Weak Q4 due to lower growth may be rare bitter pill for Sun Pharma

Sun Pharma is in the process of acquiring US-based Taro Pharmaceuticals and taking it private

Sun Pharmaceutical Industries reported a 34 per cent year-on-year (Y-o-Y) jump in net profit to Rs 2,654.6 crore in Q4FY24. The company’s Ebitda (earnings before interest, taxes, depreciation, and amortization) was, however, below Street estimates due to lower (but impressive) growth in the Global Specialty Revenues, higher R&D spend, and higher other opex.

This negated a rise in the company’s gross margin. The FY25 guidances may also have disappointed some investors since the stock saw a sell-off.

Sun Pharma surpassed $1 billion in sales in the global specialty segment in FY24, up from $430 million in FY20. Overall, the sales grew 10.7 per cent year-on-year Y-o-Y to Rs 11,800 crore in Q4. Domestic formulation sales grew 10.2 per cent Y-o-Y contributing 31 per cent of sales at Rs 3,700 crore (31 per cent of sales). The US sales grew 12 per cent Y-o-Y to Rs 3,950 crore, up 10.7 per cent in constant currency terms, and around 33 per cent of total sales.

The emerging market sales rose 12 per cent Y-o-Y to touch Rs 2,030 cr (17 per cent of sales). The Rest of the World sales grew only 3 per cent Y-o-Y to Rs 1,630 crore (14 per cent of sales). The gross margin expanded 90 basis points Y-o-Y to 79.8 per cent for the quarter.

The Ebitda margin expanded 70 basis points (bps) Y-o-Y to 24.7 per cent but better gross margin was offset by higher other expenses (up 120bps as per cent of sales). Employee expenses were down 100bps as per cent of sales.

The Ebitda grew 13.8 per cent Y-o-Y to Rs 2,900 crore. After adjusting for an Exceptional Item of Rs 160 crore, the Adjusted PAT grew 32.7 per cent Y-o-Y to Rs 2,800 crore for the quarter.

In FY24, Sun Pharma’s sales, Ebitda and PAT grew 11 per cent, 11 per cent and 16 per cent, respectively, Y-o-Y to Rs 47,750 crore, Rs 12,250 crore and Rs 9,960 crore.

Sun Pharma is looking at expanding its specialty pipeline in areas like dermatology, ophthalmology, and onco-dermatology. In FY25, it has R&D guidance of 8-10 per cent of sales (versus 6.5 per cent in FY24) and limited triggers for the specialty business apart from Deuruxo’s launch.

Hence specialty business growth may moderate from 19 per cent in FY24 to 12 per cent in FY25 and rise again to 15-16 per cent by FY26 and beyond.

In domestic, 12-13 per cent revenue CAGR is likely over FY24-26. The continued gross margin expansion could translate in 17-18 per cent earning CAGR over FY24-26.

In management commentary, Sun Pharma has guided for high single-digit Y-o-Y revenue growth for FY25. It would spread R&D investments over both specialty and generic products with about 42 per cent of spend on the specialty portfolio. The likely resolution of the import ban imposed by the USFDA on the facilities in Mohali, which Sun bought from Ranbaxy, could be a major positive.

The pharma major has an annual operating cash flows of $1 billion-plus and net cash of over $2 billion on the balance sheet. It is in the process of acquiring US-based Taro Pharmaceuticals and taking it private. Taro focuses on off-patent drugs and also has a strong balance sheet.