Experts disappointed with Sun Pharma Q2 nos but not bearish

In an interview to CNBC-TV18, pharma analyst Sarabjit Kaur Nangra, Angel Broking and Surajit Pal, Pharma Analyst, Prabhudas Lilladher spoke about the Sun Pharm Q2 numbers.Nangra thinks the numbers are broadly in line in terms of topline and bottomline and very good on the operating margin front.Pal says the numbers ar not as per expectations and if Taro's numbers are removed from topline and EBITDA level then the non-taro business is only 35 percent margin, which is not upto the mark as per Sun Pharma standards although it could be high compared to its peers. However, the house is will not change its bullish stance on the stock, says Pal.Nangra says the house is neutral on the stockSun Pharma for its second quarter ended September 2014 a net profit of Rs 1,362 crore during the same period of previous fiscal. Net sales of the company rose to Rs 4,751 crore for the second quarter, up 13 percent, from the same period of previous fiscal, Sun Pharmaceutical Industries said in a filing to the BSE.

Below is the transcript of Sarabjit Kaur Nangra and Surajit Pal’s interview with Senthil Chengalvarayan and Menaka Doshi on CNBC-TV18.Menaka: Profits, 15 percent better year-on-year (YoY) basis but a tad shy of expectations? Nangra: Numbers broadly in line as far as topline and bottomline but just tad lower than what we were expecting, so, not a major disappointment, decent set of numbers overall.

Senthil: What are your first reactions to the Sun Pharma numbers?Pal: Numbers were not as per my expectation. If I remove Taro’s number from topline and EBITDA level then this non Taro business is 35 percent margin which to my mind as per the Sun Pharma standards is not up to the mark. If I compare any other peers it is a pretty high number but as far as Sun Pharma standard is concerned it is very pathetic.

Senthil: If you strip the Taro results from this the margins aren\\'t looking, the rest of the business is at about 35 percent?Nangra: There is a slippage but definitely Sun Pharma at this point in time is enjoying margins; even base case margins are pretty much higher than industry standards as of now. The company has been saying time and again that such kind of margins on a long-term perspective can’t be sustained by the company over long period of time. So, we are also wary that for such a large company to maintain such kind of a base business at 30 plus whereas overall pharma industry every company is earning only 20 plus, in that perspective it could be tad lower but it can\\'t be written off completely.Menaka: Given the price action we have seen on the stock this might put some doubt into the minds of all of you when you relook at your target prices and say at these prices is the stock still a buy? Would that be the case with you?Nangra: We have been very conservative in terms of operating numbers of the company. We believe that such kind of a strong performance barring few products can't be sustained over a long period of time. That is why our current operating numbers also for the full year currently at 43 percent which is actually very low below the street.Next year also, given the integration with Ranbaxy, our OPM numbers are at 30 percent which is again very low in comparison to the industry. So, for us it is a neutral stock. We don’t think such run up can be sustained over a very long period of time.Menaka: You sounded decidedly disappointed in that sense. Would you be rethinking the price?Pal: I am still not ready to change the bullish tone in Sun Pharma because they have always an habit of spraying positive surprise. So, I just hope that there should not be anything which is chronicle rather I would hope that it would be one-off. So, next quarter onwards they will be back to their 40 percent ways.