Geojit Research is bearish on Sun Pharmaceutical Industries has recommended sell rating on the stock with a target price of Rs 413 in its research report dated September 12, 2017.
Geojit's research report on Sun Pharmaceutical Industries
Sun Pharma is India’s top drug maker and world's fourth largest specialty generic pharmaceutical company by revenue with 42 manufacturing facilities spread across 6 continents. US contributes 37% to the revenues. • Revenue plunged 25% YoY in Q1FY18 due to lower US and India sales. • US sales declined 42% YoY mainly on account of sharp fall in Taro sales (down 31% YoY) due to continued pricing pressure in the US and high base impact. • The domestic formulations business fell by 5% YoY primarily impacted by temporary disruption due to GST implementation. • EBITDA margin contracted 1760 bps YoY to 17.1% led by lower than expected US and India sales, decline in Taro margin and high base effect. Taro’s EBITDA margin fell to 50.5% from 62.6% in Q1FY17. • We reduce our revenue and PAT estimates for FY18/19E by 16%/14% and 69%/44%, respectively to factor in lower than anticipated growth in the US. • Given continued pricing pressure in the US generics business due to increased competitive intensity & customer consolidation and delay in Halol plant resolution restricting new launches, we change our rating to ‘SELL’ from ‘BUY’ with a revised target price of Rs 413 based on 20x FY19E PE.
OutlookFollowing a dismal US performance in Q1, we significantly lower US revenue growth rate. We expect US business to decline by 10% CAGR over FY17-19E due to persistent pricing pressure in the US generics business and delay in Halol plant resolution. Uncertainty over Halol plant resolution remains a key overhang on the stock, although, the company has taken remedial measures to address the observations raised by USFDA and awaits approval from the regulator. Despite a disappointing first quarter performance, the company has guided for a single digit decline in revenue for FY18 and expects an expansion in EBITDA margin to 20-22% in H2FY18 as against 17.6% in Q1FY18. We expect revenue to grow at a CAGR of ~1.4% over FY17-19E. However, PAT is expected to decline by 14% CAGR due to weak operating profitability and higher tax outgo. Hence, we change our rating to ‘SELL’ from ‘BUY’ with a revised target price of Rs 413 based on 20x FY19E PE.
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