SUNP has reported a good performance in 2QFY20 led by growth in India and RoW market. Ramp-up in specialty biz is a key growth driver going ahead. At CMP, stock trades at 22.0x and 17.7x of FY20 and FY21 earnings, respectively (12-month fwd 3-yr avg. Bloomberg PE at ~27x; below 1-SD three-year average), which is attractive to take fresh position, in our view. In light of increasing business visibility in India and other geographies, we maintain our BUY recommendation on the stock with a Target Price of Rs500.
Management maintained guidance of significant cost push (promotion, marketing and employee) of launching branded specialty products going forward. Expecting continuation of headwinds in US generics, SUNP guided for launch of generics with limited competition. The SUNP valuation remains challenging and one of the highest among its peers as it trades at PE of 23.3x and 22.2x of FY20E and FY21E. We maintain ‘Reduce’ and retain TP at Rs396.
Near-term challenges in specialty eclipse the medium-term outlook as the ramp up has been slow even as competition is intensifying. While the stock price seems to be ascribing a fair value to domestic and EM businesses, it overestimates the opportunity in specialty. Hence, we maintain ‘REDUCE/SU’ with TP of INR380.
We upgrade our revenues by 0.4% for FY20E on back of upgrade in ROW and API business and downgrade it by 0.5% for FY 21E by removing one time supply of generics in FY20E. We maintain our EBDITAM for FY20E while we downgrade for FY21E by 18 bps due to lower gross margins. We upgrade our EPS estimates for FY20E /FY21E by 2.1%/ 1.1% to Rs 17.8 / Rs 21. Due to upgrade in earnings we revise price target of Rs 462 based on 22x FY21E (EPS Rs 21) and maintain our HOLD rating on the stock.
The EBITDA margin recovered on sequential basis and showed significant growth on recovery of domestic business and declining other expenses as a percentage of revenue. Net earnings Rs13,875Mn were higher than our/consensus estimate by 11.3%/36.8%, respectively. The net earnings showed a growth of 118.2% QoQ and 41.2% YoY. We have retained Buy rating on SPIL with a target price of Rs 578.
Management maintained guidance of significant cost push (promotion, marketing and employee) of launching branded specialty products going forward. Expecting continuation of headwinds in US generics, SUNP guided for launch of generics with limited competition. The SUNP valuation remains challenging and one of the highest among its peers as it trades at PE of 23.1x and 22.1x of FY20E and FY21E. While SUNP tries to address the issues over corporate governance, we expect this will remain a hangover over the valuation of SUNP and eliminate premium valuation in comparison to peers. We maintain ‘Reduce’ and retain TP at Rs396 (PE 20x of FY21E earnings).
SUNP has reported a strong performance in 1QFY19 on the back of healthy growth across geographies. On positive note, it completed the transition in distribution in India business from AML to WOS, following which it reported 12% YoY underlining growth and expects better-than- covered-market growth of 9-10%. Though SUNP had addressed some corporate governance issues raised by the investors, we see the SEBI-related issues continue to remain event-specific risk for the stock in the near-term. Owing to increasing visibility in India and other businesses, we maintain BUY recommendation on the stock with a Target Price of Rs500.
Positive outlook persists We maintain BUY on SUNP following a beat to our estimates. Our TP is at Rs 545 (22x FY21E EPS). The execution in specialty segment is crucial. At CMP, the stock is trading at 23.5/17.7x FY20/21E EPS, a ~15% premium to peers. With a significant part of revenues expected to come in from the branded business in 3-4 years, we believe the stock will continue to command a premium.
Valuation - Maintain Hold with an upward revised PT of Rs. 500 The stock has corrected by almost 35%+ from its high and is currently trading at 14.2x its FY2021E earnings. We expect the company to report sales and profit CAGR of 20% and 38%, respectively, over the next two years. Although the quarter’s performance was better than expectation, the company still faces pending litigation case in the U.S. for pricing collusion. We feel FY2020 will reflect full impact of increased coststructure (on account of speciality pipeline build up); and from FY2021due to new launches, OPM could see significant improvement. Although valuation seems reasonable, we would like to monitor the sustainability of Q1 performance before taking a constructive view to upgrade the stock rating. We maintain our earnings estimates for FY2020E and FY2021E. We also maintain our Hold rating on the stock. However, we have revised the PT upward to Rs. 500.
Decent Performance Post One-off Adjustment; Maintain BUY. Outlook & Valuation: SUNP’s 4QFY19 performance were decent on account of (1) improvement in the US business; (2) distribution transition in domestic business is on track. Recently, SUNP has addressed some corporate governance issues raised by the investors, which in our view is a very positive move. We view SEBI-related issues as event-specific risks for the stock in the near-term. We reduce our PAT estimate by 17%/13% for FY20E/FY21E owing to higher R&D spend and higher marketing spend for specialty segment in the US. We also reduce our target multiple to 20x (from 22x earlier), as we roll-over our earnings estimate to FY21E. As we believe the current valuation (PE multiple of 16.6x FY21E earnings) offers favourable risk-reward, we maintain BUY recommendation on the stock with a revised Target Price of Rs500 (from Rs535 earlier).
SUNP is likely to be in an investment phase for its US specialty business over FY20, with 7-8 products in the US, slow ramp up and heightened promotional spend (300- 400bps margin impact). Meanwhile, the growth in the domestic biz is expected to return to double-digits while the co is also initiating cost control measures to improve margins.We maintain BUY on SUNP following a miss to our estimates owing to a one-off. Our TP is revised to Rs 600/sh (22x FY21E EPS + Rs 40/sh for specialty). Hopes are hinged on a ramp up in specialty business.
The management expects continuous frontloading of cost as the company enters the thick of investment activities for specialty launches. This optical move is the culmination of the long ongoing endeavour of the management for a drift from generics to specialty in the backdrop of US headwinds. We believe this is the key differentiator vis-à-vis peers. However, despite this,we expect investors to remain cautious in the backdrop of whistle blower’s complaint filing to Sebi and its possible outcome. These issues are likely tooutweigh the company’s steady fundamentals in the near term. Our target price is Rs 460 based on 18x FY21E EPS of Rs 23.4 and Rs 38 NPV for Ilumya.
We decrease our revenues by 3.5%/ 3% for FY20E /FY 21E on back of downgrade in domestic formulations business. We decrease our EBDITAM by 220 bps to 22.7 % for FY 20E and by 150 bps to 23.7 % for FY 21E due to scale up in promotional spend. We downgrade our EPS estimates for FY20E /FY21E by 18.3%/ 16% to Rs 17.4 / Rs20.8. On account of downgrade in earnings we revise our rating to HOLD and our price target to Rs 458 based on 22x FY21E (EPS Rs 20.8).
We exercise caution in the backdrop of a whistle-blower’s complaint to the Securities and Exchange Board of India or SEBI anda possible adverse outcome of that investigation. We have tweaked our estimates and assigned Buy rating to SPIL with a target price of Rs578 (down from Rs581), which is based on 20xFY21E EPS and at a discount to the historical trading multiple. There is potential for the stock to trade at a higher level if the company is able to come out clean from the ongoing whistle-blower investigation.
We cut our FY20/21 estimate by 9%/8% to factor in increased marketing spend toward the specialty portfolio in the US market. We also reduce the P/E multiple to 22x (from 23x) 12M forward earnings basis to factor in the delayed pick-up in the US generics business post resolution of the regulatory issue at Halol. Accordingly, we arrive at a TP of INR480. Maintain Buy.