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Last Updated : May 31, 2016 05:21 PM IST | Source: CNBC-TV18

Bull vs Bear: What's the outlook on Sun Pharma?

Sun Pharma is the biggest loser on the Nifty as it missed estimates. Also, the management gave a very conservative guidance of 8-10 percent growth in consolidated sales for FY17. A bullish SP Tulsian of sptulsian.com gave a support price of Rs 700.

Despite posting a whopping 93 percent rise in net profits in Q4 of FY16 year-on-year, Sun Pharma is the biggest loser on the Nifty as it missed estimates. Also the management has given a very conservative guidance of 8-10 percent growth in consolidated sales for FY17.

Surya Narayan Patra of PhilipCap is very bearish on the stock. He said that PhilipCap is cutting estimates for FY17 and FY18 by 14 and 12 percent, respectively. He gave a target of Rs 800 in the near-term for the stock as against his earlier guidance of Rs 950.

Bullish on Sun Pharma, SP Tulsian, sptulsian.com, gave a support price of Rs 700 and expects the stock to move to Rs 1250 after 24 months. He says the pharma company is fixing its business slowly and FY18 will be the take-off point for it.

Below is the verbatim transcript of Surya Narayana Patra and SP Tulsian’s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Sonia: The stock is under pressure today not just because the numbers were slightly below estimates, but also because the management guidance and body language was not as good as perhaps what the street was expecting. Just an 8-10 percent growth in sales for the next year, if we do see further pressure in the stock do you think that would be a good buying opportunity?

Tulsian: Let me first come on the guidance that yes I agree that 8-10 percent guidance has not gone well with the market, but if you really ask me FY18 will really be the takeoff point for the company, because if you see the kind of benefits which will start flowing in from the Ranbaxy acquisitions. In fact, Ranbaxy got merged with the company from 1 April 2014, the integration pain and the kind of issues which we have seen company has been struggling for that. Just to give you an example that’s the reason the exceptional loss of about Rs 700 crore, Rs 685 crore was seen having booked by the company in FY16.

I agree that firstly I expect that probably FY17 will give a top line growth of 10 percent plus because in the current situation I don’t think that management has thought it proper to raise hopes of the street and that’s the reason they have restricted the growth target of 8-10 percent.

Now come on the earnings before interest, taxes, depreciation and amortization (EBITDA) margin even if they have that 10 percent growth about Rs 3,000 crore increase in the top line will give them 30 percent margin to the company. I am not taking the incremental benefits to be enjoyed by the company, but as I said that Rs 500 crore interest and closer to Rs 700 crore exceptional that can increase the bottom line of the company, but I am expecting FY18 to really be the takeoff point where the Ranbaxy will start contributing and I won’t be surprised to see the Ranbaxy contributing about Rs 1,200-1,500 crore to the bottom line of the company. In that case probably the earnings per share (EPS) for FY17, one can take a call of Rs 28 or may be Rs 27-28, but coming for FY18, I won’t be surprised to see the company posting an EPS of closer to about Rs 35-36. One may argue that still the share is ruling at price earning (PE) multiple of 26-27 taking FY18 as an EPS estimate, but the question is that street all go overboard the moment they see any kind of positive indications coming in from the company either by way of management commentary or from the results.

In fact, I have seen in the past when share was ruling closer to Rs 900-1,000, it was a unanimous call where I have cautioned that post Ranbaxy acquisition, they are going to see a huge kind of integration pain at that time. Nobody has really raised the question that the valuations are looking expensive and market has gone overboard, so sometime unanimity doesn’t work and the company is passing through its lowest phase and all the problems which are seen happening in the company like maybe USFDA or maybe like Ranbaxy integration seems to be coming to an end.

A company with Rs 30,000 crore top line on the historic basis with 50 percent sales coming in from US, the stock seems to have a good support at Rs 700. Risk reward you have a downside of about may be Rs 50 from here, but one expect a price of Rs 850-900 in next 6-8 months or 8-10 months.

Anuj: Just to take that point forward at Rs 1,150 there was consensus bullishness, but at Rs 760 or thereabout Sun Pharma has become a consensus sell. Do you think there is a risk to this argument that may be there is too much bearishness right now or do you think that its needs to correct more. What explains to your bear call right now on Sun Pharma at these levels?

Patra: No, certainly we feel that the guidance of 8-10 percent what the management has given is really conservative, but even having said that we still believe that the kind of impact what they have indicated on the profitability front because of the kind of enhanced R&D spend or the kind of higher spend towards creating speciality business based in US, all that to some extent need a portion of the synergy benefit what it is when talked about from the Ranbaxy integration in FY17-18. So that is why we are of the view that we are basically cutting our revenue estimate and earnings estimate slightly for both FY17-18.

We are now cutting our FY17 earnings estimate by 14 percent and 12 percent for FY18 and considering this kind of gloomy outlook on the revenue growth as well as on the profitability front, there would be a kind of question also on the multiple what it should trade at. The premium multiple of more than 25 what the Sun Pharma used to get possibly in the near term considering the kind of pricing scenario both in the domestic market as well as in US market. We may not see similar kind of premium valuation multiple for Sun Pharma, so that’s why we are to some extent reducing our target multiple to 24 and now valuing at Rs 800 as a target for the near term for Sun Pharma.
First Published on May 31, 2016 03:47 pm
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