customer. India sales were up 8% YoY to INR23b, while emerging market sales were flat YoY at USD194m. Taro sales were up 4% YoY at USD161m.
- India distribution transition impacts gross margin: Gross margin shrank 30bp YoY (-370bp QoQ) to 70.2%, mainly due to the change in product mix and distribution transition in India. However, EBITDA margin expanded 70bp YoY to 22% (our estimate: 21%), largely due to lower R&D/employee cost (-200bp/-140bp YoY). EBITDA was up 19% YoY at INR18b (our estimate: INR16b). Adj. PAT grew at a relatively high rate of 34% YoY to INR13.2b due to higher other income, lower finance cost and tax rate.
- Concall highlights: (1) Specialty portfolio comprising patented products had sales of USD94m across markets. (2) Commercialization of Cequa is delayed to 3QFY20 as it had certain manufacturing- and supply chain-related issues. (3) Market share of Odomzo reached 12% at end-1QFY20. (4) Finance cost declined sharply due to reduced INR borrowing.
- Valuation view: We raise our FY20/21 EPS estimate by 7% to factor in improved growth in the domestic formulation business and lower finance cost. We continue valuing SUNP at 22x 12M forward earnings to arrive at a price target of INR510 (prior: INR465). The company's strong ANDA pipeline for US generics, gradual build-up in the specialty portfolio and the healthy outperformance in DF reinforce our positive stance on SUNP. Maintain Buy.
Sun Pharmaceutical and its subsidiaries are principally engaged in developing, manufacturing and marketing generic pharmaceutical products and bulk drugs. Co.'s products are mainly for the following therapy areas: psychiatrists, neurologists, gastroenterologists, diabetologists, chest physicians, consultant physicians, orthopedics, oncologists, gynecologists, ophthalmologists and cardiologists. Generic names of three principal products of Co. is Pentoxifyline, Pentoparzole Sodium, and Metformin Hydrochloride. Co.'s business can be divided into four segments: Indian branded generics, U.S. generics, international branded generics (ROW) and Active Pharmaceutical Ingredients (API).
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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