Analyst Call Tracker: Sun Pharma faces slew of downgrades on concerns over earnings moderation

As per Moneycontrol's Analyst Call Tracker, 'buy' call for Sun Pharma slumped to 27 in May as compared to 33 in the month prior.

Analysts have made a U turn on their view of Sun Pharmaceutical Industries  in the past month, with brokerages downgrading the stock amid rising concerns over near-term earnings moderation. Consequently, Sun Pharma found itself topping the list of stocks that witnessed the maximum ratings downgrades during May.

As per Moneycontrol's Analyst Call Tracker, the 'buy' call for the pharma stock slumped to 27 in May as compared to 33 in the month prior. In contrast, the 'hold' ratings rose to nine from the previous six and 'sell' recommendations spiked to four from just one in April.

The primary drivers behind these downgrades were concerns around earnings moderation following Sun Pharma's robust performance in FY24, which now sets a higher base for FY25. Aside from that, a spike in research and development (R&D) spends and guidance for high-single-digit revenue for FY25, further weighed on the sentiment.

The drugmaker raised its R&D spend target for FY25 to around 8-10 percent of its total sales, higher than the near 7 percent spent in FY24. This increased investment, primarily directed towards expanding its high-margin specialty portfolio, is expected to impact the drugmaker's growth and margin profile over the upcoming years, according to Choice Broking, which maintains a 'sell' rating on Sun Pharma.

"Given that the company is in an investment phase, expenses are likely to remain elevated to ramp up specialty business," Prabhudas Lilladher also noted.

Additionally, Sun Pharma anticipates a slight increase in its tax rate in FY25 from the current 12 percent, further dampening earnings growth prospects, as per brokerages.

Even though Incred Equities remains optimistic over the prospects of Sun Pharma's specialty portfolio and margins in the medium term, the brokerage also believes that FY25 can be a moderate year for earnings. On that account, Incred downgraded the stock to 'hold' from its earlier 'add' call.

Sun Pharma outperformed the Indian pharma market in FY24, however, looking ahead, the company anticipates its growth trajectory to either align with or surpass the uptick expected in domestic pharma sales.

A faster pace of growth anticipated in the IPM along with higher expenses in hand for Sun Pharma are seen as factors behind the company's rather tepid growth guidance.

In addition, the projected moderation in revenue contribution from the blockbuster cancer drug Revlimid in FY25 poses another constraint on earnings growth.

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