Last Updated : Feb 15, 2018 05:58 PM IST | Source:

Analysts expect Sun Pharma to fall up to 25% post Q3 earnings, await Halol resolution

All brokerage houses barring Motilal Oswal highlighted in this article are having Reduce to Hold rating and expect the stock to fall up to 25 percent.

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Brokerage houses are not positive on Sun Pharmaceutical Industries after its disappointing Q3 earnings and expect the stock to fall up to 25 percent over next 12 months. The stock fell as much as 1.6 percent in early trade, but then gradually recovered to gain up to 1.8 percent before closing up 0.5 percent.

The pharma major's profit fell sharply by 75.2 percent year-on-year to Rs 365.4 crore, dragged by exceptional tax expenses.

"Tax expenses (exceptional) for the quarter represented estimated impact of Rs 513.02 crore on account of re-measurement of the group's deferred tax assets as a result of the Tax Cut and Jobs Act enacted in the US on December 2017," the pharma major said in its filing.

Consolidated revenue from operations also slipped 16 percent year-on-year to Rs 6,653.23 crore in Q3 due to decline in the US business. Consolidated operating profit degrowth of Rs 40.8 percent year-on-year Rs 1,453.4 crore and margin decline of 910 basis points at 21.8 percent for December quarter 2017 were lower than CNBC-TV18 poll estimates of Rs 1,434.8 crore and 21.1 percent, respectively.

All brokerage houses barring Motilal Oswal highlighted in this article are having Reduce to Hold rating and expect the stock to fall up to 25 percent.


Brokerage - Edelweiss | Rating - Hold | Target - Rs 550

Challenging macro environment, regulatory woes and endeavour to create a US specialty business are exerting significant pressure on the business.

We believe two things can reverse the tide in the short term: 1) clearance of Halol, for which re-inspection is underway; and 2) approval for and launch of MK-3222 and Seciera, respectively, in FY19.

The stock has run up 10 percent over the past few days on the Halol re-inspection news. It is now trading at around 20 percent premium to the sector at 23x FY20E earnings of Rs 25, i.e., 70 percent growth on FY18 earnings estimates assuming all the upsides from the re-inspection and the successful launch of the specialty pipeline.

We believe, the risk-reward is unfavourable, and perceive limited upside from the current level. Therefore, we downgrade to Hold with revised target price of Rs 550.

Brokerage - Motilal Oswal | Rating - Buy | Target - Rs 675

US business declined around 36 percent YoY to USD 328 million due to inclusion of sales from Imatinib (six months’ exclusivity) in the base quarter. Sequential improvement in the US business can be attributed to re-coup of deferred sales from Q2FY18 and some expansion in market share.

We expect the stock to remain under pressure in the near term due to challenges related to growth and margins. We maintain Buy rating with a target price of Rs 675. We cut FY18/19 EPS estimates by 6/5 percent, building in a slower recovery in the US business and margin improvement.

Brokerage - Prabhudas Lilladher | Rating - Reduce | Target - Rs 447

US generics are impacted with a) strong competition in Derma portfolio of Taro, b) competitive intensity in older generics, and c) supply disruption from Halol. These have resulted in impacting its core generic sales.

There is no visibility of generic Glumetza launch in FY18 as management remained cautious of any launch that invokes recall of products in US. Nevertheless, there are array of competitive issues those impact sales growth while build-up costs for investments in generic pipeline and front-end for specialty/NDA products in US need to be incurred upfront.

The return on specialty and NDA products are back-ended with expected break-even in FY20. We believe Sun will be facing higher challenges even meeting their guidance due to likely increase in overhead costs going forward. There is a chance of further reduction in Taro and in Lipodox revenue and margins (with launch of DRL generics).

We maintain recommendation to Reduce and increase target price to Rs 447 (from Rs 359).

Brokerage - ICICIdirect | Rating - Hold | Target - Rs 530

Broadly, the challenges persist on the generics pricing front in the base business. Unlike other generic players, the approval momentum is slightly slow in Sun’s case, mainly due to pending Halol resolution.

However, progress in the speciality portfolio is promising, which is the key differentiator vis-a-vis peers. We maintain Hold rating with a new target price of Rs 530 based on 22x FY20E EPS of Rs 22.4 and Rs 38 NPV for Tildrakizumab.

Brokerage - CLSA | Rating - Sell | Target - Rs 430

Risks to specialty ramp-up/delay in Halol clearance is not priced in. Key earnings driver going forward will be improvement in US revenue.

We retain Sell call with a target price of Rs 430.

Brokerage - Nomura | Rating - Neutral | Target - Rs 479

Nomura maintains Neutral call on the stock with a target price at Rs 479 per share. Halol resolution is a key as it’s factored into stock price.

The approval from USFDA to Tildrakizumab by March 2018 is also critical.

Brokerage - Morgan Stanley | Rating - Underweight | Target - Rs 448

Morgan Stanley has Underweight call on the stock with a target price of Rs 448. We believe earnings are bottoming.

Brokerage - Jefferies | Rating - Hold | Target - Rs 520

Jefferies has Hold call on Sun Pharma with increased target price at Rs 520 from Rs 475 per share.

We build a Halol resolution by FY18-end & see strong growth in FY19. Company guided for Q4 revenue is similar to Q3, implying over 15 percent decline in FY18 versus earlier target.

Investment in specialty can limit near-term earnings recovery. Valuations & Halol re-inspection leave little room for upside risk.
First Published on Feb 15, 2018 03:28 pm
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