Q1 comment . Sun Pharma Q1: Stock falls despite strong operational performance

Markets don’t seem to be impressed by the good set of numbers from Sun Pharma .

The stock of the company has declined over 6 per cent since morning today despite the company having reported strong operational performance for the first quarter of 2019-20.

It appears that the investors are vary on the sustainability of Q1 performance in the coming quarters.

The consolidated total revenues of the company grew by 16 percent to Rs 8,374 crore in the June quarter as against Rs 7,224 crore seen in the same period last year. Its consolidated net profit rose by 31 per cent to 1,388 crore in the June quarter as against Rs 1,057 crore seen in the same quarter last year. A one-time generic order in the US ($50 million) and lower R&D spend also aided the numbers.

Past few years have been weak for the company majorly due to regulatory investigations and the pricing pressure in its key markets.

In the last one year, the stock has corrected about 46 per cent from its September 2018 high.

On the business front however things have improved for the company in recent quarters on the back of Halol plant clearance and meaningful contribution from its specialty businesses.

In the June quarter, the company’s US business that contributes around 36 per cent of overall sales, saw revenue going up by 12 per cent y-o-y in the June quarter, driven by a one-time business of generic supply to a customer and improvement in Taro’s (US subsidiary) sales. While the company’s overall generic business in the US have not seen any broad-based improvement, the ramp-up in the specialty business shows robust growth prospects in the medium term with the key drugs launches including Ilumya and Cequa.

The total specialty business revenue for Sun Pharma in the first quarter across geographies was USD 94 million. While the higher R&D cost and delay in launch of Cequa can impact the margins of the company in the near term, the ramp-up in specialty revenue and fall in marketing costs are expected to drive significant margin expansion in the medium run.

Further, the US generics business is expected to improve with more quality approvals from the Halol plant. The company has guided for low to mid-teen growth in the US business in FY20.

India & Emerging Markets

The company’s India formulation business, which accounted for approximately 28 per cent of our total sales, grew 8 per cent (y-o-y) during the quarter. The transition of domestic distribution business from Aditya Medisales to its own wholly-owned subsidiary moderated the revenue from the domestic market during the quarter. The company enjoys leadership position in the various chronic segments in the domestic market.

The company’s business growth in the emerging market was flat during the quarter due to volatile currencies. Its ‘Rest of the world’ segment grew 56 per cent y-o-y driven by higher sales and consolidation of Pola Pharma in Japan.

Sun Pharma’s operating margin for the first quarter stood at 23 per cent, improved by 807 bps sequentially due to lower R&D spend.

Risks

While earnings for Sun Pharma will be driven by growth in the specialty business and steady performance in India and the emerging markets, any adverse outcome in the ongoing investigation on drug price collusion by the US Department of Justice, escalation of SEBI investigation on the whistle-blower complaint and delay in specialty drugs approval may impact the performance of the company.

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