Buy Sun Pharmaceutical Industries; target of Rs 940: KR Choksey

Overall sales stood at INR 77.6 bn up 13%YoY (in line with our estimates of INR 78.9bn). US formulations stood at INR 37.1 bn, up 12% YoY and in USD terms, the sales stood at USD 555 mn (up 9% YoY in USD terms) on account of one month of gGleevec exclusivity in the quarter. Domestic sales were up 11% YoY to INR 20 bn, RoW sales were up by 6.3% YoY to INR 5.3 bn, Emerging Market sales were up 26% YoY to INR 11.4 bn and API sales were up 17% YoY to INR 3.7 bn. EBITDA stood at INR 26.7 bn up 44% YoY with EBITDA margins at 34.3% (as compared to our EBITDA of INR 23.9 bn, with EBITDA margins at 30.3%). R&D as a % of sales stood at 7.3% at INR 5.7 bn. PAT for the quarter stood at INR 22.4 bn up 117% YoY (as compared to our estimates of INR 16.5 bn) on account of lower interest costs & higher other operating income which consists of milestone payment of USD 45mn from Almirall for development and commercialization of Tildrakizumab for Psoriasis in Europe.

The management has iterated a moderate guidance for FY17E at 8-10% revenue growth. We have modeled 16% growth in revenues for FY17E on account of robust earnings from gGleevec (which as per estimates could generate sales of USD 360-370mn for FY17E), key launches comprising of gGlumetza; gCrestor; AG launches of gBenicar, gBenciar HCT, gTribenzor, gAzor; & resumption of normalized supply from Halol in Q4FY17E. We remain confident on Sun’s ability to generate superior returns and sustain robust revenue growth over FY16-18E on account of a high quality US pipeline and synergy benefits from Ranbaxy integration. We maintain our BUY rating with a target price of INR 940 (unchanged), valuing the company using SOTP valuation with base business at 28x FY18E EPS of INR 33 and valuing Specialty Products (Ophthalmic products at INR 5/share and MK-3222, Tildrakizumab opportunity at INR 15/share) at INR 20/share.