Sun Pharma released its Q1FY23 results last Friday with an overall pace – 4.8% revenue, 6.6% EBITDA and 17.8% PAT. Revenue growth of 10% YoY to ₹10,761 crore was on a Covid high basis last year. Adjusted for the same, it comes in at 14% higher. EBITDA margins were 26%, despite higher operating expenses. The overall results indicate a positive start to exercise, as well as areas where there may be improvements. The stock’s reaction was mixed. On Friday, when the results were announced, the stock closed up 5.5% from Thursday, but on Monday it shed 2.9% of the gains.
Sun Pharma’s global specialty sales (13% of revenue in Q1FY23) grew 29% year-on-year to $191 million. But moderate sequential growth (3% QoQ) for the second consecutive quarter should be noted. The portfolio consists of fast growing products Ilumya, Cequa, Odomzo and the recently added Winlevi.
Sun Pharma’s US generics portfolio (nearly 8% of revenue) Ex-Taro also saw strong growth (both year-on-year and quarter-on-quarter) as a major launch – gPentasa – helped the good performance. This indicates that with a strong product line, it is possible to overcome price erosion, even for other companies. Sun Pharma’s dermatology subsidiary – Taro – continues to face headwinds. Taro’s sales growth has been declining over the past two years, and in Q1FY23, sales growth was 6.5% year-on-year, even after including an entity consolidated from March 2022 (Alchemee). Overall, Sun Pharma’s US segment (30% of revenue) reported sales of $420 million, an 11% year-on-year growth.
India saw 2.4% YoY growth from the high Q1FY22 Covid base, but sequential growth was strong at 9% QoQ. With the completion of the addition of 10% of the sales force over the past two years, revenue momentum should be higher as the associated costs have already been reflected in operations. Sun Pharma’s emerging markets business, which includes Japan, Australia and other markets, continues to show strong growth (17.8% in Q1FY23) driven by Ilumya’s expansion into , among other products.
Sun Pharma’s gross margins were stable QoQ and YoY. Price increases for branded generics, which are typically made in the first quarter, may have offset higher input costs. Other expenses and personnel costs were slightly higher, due to higher costs related to the standardization of promotion and marketing activities and the increase in the national sales force.
R&D spending at 4.2% of sales was down, which contributed to the EBITDA margin. Still, the standardization of clinical trial centers in Russia and Ukraine, where Ilumya’s phase 3 psoriartic arthritis trials are taking place, may have dampened costs. Overall, EBITDA margins at 26% were within the range of consensus estimates, but due to lower R&D and foreign exchange gains in the quarter. This results in a slightly lower quality beat. Moderate margin gains were amplified by lower tax expenditures (8% effective tax rate in the quarter), which contributed to the 17% PAT overrun.
Valuation and outlook
Sun Pharma is trading at 27 times FY23 expected earnings (Bloomberg consensus), which is closer to its historical range (5-year average of 26.8). Revenue growth levers from India, emerging markets and the US specialty business appear to be intact. Margins reached 26%, although they were helped by lower R&D spending, but overcoming higher operating and material costs (yet to normalize). We reiterate our hold call given on the Sun Pharma share dated January 1, 2022.
August 02, 2022