The company’s revenues have come ahead of expectations but its margin improvement stood out despite some cost overheads rising in Q2. The stock’s jump of 3.5% post the results announcement on Tuesday was largely due to the improvement in margin, driven by the specialty products business.
The pickup in the domestic business is also notable considering that the company has a strong chronic therapies portfolio. Note that chronic therapies have been slow-moving in the domestic market. Domestic revenue growth of about 6% sequentially is notable in that backdrop, and has gone down well with the Street. Sun Pharma also launched about 22 new products in the domestic market, which is likely to reflect in improved revenue growth in coming quarters.
The rest-of-the-world market has shown high growth as well. Dollar revenues from this segment grew 31% sequentially. Emerging markets’ sequential revenue growth of 21% is quite encouraging as well.
Active pharma ingredient (API) sales also grew well, given that some stocking was already evident in the last quarter. As a result, overall revenue grew about 5.3%, much ahead of the Street estimates.
Sun Pharma’s speciality products business has seen an improvement in the US with revenues rising 19% sequentially in US dollars. “Sun Pharma’s specialty business and products like Ilumya and Cequa have reached pre-covid levels. As these products have high margins, the margin improvement story looks set to continue," said Bharat Celly, analyst, Equirus Securities.
Despite cost increases during the quarter, particularly on operations and research and development, Sun Pharma beat the Street’s estimates quite well. Ebitda (earnings before interest, tax, depreciation and amortization) margins came at 25.6% in Q2, about 130 basis points higher sequentially, and well over last year’s levels.
Of course, some of the operational expenses are likely to rebound further with the easing of lockdowns. Sun is also likely to increase its field force as well.
Nevertheless, revenue growth in the US should remain good on the back of its speciality product pipeline. The price erosion seen in the generic space over the past few years in the US market is slowing.
The company is increasing filings in the US market. The firm has about 20 tentative approvals, while it received four approvals for drug launches last quarter.
While the stock is up about 7% over its pre-covid highs, valuations look fair at 21 times FY22 consensus earnings. Even so, an earnings upgrade cannot be ruled out on the back of improving margin profile.
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