Sun Pharmaceutical Industries ' fourth quarter consolidated profit shot up 124.63 percent sequentially (down 44 percent year-on-year) to Rs 888 crore. Weak operational performance dented bottomline on year-on-year basis. This was the first quarter when combined earnings reported (Sun Pharma and Ranbaxy).
Reacting to the result, pharma analyst Sarabjit Kaur Nangra of Angel Broking said the numbers were way below expectation and the correction in the stock is only short-term. She, however, is positive that Sun will be able to turn around Ranbaxy acquisition and will also make it more profitable.
Below is verbatim transcript of the interview:
Q: This much of a cut was always expected given that the Ranbaxy integration would have chipped off something from Sun Pharma. Are you expecting it to go lower?
A: It was expected that the reason that the stock is falling is because it has come in much below what the street was also expecting in terms of numbers to be impacted because of the integration. It is a short-term dip in the stock.
We believe things happen when a large-scale integration happens and especially when you integrate a company which is already going through tough times into profitable one, that is why we believe the stock is reacting to the same. But we are positive that company will be able to turn around this kind of an acquisition and also turn it more profitable.
Q: What’s your price target?
A: Currently, we are running with a target of Rs 106 which makes it a buy at current fall.
Q: Stripped of these integration cost, how have the numbers looked operationally and what would you expect to see in the first quarter of FY16?
A: If you look at numbers which were more disappointing, was on the margins front. This is because sales though were lower, but those issues get resolved once the company gets integrated within one or two quarters so that is not a big worry.
Only part of the worry was margins which came at 14.5 but then as management pointed out other expenses were high to the extent of around 10 percent which were impacting the margins.
You had a research and development (R&D) expenditure which was higher at around 9.6 percent and vis-à-vis 7 so that is again 200 basis points higher. So a normlaised operating business base case margin that the company would have reported would have been around 28 -29 which is closer to 30 percent which management has been saying that they will be able to manage post Ranbaxy for at least one year.
Then FY17 onwards probably synergies will start kick in. So this merger given a bigger one is definitely will test some patients for Sun pharma in terms of drawing out the synergies but that will happen over a period of time.
It is a patient game in terms of margin but at 30 percent also it is not bad because 30 margins a pharma company doing, is definitely not a bad performance. It is just that the company has been operating at a higher operating profit margins (OPM) at around 24-25.
Even management has been pointing time and again that these margins can not be sustained because Sun Pharma is only company whose is earning such high margin.
Q: Will you be buyer in Cipla and in Glenmark Pharmaceuticals?
A: I don’t track Glenmark but we are neutral on Cipla as of now because the price has run up ahead of fundamentals.
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