Stock Fundamentals

Sun Pharmaceutical Ind: The recovery phase

Nalinakanthi V | Updated on January 17, 2018 Published on June 26, 2016

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Merger hiccups with Ranbaxy and regulatory troubles will soon be resolved

The volatility in Indian equities has had a negative rub off on many bluechip pharma stocks. The stock of drug major, Sun Pharmaceutical Industries, is one such. Besides the market-wide turbulence, weak performance in 2015-16, concerns over the resolution of ongoing regulatory tussle with the US Food and Drug Administration at its Halol plant (Gujarat) and modest growth guidance for 2016-17 have had an adverse impact on the stock’s performance.

But given that the long-term growth outlook seems good, the stock price correction presents a good buying opportunity in the country’s largest drug maker. Investors must have a perspective of at least two years.

The company on Thursday announced a buy back of up to 7.5 million shares at ₹900 apiece. This implies a premium of 20 per cent to Friday’s closing price. The record date for the buyback is July 15, 2016. At the current price, the stock trades at around 22 times its estimated 2017-18 earnings, implying a 10 per cent discount to its three-year historical band.

Volatile past

Sun Pharma’s stock performance has been volatile in the past year on two counts. One, weak financial performance in 2015-16 has kept the stock under pressure.

The company, which completed the acquisition of Ranbaxy Laboratories in April 2015, has been consolidating the operations of the latter. As a result, its operating profit margin tumbled by over 15 percentage points to about 29 per cent levels in 2014-15.

But since the merger, Sun Pharma has been consciously scaling down its presence in low-margin products and markets. While the negative impact of this was visible in the consolidated entity’s performance last year, the benefits of these initiatives are expected to start flowing in the current year.

Second, growth in the US market, which accounts for nearly half the company’s revenue, moderated in 2015-16 due to regulatory issues at its Halol plant.

The company has a strong pipeline of 159 products which are currently awaiting approval by the USFDA. The approval for these products, which was delayed due to regulatory issues at the Halol plant, is expected to gather momentum in the current fiscal.

The company has already undertaken remediation efforts at the Halol plant and expects re-inspection this fiscal. This, if happens, should help the company secure approval for its generic products and thereby provide a fillip to its US business.

Besides, Sun Pharma’s in-licensing of psoriasis drug MK-3222 from Merck and acquisition of ophthalmic company InSite Vision should help build its specialty portfolio in the dermatology and ophthalmology segment.

Improving productivity

In the domestic market, the decision to withdraw bonus offers to distributors and retailers in the acute segment, though it led to a moderation in growth, should help improve profitability. Also other efforts to improve profitability are beginning to pay off. The productivity of its field force in India is gradually improving, after the sharp fall in 2014-15, following consolidation of Ranbaxy’s India business. The average revenue per sales representative which fell from ₹1.1 crore in 2013-14 to ₹0.75 crore in 2014-15 improved marginally to ₹0.78 crore in 2015-16.

Besides improvement in the productivity of its 9,200 plus sales force, the company’s strategy to build a global consumer healthcare business should aid profitability in the long term.

Earlier this month, Sun Pharma decided to promote its prescription sunscreen cream brand Suncros directly to consumers. The initiative to promote the product through both the consumer and prescription channels should help domestic sales. Any weakness in the rupee vis-à-vis the dollar on account of the global turmoil following Brexit is positive for Sun Pharma, since it derives more than half its revenues from the US market.

While the steady growth in India is positive, timely resolution of regulatory issues at the Halol plant is critical to the company’s US business.

In 2015-16, Sun Pharma reported flat growth in revenue of about 2 per cent. The operating profit margin for the period too was flat at 29 per cent.

Published on June 26, 2016

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