Pharma companies have had momentum on their side since the first quarter, and Sun Pharmaceutical Industries Ltd (Sun Pharma) Q2 numbers show the good run is continuing. Sun Pharma’s revenues have come ahead of expectations but its margins improvement stands out despite some cost overheads increasing in Q2. The stock’s jump of about 4% on Tuesday was largely due to margin improvements, driven by the specialty products business.

The pickup in the domestic business is also notable considering that the company has a strong acute therapies portfolio. Note that acute therapies have been slow-moving in the domestic market. Domestic revenue growth of about 6% is notable in that backdrop, and has gone down well with the Street. Sun also launched about 22 new products in the domestic market, which is likely to reflect in improved revenue growth in the 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 sales also grew well, given that some stocking was already evident in the last quarter. As a result, the overall revenue growth numbers grew about 5.3%, much ahead of the Street.

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 increases in costs during the quarter particularly on operations and research and development, Sun Pharma beat the Street’s estimates quite well. Ebitda margins came at 25.6% in Q2, which is about 130 basis points higher sequentially, and well over last year’s levels. Ebitda is earnings before, interest, tax, depreciation and amortization. Of course, some of the operational expenses are likely to rebound further with the easing of lockdowns. Besides, 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 seen in the last few years in the US market is slowing down. 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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