Halol contributes 35-40% to Sun's US sales: Angel Broking

Below is verbatim transcript of the interview:

Q: If the market is right now overreacting to this news, is 4 percent correction in stock justified?

A: Halol facility is definitely one of the major facilities for Sun Pharma and it is one of the two USFDA approved facilities that they have in India in formulation. Earlier, the company’s another facility, which is also an API formulation facility, got an USFDA warning this year.

One more facility getting audited is a cause of concern but the action of the company has taken investor to take some kind of a comfort after it withdrew many faulty products. In case there is some severe repercussion or severe audit report then it definitely spills some kind of negativity for the company.

Q: If there is an adverse outcome from the audit that the USFDA is conducting on the Halol facility, what would be the EPS impact in FY15 if in case the Halol facility stops providing or manufacturing from the US?

A: Halol contributes roughly around 30-40 percent of the US sales of the company which is definitely a good churn to profitability. The only saving grace for Sun Pharma would be its merger with Ranbaxy which happens next year. Contribution on sales terms might come down for the company if it is a long kind of a thing which happens - adverse impact happens, which takes time to get resolved.

In that case, our impact in the next year on topline could reduce because US concentration will come down and it will have other markets to drive growth but on profitability front it will still be there.

Currently, our numbers are fairly valued at these valuations trading of around 27 times. So any earning gyration that happens because of this could have implications. We believe if it happens, the stock has a capacity to come down by 15 percent at least.

Q: Fair to assume, it is not one of your top picks right now. What would be your top picks in the pharmaceutical space?

A: Currently, most pharmaceutical stocks have done a fair good amount of run up and are trading at fair valuations. The only investors who are looking beyond one year, who have an investment horizon of 4-5 years would make good money in pharmaceutical stocks. Near-term investors have to be patient with these companies if they buy at this point in time.

Currently, our top pick in this space, among the largecap Dr Reddy’s and we like Ipca Labs because that company provides an opportunity given the newsflow and the valuation that it is trading at. So these are the two companies we like in pharmaceutical space right now.

Q: So you are not worried about Ipca Labs regulatory issues at all? That is not at risk or overhang to the earnings valuations for Ipca and what would be your target price be also?

A: The news is already out and in pharmaceutical, once the stock has reacted to, it’s factored in. It is a matter of time before things get rectified. We have seen in many cases like Lupin, Cadila, it is just that Ranbaxy has become a kind of a story which is assigned to USFDA unsuccessful or longer battle, the rest of the companies are fairly managed well.

I don’t track Wockhardt but that company will also be able to come out of it. We have seen midcap like Aurobindo - it used to be midcap pharmaceutical company - coming out of such issues.

So I don’t think USFDA has such an overhang which cannot be overcome. Pharmaceutical is not a sector to be invested from a short-term view. With a long-term perspective, it definitely makes sense to get in when things are riding wrong way and to make a good return out of the sector and so, it is already there in the market. I don’t think any incremental distraction can happen to that stock from hereon.