Dilip Shanghvi, founder of Sun Pharmaceutical, poses at the company’s lab in Mumbai (Photographer: Kuni Takahashi/Bloomberg)

Sun Pharma Rallies Most In 2018 As Earnings Beat Outweighs Bearish Brokerage Commentary

Sun Pharmaceutical Industries Ltd. shares rose the most in 2018 as March quarter profit exceeded analysts estimates, helped by lower material costs and a one-time tax benefit.

Brokerages were cautious on Sun Pharma’s outlook despite the earnings beat. HSBC downgraded the stock to ‘Hold’ from ‘Buy’ and cut its target price by over 21 percent to Rs 510 citing increased cost pressures in the near term. Deutsche Bank maintained the rating at ‘Hold’, but cut its target price to Rs 431 from Rs 496.

Of the 42 brokerages tracking the stock, 16 have a ‘Buy’ rating, 13 have a ‘Sell’ rating, while 13 have a ‘Hold’ rating. The 12-month consensus price target on the stock is Rs 526.65, according to Bloomberg. Today, the stock rallied as much as 6.9 percent -- its biggest single-day rise since December 27, to Rs 699 apiece. Sun Pharma has declined 7.19 percent in the last one year as compared to a gain of 12.27 percent for the benchmark S&P BSE Sensex during the same period.

Sun Pharma’s January-March quarter net profit rose 7 percent to Rs 1,310 crore on the back of a one-time gain of Rs 259 crore. The pharma company is targeting launch of three specialty products in the current year. These include Ilumya, a psoriasis drug, Yonsa, and oncology drug, and OTX-101, a dry-eye drug. There could be significant cost outlays in the near-to-medium term on account of these launches, HSBC said in a note to clients.

Research and development expenses as a percentage of sales stood at 9.2 percent in the March quarter, and it will continue to remain high in the financial year 2018-19, HSBC analysts added.

We believe there could be significant lag between initial costs incurred for specialty drugs and realisation of sales.
HSBC Note

Here’s what other brokerages had to say about Sun Pharma:

Deutsche Bank

  • Maintain ‘Hold’, cut target price to Rs 431 from Rs 496.
  • R&D for additional clinical trials for a new indication for psoriasis drug Illumya will keep operating expenses higher.
  • Execution risks in specialty launches could weigh on the stock.
  • Earnings factor in near- and medium-term upside potential.

Edelweiss

  • Maintain ‘Hold’, with a target price of Rs 480.
  • Expect margins to remain at current levels at best.
  • Estimate specialty pipeline to add around $300 million revenue over the next five years.
  • R&D investments and marketing spend to remain elevated.
  • Most upsides from Halol clearance and specialty pipeline are already baked in the price.
  • See limited upside from the current levels.

Kotak Institutional Equities

  • Maintain ‘Neutral’. with a target price of Rs 500.
  • Cut FY2019/20 earnings per share estimates by 14.5 percent and 7.2 percent, respectively.
  • Sun Pharma's growth till 2021 is contingent on the success of specialty franchise.

Also read: Specialty Boost For Sun Pharma Amid Generics Woes