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You are here : IndiaNotes >> Research & Analysis >> Companies >> Sun Pharmaceutical Industries Ltd. >> Research

Sun Pharma Q1FY18: Weak quarter; Maintain buy with reduced target price

Motilal Oswal | 15 Aug, 2017  | Follow Author | Add to my Favourites 
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Weak quarter; Guides for significant cut in margins


- 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).


- Concall takeaways: (a) Maintained RBXY integration benefits of USD300m by end-FY18E. (b) Tildrakizumab NDA launch by early-2019E. (c) Remediation measures at Halol over; SUNP awaiting USFDA inspection. (d) Odomzo global mkt. size: USD200m. (e) Seciera filing with USFDA in 3QFY18E.


- Challenges persist, but aren’t they factored in price? We expect the stock to remain under pressure in near term due to challenges related to growth and margins. Maintain Buy with a reduced TP of INR515, based on 22x FY19E (v/s 650 @20x FY19E). We cut FY18/19E EPS by ~35%/24%, building in lower US sales and margins. We raise our target multiple to 22x, expecting recovery from 2HFY18E/FY19E as earnings bounce back, Halol resolution happens and visibility of specialty business monetization improves.


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About Motilal Oswal

Motilal Oswal was founded in 1987 as a small sub-broking unit, with just two people running the show. Today it has a 2000 member team with a networth of Rs7 bn and market capitalization as of March 31, 2008 at Rs19 bn.

 

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