Views on Sun Pharmaceuticals Update: Angel Broking

Views of Ms. Sarabjit Kour Nangra (VP Research - Pharma, Angel Broking) on Sun Pharmaceuticals Update:

Sun Pharma, has released its outlook for FY2016, the key highlights of the same are follows:

"Revenue Growth: Company expects revenues to remain flat or show a decline in FY2016, as the Ranbaxy integration is expected to increase its costs. The consolidated profit in addition to revenue may also be adversely impacted due to certain expenses/ charges arising out of integration and remedial actions.

Profitability: The target for the synergy benefits from the Ranbaxy acquisition has increased by 15-20% as compared to its original target of US$ 250mn by FY2018 (i.e. US$ 280-300mn). This is expected to be achieved by focusing on overall profitability improvement driven by revenue and procurement synergies, manufacturing rationalization and various additional cost-management measures.

R&D: Company continued to allocate significant resources to R&D in order to strengthen the specialty pipeline including patented products and complex generics. This will mandate increased R&D investments including that for the development of MK-3222.

CGMP compliance: A key priority for the company is to ensure continued 24x7 cGMP compliance by continuously enhancing systems, processes and human capabilities to meet global regulatory standards at all manufacturing facilities. As a part of this process and in order to address the cGMP deviations at its Halol facility, the Company has undertaken various remedial measures. These remedial measures have resulted in supply constraints for some of the products.

The company expects this situation to continue for some more time till all the remedial steps at Halol are completed. The remedial action at the Mohali, Dewas, Poanta Sahib and Toansa facilities is on track. The company is working towards the fulfilment of the requirements of the US consent decree and will try to expedite the resolution for at least one of these facilities.

Conclusion: After the FY2016 sales and profit guidance, we expect the company's financials to be impacted. However, post the consolidation, the company will be better placed to achieve higher than industry growth in subsequent years. The merger related wows were evident after the 4QFY2015, where the company's revenues and OPM were impacted on back of the same. On the OPM front, adjusting for the merger related costs, were at 26-27%. Thus, we believe that 29-30% margins from FY2017 should be not a problem, once it writes off all the merger costs in FY2016.

Thus, now we have moderated our numbers, for FY2016 and FY2017. We expect the FY2016 sales growth to come through 2.0% in FY2016 and 20.4% in FY2017. On OPM front, we expect the OPM's to come in at 27.7% (not including the extraordinariness from the merger) and 29.7% in FY2016 and FY2017 respectively. Company expects a much better operating performance from FY2018, when the synergies start roll on.

On valuation front, at price of INR 947 the company now trades at 35.3xFY2017E earnings and 6.0xFY2017E EV/Sales which would be fair. We believe the company, given its leadership position and its ability to turnaround its acquisitions will continue to command premium in the market. Also, we believe that the company can sustain a 30% OPM and hence 6xFY2017E EV/sales should be fair. Thus we recommend a price target of INR 950.

Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.832.25 as compared to the previous close of Rs. 805.3. The total number of shares traded during the day was 667762 in over 20715 trades.

The stock hit an intraday high of Rs. 834.6 and intraday low of 807.05. The net turnover during the day was Rs. 550817119.