Sun Pharma Is Top Nifty Gainer As Analysts Remain Bullish After Q2 Results
Employees enter Sun Pharma’s corporate office in the Andheri suburb of Mumbai, India. (Photographer: Amit Madheshiya/Bloomberg)

Sun Pharma Is Top Nifty Gainer As Analysts Remain Bullish After Q2 Results

Sun Pharmaceutical Industries Ltd. became the top performer on the Nifty 50 index after analysts maintained their bullish investment recommendations for the nation’s largest drugmaker, citing a ramp up in sales of key specialty products and cost savings.

The company’s net profit rose 70% year-on-year to Rs 1,813 crore in the quarter ended September, aided by higher other income and lower expenses. Its revenue rose 5% over a year earlier to Rs 8,553 crore. Other expenses declined 3% to Rs 2,392 crore, while other income rose 28% to Rs 256 crore.

Sun Pharma’s global specialty sales rose 19% year-on-year and 38% sequentially to $108 million during the reported quarter on recovery across portfolio to pre-covid levels. Its specialty franchise comprises mainly dermatology and ophthalmology products. Ilumya (a treatment for moderate-to-severe plaque psoriasis), Odomzo (for cancer), Levulan (overgrowths of skin) and Absorica (a treatment for persistent severe nodular acne) are some of the key derma products, while Cequa (for dry eye) and Bromsite (swelling and pain in eye) are ophthalmological products.

While analysts expect the specialty business ramp up to drive margin and growth, a few see the Absorica generic to face competition.

Of the 39 analysts tracking the stock, 29 have a ‘buy’ rating, three recommend a ‘hold’ and rest suggest a ‘sell’. The average of Bloomberg consensus 12-month target price implies an upside of 14%.

Shares of Sun Pharma gained as much as 6%—the most in more than two months—to Rs 514.9 apiece. The stock is up for the fourth straight day.

Here’s what the brokerages have to say about Sun Pharma’s Q2 results:

BofA Securities

  • Maintains ‘buy’ but cuts price target to Rs 614 from Rs 618 apiece.
  • Recovery in the U.S. specialty sales contributed to beat.
  • A generic for Absorica is likely in Dec. 2020 but is factored in the numbers.
  • Net EPS lower as the brokerage removes export incentives for FY22.
  • U.S. specialty, EM and API will drive margins for FY22-23.

Nomura

  • Maintains ‘buy’ with a price target of Rs 623 apiece.
  • Q2 results ahead of estimates.
  • Ramp-up in sales of key specialty products a positive.
  • Faces some challenges in the near term due to surge in Covid-19 cases.
  • Assess the risk-reward to be favourable.
  • Expects 58-62% of FY22-23 earnings from the domestic formulations business.

JM Financial

  • Maintains ‘Buy’ with a target price of Rs 770 apiece.
  • Sees multiple drivers of a sustained earnings momentum, including specialty portfolio now reverting to its normalised growth trajectory, uptick in prescriptions across Taro’s key products in the U.S. and further consolidation of Sun’s leadership position in the domestic market.
  • Revises FY21 and FY22 earnings per share by more than 6% and 5%.
  • Gross margin expansion and end of negative operating leverage post breakeven in key specialty assets by FY22 should aid Ebitda margin expansion of 670 basis points over FY20-23.

HDFC Securities

  • Maintains ‘add’ with a target price of Rs 565 apiece.
  • Maintains that scale-up of specialty business will be the most critical catalyst for the stock.
  • Increases estimates for FY21 by 11% to factor the Q2 beat.
  • Estimates for FY22-23 largely remain unchanged.

Axis Capital

  • Upgrades to ‘add’; hikes target price to Rs 550 from Rs 540 apiece.
  • Reasonable valuation given stock price underperformance.
  • Adjusted Ebitda was 18% above estimates led by improvement in gross margin and cost savings on lower marketing/travelling expenses due to Covid-19.
  • Growth recovery across key markets and scale-up of specialty assets (currently in investment phase) remain key rerating catalysts.

Edelweiss Securities

  • Upgrades to ‘Hold’; raises target price to Rs 515 from Rs 450 apiece.
  • As specialty recovers to pre-Covid-19 levels, domestic chronic business is steady, and opex control to ensure a steady base business and earnings visibility.
  • Raises target price multiple to 24 times from 22 times, and FY22 earnings per share by 5%.
  • Further upside looks limited as Absorica generic is likely to offset the Ilumya and Cequa ramp-up, while higher specialty expenses would cap margin expansion.

Emkay Global

  • Assumes coverage with a ‘buy’ and a target price of Rs 560 apiece.
  • Gross margin expanded to 75% due to better product mix, cost optimisation and higher specialty sales.
  • Expects specialty sales CAGR of 14% over FY23, mainly driven by Ilumya and Cequa but partially offset by generic competition in Absorica.
  • Target price implies a P/E multiple of 20 times on the brokerage’s FY23 EPS estimate.
  • Catalysts: Specialty sales growth, Halol plant resolution and recovery in the branded markets
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