MOSL: SUN PHARMA (Buy)-Progressing well in Specialty-Generics biz to pick up gradually

Sun Pharma: Progressing well in Specialty; Generics biz to pick up gradually

(SUNP IN, Mkt Cap USD18.5b, CMP INR562, TP INR760, 35% Upside, Buy)

• Domestic formulation sales disappoint: 2QFY19 revenue grew moderately by ~4% YoY to INR68.5b (our estimate: INR75.5b). The miss in revenue is primarily attributable to de-growth in domestic business (~28% of sales) on the back of one-time inventory reduction in supply chain. US business (~36% of sales) grew by a healthy ~11% YoY in constant currency. Gross margin improved by ~280bp YoY (+380bp QoQ) to 74.3%, largely due to lower COGS for Taro and write-back of certain provisions taken earlier. EBITDA margin expanded by ~110bp YoY (-30bp QoQ) to 21%. SUNP reported a loss of INR2.2b during the quarter due to one-time provision of INR12.1b related to the Modafinil anti-trust litigation. Adjusted for this, PAT was up ~9% YoY to INR9.9b (our estimate: INR10.9b). For 1HFY19, sales/EBITDA/PAT increased 10%/27%/38% YoY to INR141.6b/INR31.4b/INR19.8b.
• Headway in Specialty encouraging: The initial off-take of the recently launched Illumya (Tildrakizumab) has been encouraging, especially considering intense competition in the US. Tildrakizumab would also be soon commercialized in Europe, with sales gradually ramping up in EU countries. Operating cost toward expansion in field force for specialty products is being incurred, which would further increase with the launch of more such products – particularly Sequa and Xelpros – in the coming quarters. There is steady increase in prescription for Absorica over the past three months.