SUN Pharmaceutical Industries rating ‘Buy’: Stock trading at lower end of historical range

Sun Pharmaceutical industries Rating 'Buy': Stock trading at lower end of historical range

Sun Pharmaceutical industries Rating ‘Buy’: Stock trading at lower end of historical range

SUNP’s Q3FY19 results were ahead of our estimates. The positive surprise was on account of stronger emerging market/RoW sales and slower-than-expected rise in costs. Net sales for the quarter were up 16% y-o-y and came in 3% ahead of our expectations. Ebitda was up 32% y-o-y and 21% ahead of our expectations after accounting for $30.7 mn in forex gain. Lower R&D spends and slower growth in other overheads drove outperformance vs. expectations. This is the highest Ebitda reported in the past eight quarters.

The pricing environment in US generics has stabilised; however, we find limited contribution from new launches. In India, growth remained weak at 7% y-o-y.

Stronger growth in ex US and ex India markets and API supported overall revenue growth. The management commentary suggests that SUNP will focus on driving efficiency and lower costs. Even in specialty, SUNP may focus on consolidating on the back of recent launches, which we think may limit the rise in overhead expenses. We think cost control measures could present a cushion to slippage in US revenues. Our EPS estimates for FY19/20F are revised up 22/5% to factor in 9MFY19 results. We reset our 12-month target at `536/sh based on 20x (unchanged) FY21F EPS of `26.8. The stock is currently trading at 16.3x FY21F P/E. Maintain Buy.

Ramp-up in specialty sales and cost control measures reflected in quarterly results are likely to be key catalysts for the stock.

In terms of EV/Ebitda, the stock is trading at 13.4x one-year forward consensus Ebitda estimates vs. an average of 17.3x over the past 10 years. In terms of P/E, the stock is trading at 20.7x one-year forward earnings vs. 23.4x average trading multiple over the past 10 years. The stock is trading closer to the lower end of the historical trading range.

Q3 results were ahead of estimates
Sales recorded 16% growth y-o-y and were 3% ahead of our expectations. Strong revenue growth in emerging markets (EM) and rest of the world (RoW) markets was a positive surprise. US revenues were largely in line with our expectations, but India growth was lower than our expectations.

We note that the US revenues were in line with our estimates despite stronger-than estimated sales at Taro. This implies some weakness in the ex Taro business in the US. We anticipated stronger Ilumya sales from initial channel fill, which was not the case. The other expenses in Q3FY19 include forex gain of $30.7 mn.

Excluding the impact of the forex gain, Ebitda at `18.5 bn was up 32% y-o-y and 21% ahead of our expectations. As a result, net earnings were 33% ahead of our expectations. We expected other expenses to rise in Q3FY19 due to promotional activities following the launch of Ilumya and Xelpros.