Sun Pharma sails through Q1, but the stock may be outpacing profit growth

Investors can’t get enough of Indian pharma stocks these days. That seems to be the reason why Sun Pharmaceutical Industries Ltd’s stock was up about 5% on Friday. Otherwise, there are no major positive surprises or triggers in the Q1 numbers. The June quarter results were largely in-line with what the Street was expecting.

In fact, Sun Pharmaceutical’s revenues fell about 10% year-on-year in the first quarter, which is a worry. Global growth across many of its markets was sharply lower. In fact, US revenue drop of 33.5% y-o-y is sharp considering that it did well in Q4. The covid-19 impact on this segment is pretty evident going by the slower sales.

Of course, to an extent the slower growth rate was also due to a higher base last year from one-time opportunities. Even so, some of the slowdown is also being attributed to marginal price-erosion scenario in the US. Sun Pharma’s arm Taro also points to the sluggish US environment with sales showing a drop of 27% y-o-y.

Revenue growth from emerging markets and Rest of the World segments fell sizeably over the last year, which is a disappointment. One saving grace is marginal uptick in the India business. Revenues improved 3% y-o-y growth. Domestic sales had slumped in April and May in the Indian pharma market. But Sun Pharma’s domestic was able to launch new products, which aided growth.

The company’s active pharma ingredients (API) segment is proving resilient, with growth of about 20% y-o-y. Even so, the contribution of the API business for captive consumption is rising.

The company increased research and development expenses to 5.6% of revenues in Q1 as compared to 5.1% in the year-ago period. Some of that will benefit the US drug launch pipeline. Sun has about 95 abbreviated new drug applications pending for approval. In Q1, Sun Pharma received approvals for 8 drugs in the US.

Meanwhile, Sun’s Ebitda margins improved marginally. “Sun Pharma’s operating margin improvement was in line with what others have reported and is likely due to favourable foreign exchange rate and lower marketing spend in branded markets,” said Kunal Dhamesha, pharma analyst, Systematix Securities Ltd.

Even so, the stock’s recent run-up of about 23% since the beginning of the year has been sharp and to some extent prices the earnings growth in the coming years. A pick up in earnings in FY22 expected, but may not be enough to justify valuations. The stock trades at a PE of 20 times FY22 earnings.

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