Sell Sun Pharma; target of Rs 638: Nirmal Bang

Nirmal Bang is bearish on Sun Pharma and has recommended sell rating on the stock with a target of Rs 638 in its August 13, 2012 research report.

“Sun Pharmaceutical Industries (SPL) 1QFY13 earnings were ~20% above our/consensus estimates led by higher-than-expected contribution from Lipodox, Taro and rupee fall (all untenable in the long term). We believe uncertainty over continuation of Lipodox sales (Johnson & Johnson had earlier indicated resumption of Doxil supplies by 4QCY12; it is in the process of nailing a pact with an alternate contract manufacturer) and price hikes in its subsidiary, Taro (depending on incremental competition) leave little room for error given Sun’s high valuation (23.7xFY14E EPS) and a rather ordinary product pipeline (barring anti-diabetic drug Prandin, we do not see any other exciting product).”

“We increase our FY13E earnings estimate by 5% as we factor in higher Lipodox sales and also raise our EBITDA margin assumption from 37.5% to 40.5% in the wake of strong 1QFY13 performance. We increase our FY14E earnings estimate only marginally as the rise in revenue (due to change in rupee-US dollar assumption from Rs54.5/$ to Rs55.5/$) and margins (from 36.2 to 38.0%) gets negated by higher depreciation and tax. We revise our TP to Rs638 (from Rs596 earlier) but downgrade our rating from Hold to Sell following stretched valuation.”

“Higher-than-expected Lipodox sales (oncology drug; ~US$58mn as per our calculations) and strong Taro performance (US$159mn revenue; ~US$10mn above our estimate), drove revenue 22%/18% above our/consensus estimates, respectively. Other markets i.e. India (up 20%YoY, adjusted for advance sales booking in 4QFY12), ROW markets (up 20%YoY and 45%YoY excluding Taro sales in constant currency terms) and API sales (up 36%YoY; lumpy in nature) were in line with expectations. The management expects India sales to normalise from 2QFY13 (as against 3QFY13 earlier). Margins improved 1,275bps YoY and 510bps QoQ, 590bps/660bps above our/consensus estimates, respectively, led by higher-than expected contribution from Lipodox/Taro as well as rupee depreciation (margins are flat sequentially excluding one-offs). PAT growth was restricted to 59%YoY as strong operating performance was dented by forex losses (not quantified) and higher taxes (17% versus 3% in 1QFY12 and 16% in 4QFY12).”

“SPL trades at 23.7x FY14E EPS, which is on the higher side of its five-year average PE band and at a 30% premium to peers. The current valuation is stretched as we feel FY13 growth drivers (Lipodox/Taro/rupee fall) are not sustainable. Consequently, we downgrade our rating to Sell from Hold earlier,” says Nirmal Bang research report. 

Non-Institutions holding more than 90% in Indian cos    

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