Reduce Sun Pharmaceutical Industries, target Rs 510 : Sharekhan
Sharekhan has a reduce call on Sun Pharmaceutical Industries Ltd. with a target price of Rs 510. The current market price of Sun Pharmaceutical Industries Ltd. is 568.55. Time period given by analyst is year when Sun Pharmaceutical Industries Ltd. price can reach defined target.
Dismal performance: Sun Pharmaceuticals' revenue for Q4FY2017 declined by 6.8% YoY and the operating profit contracted by 31.9% YoY to Rs1,547.5 crore. The Operating Profit Margin (OPM) shrank by 800BPS to 21.7% while the adjusted net profit for the quarter declined by 19.5% to Rs1,344.5 crore. R&D investments stood at Rs 600 crore or 8.8% of revenue. The weak performance was led by a 34% YoY fall in the US business, owing to mounting pricing pressure and lack of product approvals due to the USFDA observations on the Halol facility.
Weak guidance due to lingering uncertainties: The USFDA has classified the company's Halol facility under the Official Action Indicated (OAI) post the re-inspection done in December 2016. This indicates further delay in the resolution of the Halol plant issue (expect remediation to be over by the end of FY2018 post which the USFDA will again re-inspect the plant), and till then the company will not receive any new product approval. The management has confirmed site transfer of some NDAs and key products to mitigate the risk from delayed approvals. However, taking into consideration uncertainties like pricing pressure, GST roll-out, price cuts in the domestic business in the near term, the management has guided for a single digit de-growth in sales for FY2018. R&D spend will be in the range of 9-10% of sales in FY2018 (vs 7.6% in FY2017), and the tax rate will also increase, thereby exerting more pressure on the profitability.
Downgrade to reduce with revised price target of Rs510: Taking cue from the management's bleak guidance for FY2018, we have downwardly revised our earnings estimate for FY2018 by 17% and introduced earnings estimates for FY2019. We downgrade our recommendation to 'Reduce' with a revised price target of Rs510, valuing the stock at 16x its FY2019E earnings.
Dismal performance: Sun Pharmaceuticals' revenue for Q4FY2017 declined by 6.8% YoY and the operating profit contracted by 31.9% YoY to Rs1,547.5 crore. The Operating Profit Margin (OPM) shrank by 800BPS to 21.7% while the adjusted net profit for the quarter declined by 19.5% to Rs1,344.5 crore. R&D investments stood at Rs 600 crore or 8.8% of revenue. The weak performance was led by a 34% YoY fall in the US business, owing to mounting pricing pressure and lack of product approvals due to the USFDA observations on the Halol facility.
Weak guidance due to lingering uncertainties: The USFDA has classified the company's Halol facility under the Official Action Indicated (OAI) post the re-inspection done in December 2016. This indicates further delay in the resolution of the Halol plant issue (expect remediation to be over by the end of FY2018 post which the USFDA will again re-inspect the plant), and till then the company will not receive any new product approval. The management has confirmed site transfer of some NDAs and key products to mitigate the risk from delayed approvals. However, taking into consideration uncertainties like pricing pressure, GST roll-out, price cuts in the domestic business in the near term, the management has guided for a single digit de-growth in sales for FY2018. R&D spend will be in the range of 9-10% of sales in FY2018 (vs 7.6% in FY2017), and the tax rate will also increase, thereby exerting more pressure on the profitability.
Downgrade to reduce with revised price target of Rs510: Taking cue from the management's bleak guidance for FY2018, we have downwardly revised our earnings estimate for FY2018 by 17% and introduced earnings estimates for FY2019. We downgrade our recommendation to 'Reduce' with a revised price target of Rs510, valuing the stock at 16x its FY2019E earnings.