MUMBAI : Dragging on its otherwise decent Q4 results was the impact of cost increases on Sun Pharmaceutical Industries Ltd. While its specialty business has picked up, a further squeeze on margins may dampen the stock in coming quarters.
One key parameter that the street was looking out for was the ramp-up in its specialty division. One of its key brand-named formulation products, Ilumya, logged sales of about $94 million in FY20, higher than estimates, and is quite encouraging.
Sales of other specialty products drove an increase in overall global specialty sales by about $8 million. In coming quarters, however, faster growth may be a Covid-19 challenge. Though some of its products have the potential for more sales in the next two years, analysts reckon that Ilumya has could touch about $145 million in sales in FY21.
Besides, the company filed six abbreviated-new-drug applications and received two approvals in the US. Still, the weakness in generics continues, proving to be an overhang.
The domestic business grew 8% year-on-year (y-o-y), as expected, after adjusting for distributor changes. Other emerging markets grew at a decent pace in the last quarter. While growth could be stunted by lower hospital and clinic patients, the company has been strengthening its marketing cohort. That should see its domestic revenues beat the market.
While Sun did well on the business front, rising costs from higher marketing and staff expenses have been a dram disappointing. The Street was expecting better margin growth in Q4, but margins lagged considerably. “EBITDA missed our estimates by 9%, with margins showing no signs of any operating leverage of higher improved specialty performance, with SG&A spend and staff costs remaining elevated, dragging down EBITDA margins to 18.9%," said Kotak Institutional Equities in a note to clients.
Much of the fortunes now hinge on a meaningful ramp-up in its specialty products. Margin growth could be slow given that marketing and sales promotional costs in coming quarters is likely to be high.
Also, research and development expenses are slated to rise. The specialty R&D spent is likely to increase substantially from about 6% of sales to 8-9% in the coming year, noted Nomura Financial Advisory Services in a client note.
As costs could remain elevated, margins may remain under pressure, which could keep the pressure on the stock. Nevertheless, it trades at a PE of about 27 times FY20 earnings, lower than some of its peers.
