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Global brokerages stay positive on Sun Pharma, see 14-31% upside after Q4

Numbers, reported on May 28 after market hours, were below analyst estimates but adjusted earnings were in line with expectations

May 29, 2019 / 10:27 AM IST
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Global brokerage houses have retained their positive stance on Sun Pharmaceutical Industries and see 14-31 percent potential upside after the fourth-quarter earnings, though few of them slashed price target.

The stock gained a percent on May 29, but overall sector has been laggard in last one year on US FDA concerns and US pricing pressure. Consequently, the stock has fallen nearly 17 percent in the last one year.

Numbers, reported on May 28 after market hours, were below analyst estimates but adjusted earnings were in line with expectations.

Profit in Q4 fell 52.6 percent due to one-time impact of Rs 1,085 crore on account of restructuring of distribution business (transferred to subsidiary from Aditya Medisales).

Reported revenue growth was 2.7 percent but adjusted revenue growth was at 21 percent to Rs 8,129 crore YoY. Reported India business declined 44 percent YoY to Rs 1,101 crore due to adjustment on account of Aditya Medisales, but adjusted India revenue increased 11 percent YoY.

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US business growth was ahead of analyst estimates, growing 20 percent YoY to $443 million in Q4 driven by significant business of generic supply to customers.

The pharma major sees mid to low teens growth and R&D expense 8 to 9 percent of sales in FY20. Company is confident on ramp-up of specialty drug Illumya in the US and the launch of Cequa (cyclosporine ophthalmic solution), which treats dry eye disease, in coming months.

Here is what brokerages say about the company's earnings:

Brokerage: Nomura | Rating: Buy | Target: Rs 536 | Return: 30 percent

We have a buy rating on the stock with a target price of Rs 536. Adjusted Q4 sales were 2.5 percent below our estimate and FY20 guidance was below our current estimates.

EBITDA in Q4 was supported by one-time generic sales opportunity and US revenues positively impacted by one-time generic revenue opportunity.

Our estimate implies revenue growth of 19 percent YoY in FY20 against the company's target of 13-15 percent. Management commentary suggests higher-than-estimated spending on specialty business.

Brokerage: Jefferies | Rating: Buy | Target: Rs 520 | Return: 26 percent

With valuations at 20 percent discount to 16x FY21 PE, we have a buy call on the stock but have slashed price target to Rs 520 from Rs 540 as EPS estimated for FY20/21 has been cut by 10/3 percent.

The fourth quarter was a weak one led by investment in Ilumya and FY20 guidance is mixed. FY20 topline target is in-line but guidance for R&D & promotional spend is higher.

We remain positive on specialty business outlook and our survey indicates $300 million peak sales for specialty business.

Brokerage: CLSA | Rating: Buy | Target: Rs 520 | Return: 26 percent

We maintain buy call but have cut price target to Rs 520 from Rs 560 after FY20-21 EPS estimates reduced by 9 percent.

FY20 is a critical year for US specialty product ramp-up. Ilumya is gaining traction but Cequa launch is delayed to Q2FY20.

Addressing governance issues is a key focus area with visible progress. Investor attention may incrementally shift towards its specialty pipeline ramp-up. Strong execution could drive a rerating.

Company guided for a low to mid-teen growth rate in FY20 is in-line with our estimate.

Brokerage: UBS | Rating: Buy | Target: Rs 500 | Return: 21 percent

We have a buy rating but have slashed price target to Rs 500 from Rs 515 as Q4 was lower than estimates largely due to decline in India revenues and there was slower than expected monetisation of the innovative pipeline.

We foresee a valuation discount for the company to other large-cap Indian pharma peers. Adverse outcome in US drug price collusion could add to downside pressure and contingent income tax liability remained high at Rs 5,920 crore.

Brokerage: Citi | Rating: Buy | Target: Rs 540 | Return: 31 percent

We have a buy rating on the stock with a target price at Rs 540 as underlying numbers in Q4 and trends indicate improvement QoQ and management commentary including FY20 guidance is reasonably encouraging.

We have not seen any incremental update on the corporate governance issues and there is no update on recent price collusion allegations in the US.

Current price appeared to factor in most concerns.

Brokerage: Credit Suisse | Rating: Neutral | Target: Rs 470 | Return: 14 percent

We maintain our neutral rating on the stock with a target price at Rs 470.

We see a weak investment case with upside dependent on Ilumya. Investment phase is not over; high promotion spend is expected in FY20 too.

R&D guidance of 8-9 percent sales in FY20 (versus FY19 at 7 percent) could negatively surprise. FY20 sales growth guidance of 13-15 percent implies base business growth of 8-10 percent.

Brokerage: Morgan Stanley | Rating: Underweight | Target: Rs 470 | Return: 14 percent

We are underweight on the stock with a target price at Rs 470.

Generic business is stabilising and US specialty is taking a longer road to Rx generation & profitability.

We expect FY20 to be a transition year for the specialty business. Halol remediation is completed and new approvals should begin to accelerate.

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first published: May 29, 2019 10:27 am
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