Emkay Global Financial Services' research report
Strategy
Buy Sun Pharma (SUNP.IS) @ 806-808 and Sell Lupin (LPC.IS) @ 1422-1424 in anticipation of a reversion in the price ratio. The current price ratio is 0.5671 and the target price ratio is 0.6238. We recommend holding positions with a stop loss placed at 0.5388 on a closing basis. The strategy has to be a rupee neutral strategy.
Rationale
"The chart (in the pdf) indicates the normalized spread prevailing between returns of Sun Pharma vis-à-vis Lupin in a one year data window. Since 23 December, 2013, Sun Pharma has surged by around 40% while Lupin has increased by around 56%, resulting into a negative return spread of around 16%. Historically, in the last 1 year, the pair has shown convergence in the range of -19% to -15% on 2 occasions (as shown in chart below). We believe a similar situation to occur", says Emkay Global Financial Services research.
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