Sun Pharma reported its Q1FY23 results last Friday with an all-round beat - revenue beat of 4.8 per cent, EBITDA beat of 6.6 per cent and PAT beat of 17.8 per cent. The revenue growth of 10 per cent YoY to ₹10,761 crore was on a high base of Covid last year. Adjusted for the same, it comes in at higher 14 per cent. The EBITDA margins were at strong 26 per cent, despite higher operating expenses. The overall results indicate a positive start to the fiscal, along with areas where there can be improvement. The stock reaction has been mixed. On Friday, when the results were announced, the stock closed up 5.5 per cent over Thursday, but on Monday gave up 2.9 per cent of the gains.

Sun Pharma’s global speciality sales (13 per cent of revenues in Q1FY23) reported a 29 per cent YoY growth to USD 191 million. But moderating sequential growth (3 per cent QoQ) for the second quarter in a row needs to be noted. The portfolio consists of a strong growing products Ilumya, Cequa, Odomzo and recently added Winlevi.

Sun Pharma’s US generic portfolio (close to 8 per cent of revenue) Ex-Taro also reported a strong growth (both YoY and QoQ) as one major launch - gPentasa - aided the good performance. This indicates that with a strong suit of products, overcoming price erosion can be possible, even for other companies. Sun Pharma’s dermatology focussed subsidiary - Taro - continues to face headwinds. Taro sales growth has been declining in the last two years, and in Q1FY23, the sales growth was at 6.5 per cent YoY, even after including a consolidated entity from March-2022 (Alchemee). Overall, Sun Pharma’s US segment (30 per cent of revenues) reported sales of USD 420 million which is 11 per cent YoY growth.

India reported 2.4 per cent YoY growth over the high Covid base of Q1FY22, but the sequential growth was strong at 9 per cent QoQ. With completion of 10 per cent sales force addition over the last two years, the revenue momentum is likely to be higher as the associated costs have already been reflected in operations. Sun Pharma’s emerging market operations which include Japan, Australia and other markets continue to report strong growth (17.8 per cent in Q1FY23) driven by Ilumya’s expansion in markets, amongst other products.

Sun Pharma’s gross margins were flat QoQ and YoY. The pricing increases in branded generics, which are generally carried out in the first quarter, may have off-set higher input costs. The other expenses and employee expenses were marginallyhigher, owing to higher costs on normalisation of promotional and marketing activities and the increased domestic sales force.

The R&D expenses at 4.2 per cent of sales were on the lower side, aiding EBITDA margin. Yet, to normalise clinical trial centres in Russia and Ukraine, where Ilumya’s psoriartic arthritis Phase 3 trials are being held, may have held back the costs. Overall, EBITDA margins at 26 per cent is in the range of consensus estimates, but owing to lower R&D and forex gains in the quarter. This makes for a marginally low- quality beat. The moderate gains at the margin level were amplified by lower tax outgo (effective tax rate at 8 per cent in the quarter) aiding the 17 per cent beat in PAT.

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). The revenue growth levers of India, emerging markets and the US speciality business seem to be intact. The margins have scaled to 26 per cent, although aided by lower R&D spends, but overcoming higher (yet to be normalised) operating and material costs. We reiterate our Hold call given on Sun Pharma stock dated January 01, 2022.